How do I use a note as collateral?!
Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes
How do I use a note as collateral?!
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes@Roman M. I used to do these all the time with my commercial bank not sure why you think a commercial bank won't touch it.. its called a Hypothecation.. quite common.. Easy and works great..
I did mine when I was in the timber industry.. it was common for me to log a property then sell said property to buyer on contract.. but they had to go through the building permit process and in Oregon that can take a year or two.. so I would sell on contract.. then take my contract to my trusty commercial banker and hypothecate it.. IE pull the cash out of it so I could go buy more timberland to log.. get payments from my buyer .. pay the bank their payment then when my buyer cashed me out I cashed out the bank and got my equity... for me it was not as much a tax play as a get stuck money out now without massive discount to a NOTE buyer pimper .. who is looking to get notes with massive discounts. my bank would do this for 1 point and going rate at the time on interest which was about 6 to 7% .. I usually got 8 to 9 on the seller carry.
19 Replies
- Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes9yChristopher Winkler any suggestions? You send pretty knowledgeable on the subject
- Specialist · Dallas, TX · Member since 2014 · 900 posts · 392 votes9y
HI @Logan Turner, the partial is an option, until/unless they stop paying for any number of reasons. But you would not lose it all, it just becomes a non performer and it would be interesting to see what happens if the homeowner stops paying. Anyone who sells partials care to comment if they sold a patial and the homeowner stopped paying?
Otherwise find someone to loan you the money, and use the note as collateral. You could make up an assignment, not record it, and send it to the person to hold to secure the loan, but if they recorded it, you would be screwed.
I would start at your bank or a local small bank and see if they will loan against it. Good luck and I'll let you know if I come up with any other brilliant ideas. :0)
- Investor · Miami Beach, FL · Member since 2016 · 486 posts · 216 votes9y
there is a way but only thru a private lender who has an appetite for this. No bank will touch this.
Once you find a private lender who I will assume will charge you north of 7% rate, You will need a business lawyer to prepare all paperwork to structure this to make sure that everyone interest is protected. You will need to place your original note in escrow with an attorney and a UCC lien will need to be filed against the note.
Not everyone understands the concept of pledging note as collateral for a loan so it won't be easy to explain to your potential private lender if they are not familiar with concept.
- Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes9y
@Roman M. you're saying a community bank won't loan against a note secured by real estate? I'm contacting a couple local commercial guys now to see what they think. But I believe that's what Bill Gulley mentioned doing that.
I'll report back what I find out from two local commercial lenders
- Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes9yIn case anyone is interested. Commercial lender got back to me and they will in fact issue me a loan strictly off my note. How it works. Note receivable will be assigned to bank as collateral should I fail to make payments. The note receivable must have a promissory note and deed of trust and no other lien on the property. Commercial lender will lend for a max of 15 years and up to 80 percent of cost, note UPB, and house appraised value. Whichever is the lowest. They will make an exception if for example my all in cost was 60k. Note was 95k and house value was 100k. They would then lend 100 percent of cost. So 60k in this example. Again they won't amortize a loan for 15 years if the note is 10 years. So it has to be equal or less on length. Since it is the collateral. So here's what it looks like broken down. Cost 60k, note 92k @10 percent for 10 years house value 95k Bank will issue me a loan (check in mail) for 60k 5.8 % interest and 10 year am. I receive 1256 from the note each month I pay 662 on the loan each month. Plus I get my 60k back and rinse and repeat. That my friends is arbitrage at it's best.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Roman M. I used to do these all the time with my commercial bank not sure why you think a commercial bank won't touch it.. its called a Hypothecation.. quite common.. Easy and works great..
I did mine when I was in the timber industry.. it was common for me to log a property then sell said property to buyer on contract.. but they had to go through the building permit process and in Oregon that can take a year or two.. so I would sell on contract.. then take my contract to my trusty commercial banker and hypothecate it.. IE pull the cash out of it so I could go buy more timberland to log.. get payments from my buyer .. pay the bank their payment then when my buyer cashed me out I cashed out the bank and got my equity... for me it was not as much a tax play as a get stuck money out now without massive discount to a NOTE buyer pimper .. who is looking to get notes with massive discounts. my bank would do this for 1 point and going rate at the time on interest which was about 6 to 7% .. I usually got 8 to 9 on the seller carry.
- Investor · Miami Beach, FL · Member since 2016 · 486 posts · 216 votes9yOriginally posted by @Logan Turner:
In case anyone is interested. Commercial lender got back to me and they will in fact issue me a loan strictly off my note.
How it works. Note receivable will be assigned to bank as collateral should I fail to make payments.
The note receivable must have a promissory note and deed of trust and no other lien on the property.Commercial lender will lend for a max of 15 years and up to 80 percent of cost, note UPB, and house appraised value. Whichever is the lowest. They will make an exception if for example my all in cost was 60k. Note was 95k and house value was 100k. They would then lend 100 percent of cost. So 60k in this example. Again they won't amortize a loan for 15 years if the note is 10 years. So it has to be equal or less on length. Since it is the collateral.
So here's what it looks like broken down.
Cost 60k, note 92k @10 percent for 10 years house value 95kBank will issue me a loan (check in mail) for 60k 5.8 % interest and 10 year am.
I receive 1256 from the note each month
I pay 662 on the loan each month.
Plus I get my 60k back and rinse and repeat.i hope you get that check. I had called local community banks where I am and they said they can't lend against this type of collateral.
Let us know.
- Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes9y
@Logan Turner I talked to a guy once at FCI that said that they hypothecated loans but their rates were similar to hard money loans and were north off 10%. Too much for me.
Would you mind sharing the info on the commercial bank? I want to look into this for one of my own notes.
- Specialist · Dallas, TX · Member since 2014 · 900 posts · 392 votes9y
@Logan Turner Glad my suggestion worked! Sweet job and great to know for the future!
- Member since 2019 · 1 post · 1 vote7y
Hi, Logan
Could you refer me to the commercial bank giving the loan?
Thanks.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes7y
@Logan Turner
Who was the
Lender ?
7e investments53 Reviews - Lender · Member since 2019 · 49 posts · 5 votes2y
Quote from @Christopher Winkler:
HI @Logan Turner, the partial is an option, until/unless they stop paying for any number of reasons. But you would not lose it all, it just becomes a non performer and it would be interesting to see what happens if the homeowner stops paying. Anyone who sells partials care to comment if they sold a patial and the homeowner stopped paying?
Otherwise find someone to loan you the money, and use the note as collateral. You could make up an assignment, not record it, and send it to the person to hold to secure the loan, but if they recorded it, you would be screwed.
I would start at your bank or a local small bank and see if they will loan against it. Good luck and I'll let you know if I come up with any other brilliant ideas. :0)
Please explain why the Note-holder would be screwed in "but if they recorded it, you would be screwed."
Thanks. - Lender · Member since 2019 · 49 posts · 5 votes2y
Quote from @Roman M.:
there is a way but only thru a private lender who has an appetite for this. No bank will touch this.
Once you find a private lender who I will assume will charge you north of 7% rate, You will need a business lawyer to prepare all paperwork to structure this to make sure that everyone interest is protected. You will need to place your original note in escrow with an attorney and a UCC lien will need to be filed against the note.
Not everyone understands the concept of pledging note as collateral for a loan so it won't be easy to explain to your potential private lender if they are not familiar with concept.
Might you refer me to such an attorney, one who is an expert in an UCC lien + Notes (PN, NPN, RPN)? Perhaps an attorney who himself invests in Notes.
- Lender · Member since 2019 · 49 posts · 5 votes2y
Quote from @Logan Turner:
@Roman M. you're saying a community bank won't loan against a note secured by real estate? I'm contacting a couple local commercial guys now to see what they think. But I believe that's what Bill Gulley mentioned doing that.
I'll report back what I find out from two local commercial lenders
What did your local commercial lenders say about this item?
What did your community bank say?
Who is Bill Gulley?
- Lender · Member since 2019 · 49 posts · 5 votes2y
Dave van Horn, a Notes expert out of Philly, stated that some banks do collateralize Notes but they are pretty rare.
Could someone comment on this?
What are some banks which would collateralize a Note?
- Lender · Member since 2019 · 49 posts · 5 votes2y
Quote from @Logan Turner:
In case anyone is interested. Commercial lender got back to me and they will in fact issue me a loan strictly off my note. How it works. Note receivable will be assigned to bank as collateral should I fail to make payments. The note receivable must have a promissory note and deed of trust and no other lien on the property. Commercial lender will lend for a max of 15 years and up to 80 percent of cost, note UPB, and house appraised value. Whichever is the lowest. They will make an exception if for example my all in cost was 60k. Note was 95k and house value was 100k. They would then lend 100 percent of cost. So 60k in this example. Again they won't amortize a loan for 15 years if the note is 10 years. So it has to be equal or less on length. Since it is the collateral. So here's what it looks like broken down. Cost 60k, note 92k @10 percent for 10 years house value 95k Bank will issue me a loan (check in mail) for 60k 5.8 % interest and 10 year am. I receive 1256 from the note each month I pay 662 on the loan each month. Plus I get my 60k back and rinse and repeat. That my friends is arbitrage at it's best.Have you executed on this method? If so, please update us.
What is the name of this commercial lender?
- Lender · Member since 2019 · 49 posts · 5 votes2y
Quote from @Jay Hinrichs:
@Roman M. I used to do these all the time with my commercial bank not sure why you think a commercial bank won't touch it.. its called a Hypothecation.. quite common.. Easy and works great..
I did mine when I was in the timber industry.. it was common for me to log a property then sell said property to buyer on contract.. but they had to go through the building permit process and in Oregon that can take a year or two.. so I would sell on contract.. then take my contract to my trusty commercial banker and hypothecate it.. IE pull the cash out of it so I could go buy more timberland to log.. get payments from my buyer .. pay the bank their payment then when my buyer cashed me out I cashed out the bank and got my equity... for me it was not as much a tax play as a get stuck money out now without massive discount to a NOTE buyer pimper .. who is looking to get notes with massive discounts. my bank would do this for 1 point and going rate at the time on interest which was about 6 to 7% .. I usually got 8 to 9 on the seller carry.
Does this approach still work today in 2024 ?
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Timur Abdullin:
Quote from @Jay Hinrichs:
@Roman M. I used to do these all the time with my commercial bank not sure why you think a commercial bank won't touch it.. its called a Hypothecation.. quite common.. Easy and works great..
I did mine when I was in the timber industry.. it was common for me to log a property then sell said property to buyer on contract.. but they had to go through the building permit process and in Oregon that can take a year or two.. so I would sell on contract.. then take my contract to my trusty commercial banker and hypothecate it.. IE pull the cash out of it so I could go buy more timberland to log.. get payments from my buyer .. pay the bank their payment then when my buyer cashed me out I cashed out the bank and got my equity... for me it was not as much a tax play as a get stuck money out now without massive discount to a NOTE buyer pimper .. who is looking to get notes with massive discounts. my bank would do this for 1 point and going rate at the time on interest which was about 6 to 7% .. I usually got 8 to 9 on the seller carry.
Does this approach still work today in 2024 ?
these deals are done with your commercial banker .. they are not something that is advertised or talked about.. its why I keep all my accounts and my affiliated companies accounts at my commercial bank. you need to be able to talk to your personal banker and that banker needs to be in a Senior position.. thats how it worked for me. So average balances in the bank in the low to mid 7 figures is how you do these deals. - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Jay Hinrichs:
Quote from @Timur Abdullin:
Quote from @Jay Hinrichs:
@Roman M. I used to do these all the time with my commercial bank not sure why you think a commercial bank won't touch it.. its called a Hypothecation.. quite common.. Easy and works great..
I did mine when I was in the timber industry.. it was common for me to log a property then sell said property to buyer on contract.. but they had to go through the building permit process and in Oregon that can take a year or two.. so I would sell on contract.. then take my contract to my trusty commercial banker and hypothecate it.. IE pull the cash out of it so I could go buy more timberland to log.. get payments from my buyer .. pay the bank their payment then when my buyer cashed me out I cashed out the bank and got my equity... for me it was not as much a tax play as a get stuck money out now without massive discount to a NOTE buyer pimper .. who is looking to get notes with massive discounts. my bank would do this for 1 point and going rate at the time on interest which was about 6 to 7% .. I usually got 8 to 9 on the seller carry.
Does this approach still work today in 2024 ?
these deals are done with your commercial banker .. they are not something that is advertised or talked about.. its why I keep all my accounts and my affiliated companies accounts at my commercial bank. you need to be able to talk to your personal banker and that banker needs to be in a Senior position.. thats how it worked for me. So average balances in the bank in the low to mid 7 figures is how you do these deals.100% agree Jay. We have approx $20M+ in assets and have spoken to some lenders about this and majority of them are a no. It is all about banking relationships. There are a few larger players like Western Alliance and Axos who advertise and do it, but they want to see a much larger portfolio
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