I'm assuming a note to purchase a property how to handle it?

14 Replies

I'm assuming a note with zero down and purchase price equals the balance of the note. The note is held by a private investor who is willing to let me assume the note. What's the best way of handling this from a legal perspective? Also, I can do a warranty deed and title search, is there anything else that I'm leaving out to make this legit (I know about the filing)?

Well I'm answering my own question for the benefit of future readers. My attorney prepared an assumption deed and a warranty deed. The note holder was willing to let me assume the note. So voila, I just purchased my first property with no money down, just like the infomercials say is so commonplace. It took me 3 years to find this one, they are not commonplace where I live, but I'm glad I found this one :lol:

Hey Justin,
Well, I wasn't looking for a note when I found this one. A motivated seller called me from one of my ads. It turns out that she had bought the house from another investor years ago who had subsequently sold the note to a person who buys notes with all of his retirement portfolio. That being said, the guy has plenty of money to tie up in discounted notes. He tells me that he usually finds them by searching courthouse records. He's averaging 8-10% on his yields. I'm beating that in the stock market, but with notes there's no volatility. I told the seller that if the note holder would let me assume the note, she could deed the property to me. I will take over the payments, repair the house and sell the house on a new note. It essentially creates a wraparound mortgage. I pay $230 to the note holder, sell the house and become a note holder on a bigger price at a bigger interest rate. My spread will be $220.00/month. In my view, it beats making about the same (or less) in rent. I find it easier to collect a house payment than a rent payment because of the foreclosure laws. How's that for an answer? :lol: All of that to say, I don't look for notes, I create them. Are you looking to be a note holder?
I don't know much about notes but am trying to learn!

hmm that is interesting, at the moment im indecisive it would be great to do wrap-around rentals, but im afraid of the legal problems that may occur from renting properties rented to me. Finding info on buying notes is hard to find. What benefits do you get from using these wrap around notes? You said something about foreclosure laws, what do you mean? At the moment i only have one rental property with the mortgage under my name, so its great to learn other methods to avoid high costs.

thx again

Justin,
The benefits as I see them are that you don't own, but in a sense you get to control. You receive monthly payments yet you have no responsibility for the property, no maintenance, etc.. What I meant about foreclosure is that the laws favor people who lend money. If you run the numbers of doing a property this way versus renting along with all of its hassles (constant repairs, changing tenants, trying to find good tenants and those who will pay on time). I'd rather sell the property. I often challenge landlords to tell me what their return on their investment is. Most people are incapable of figuring it or are too scared to! Go to bankrate.com, and look at the interest you will earn by selling a property for a given amount at 12% for x number of years. All of that interest money will be yours along with the amount that you marked up the property. An example: buy a house at $20,000, sell at $40,000 at 12%, your effective rate of interest is 24% for the life of the note. No fluctuation like you have in the stock market. Try finding a return like that anywhere in the world that will last for extended period of time. Good Luck.

Mike,

Good discussion. Thanks for sharing.

I have three questions or comments.

1. You said that you assumed the loan and the attorney handled the paperwork.

Legally I believe the end result is you were added to the note but technically the prior borrowers are not removed. If you were to default the lender has the legal right to go back after the prior borrowers who were on the note at one time or another. Assumptions increase the number of borrowers on the note but do not remove priors.

I did not check with an attorney to really verify the above. What did your attorney tell you about this?

2. You said that the note holder has a portfolio of notes which they buy at a discount. He is earning 8% to 10%.

Is that all he is making? It seems low for a buyer of notes at a discount.

3. Taking Mike-OH's view that 40% to 50% of the gross income from a rental goes back out in expenses a wrap might make a lot more sense than people think. No real upside from appreciation or rent increased unless you have something more creative in place. At the same time no short term expenses. In a market that is not appreciating very quickly the cash flow might be better with wraps.

Note that you have to recreate the business as the notes will get paid off compared to just holding a rental.

Is your thinking largely along the same lines as #3 above?

John Corey

John,

You've made some good points. My attorney didn't mention the issue of people not being removed from a note but rather moved back. I don't know the legal answer to that, and since I'm on the other side of the fence it wouldn't affect me. My goal is to never sell a note. I realize things happen and at some point I might need to ditch one, but for a person active in note purchasing that's an issue to know about.

Secondly, I too was appalled when the note buyer mentioned to me that he's now averaging 8-10% on his notes. He's been active in this for 30 years and of course has war stories involving much higher interest rates. He says that he's having a difficult time finding really good returns because so many newbies are buying notes right now. I suppose he likes the solidity of mortgages-vs-the ups and downs of the stock market. When I do deals, regardless of size, I don't look at the lump sum, I look at the percentage of increase on my investment. That's where the rubber meets the road.

That leads me into our third point. A lot of people are getting into real estate thinking that they will let a renter pay down their mortgage and at some point down the road through the magic of appreciation and full title, they will have a great nest egg. I know that this can work but I often see that it does not for many people. Most of us need income today so that with the incredible power of time, compound interest and money, we will have security. Most landlords cannot tell you the rate of interest they are getting on their money because they haven't ever figured it. If they did figure it out and look into other investment options, many would get out of the business as quickly as they got in :D

Wow! great discussion Mike and John. One of the reasons I'm a little uneasy with rental is the ROI. I just figured I wasn't figuring right. (Pun not intended.)

Years ago, we sold our paid off 11yo mobile and 1.5 acres, carried the note and made money on what was then called a "bad investment" meaning the purchase of a mobile home. We had 16k invested, sold the place for 25k at 10% compounded interest for 10 years.

So, can you help me out by using this example and show me how to figure the difference between what our ROI was by carrying the note as opposed to renting for ten years using Mike OH's expense theory?

Thanks for your help.

Vicky

Ok, here's my figuring:

Carrying note @10%:
$16k investment
$39k gross return (roughly)
$23k net ROI

Rent @ $300 mo:
$180 per mo after 40% expenses
$21k net ROI
More hassel

Of course, this doesn't include a mortgage, and $300 positive cash flow for a rental is mighty good these days (generally around here the cap rate is 10%). So, the difference would be substantially greater.

Does this make sense? Am I missing anything?

Vicky

Originally posted by "mike mitchell":
Well I'm answering my own question for the benefit of future readers. My attorney prepared an assumption deed and a warranty deed. The note holder was willing to let me assume the note. So voila, I just purchased my first property with no money down, just like the infomercials say is so commonplace. It took me 3 years to find this one, they are not commonplace where I live, but I'm glad I found this one :lol:

A bit of clarification given some later things I read.

Did you buy a note and someone else owns a property where the property is the security for the note? In this case you purchased the note but have no legal claim to the property other than if there is a default on the payments. You did not buy the property.

Or did you buy the property and for what ever reason the present lender as willing to let you assume the note from the prior borrower. Meaning you stepped into the bororwer shoes. In this case you did not buy a note, you bought a property and took over the payments.

Reading through this a few times I hear that you like the idea of a note better than dealing with tenants as a landlord. When buying a note you do not assume it, you just buy it. There is no deed to file as you are not transferring title to the property. If the lawyer prepared what you said then you bought the property and not the note.

Yes, I am confused.

John Corey

Hi John and Vicky and anyone else interested in the topic,
I'm sorry I wasn't real clear in my initial posting. I purchased a property and the purchase price was the balance of the existing note which the holder allowed me to assume. So yes I simply stepped into the borrower's/seller's shoes.

I love looking at real case scenarios. To me the $2000 less that the landlord could have made with all of its collection problems (renting a mobile home) steers me once again to what I've been doing, selling properties and toting the note. I think you've probably covered the expenses. Is any vacancy figured in there?

And by the way, I've financed several properties recently at 12%. That puts a little more gravy on top!

Great stratagy mike,

Another way to go, on the exit, would to be to create a wrap around note. Where you continue to service the existing note and create a new note to facilitate the sale of the property. Depending upon the original note's clauses and your local laws it's a good approach to create cash flow in a no down scenerio. I have a friend in colorado that does only that.

Michael,
You're on to my plan! My payment will be $230. I'll receive around $430. That $200/month for the next 10-20 years is not bad for a very few hours of putting a deal together and they can repair their own toilets :lol: