How do I use a note as collateral?!

[Logan Turner]

I've been reading a few note guides, and came across the concept of using your note as collateral for another loan. This way instead of selling, paying taxes, you can borrow against it and invest again. Anyone have any idea how to do this? I have a note with UPB at 91k and 10 percent interest rate and I'd love to get a personal loan for around 25-35k. I can sell the note for 74k but would be hit with a tax cost of around 40 percent. And I don't need all 74k right now. I'm also not too keen on a partial note as I feel my position in the repayment if a default occurred would risk me losing it all, since all lawyer fees etc get paid first! Anyone able to help me get creative and squeeze out some money from this note without selling it all or partial?

[Logan Turner]

Christopher Winkler any suggestions? You send pretty knowledgeable on the subject

[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)

[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.

[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

[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.

[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.

[Roman M.]

Originally 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 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.

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.

[Andy Mirza]

@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.

[Christopher Winkler]

@Logan Turner Glad my suggestion worked! Sweet job and great to know for the future!

[Dave Rosenthal]

Hi, Logan

Could you refer me to the commercial bank giving the loan?

Thanks.

[Chris Seveney]

@Logan Turner

Who was the

Lender ?

[Timur Abdullin]

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.

[Timur Abdullin]

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.

[Timur Abdullin]

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?

[Timur Abdullin]

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?

[Timur Abdullin]

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?

[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 ?

[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.

[Chris Seveney]

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