Please help me understand this concept from Ben Leybovich's eBook

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Please help me understand this concept from Ben Leybovich's eBook

Benjamin Shaw
Danbury, CT · Member since 2017 · 56 posts · 10 votes

Hi BP!   So I'm taking a look at the eBook from @Ben Leybovich called 20 Ways to Buy an Investment Property with $2,000 or Less, which you can get here.

I heard ben on the podcast a few times, and his words really resonate with me, although I do not fully understand all of the terminologies that he uses so fluently. Take for example the excerpt shown below in which he talks about funding a deal via both a private lender and seller financing:

"OK – let’s say you are in fact able to find someone who’ll give you the money, but because you are such wildcard, they do not want to give you any more than 60% of the purchase price. In this case, you could structure the deal whereby the private lender gets a note and mortgage (deed of trust) in first position, while the owner takes back a note in second position."

I get the basic idea, but I do not fully understand the  last sentence "you could structure the deal whereby the private lender gets a note and mortgage (deed of trust) in first position, while the owner takes back a note in second position."

ELI5: What exactly does it mean for the "private lender to get a note and mortgage (deed of trust) in first position, while the owner takes back a note in second position." ?

Any chance anyone could break down this sentence so a 5-year-old could understand it?

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Michael Beeman
Casey, IL · Member since 2017 · 175 posts · 308 votes
9y

@Benjamin Shaw

Holding a note (mortgage) are basically the same thing. They are a lien from a certain position on a property. Maybe it will help if i take a property i recently purchased and give you an example of how to use this. As in all instances, definitely do not try to do this without consulting and using a qualified real estate attorney. 

@Ben Leybovich please step in if the following example does not follow your meaning. You're certainly a more qualified and experienced teacher. 

Example:   I want to purchase a 4-plex. I have already evaluated the deal and recognized it is a great deal. And I have multiple exit strategies at the end of it. I know that I do not have the financing. So I find a private lender who is willing to finance 60% of the property cost, but only if he has a first mortgage (note) on the property.  

Now I have 60% of the total property financed.  Next I approach the seller and say, "I would like to buy your property, and I can give you 60% of your asking price up front, and I will need you to give me a loan for the other 40% as a second mortgage against the property"  

The seller may not like this. But, you can help "sell" the idea to the seller in this manner.  "If you (seller) would do this, you will still hold a lien against the property that I intend to manage and handle all of the day to day operations and maintenance issues. You will no longer have to be involved. Plus you will be receiving the asking price (or whatever negotiated price can be agreed upon) in full. With basically 60% of the money up front, and interest plus the balance on the rest of the money."  .. I might also tell the seller, it's kind of like he refinanced his property to get 60% of the value out of it, and he still has no more burden of running the day to day operations.

There are a lot of different way of "selling" the seller on this concept. And, you will probably have to. Most sellers want all of their money up front. But, many sellers realize that there aren't a lot of buyers for their particular property.  And getting 60% up front, plus a 2nd mortgage and interest on the other 40% is an interesting option.  

I hope that helps. Ben is certainly a better teacher than I am. I would recommend really diving into your studying of his and other real estate teachings before making a leap of this kind.  

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  • Michael Beeman
    Casey, IL · Member since 2017 · 175 posts · 308 votes
    9y

    @Benjamin Shaw

    Basically just like a First Mortgage and second mortgage. If your private lender has a first mortgage, in the event that u stop paying, he has first position to foreclose on the property. 

    Now, the original owner of the property has what is essentially a second mortgage, So, he will have the option to foreclose from second position if you stop paying him as well. But, if he forecloses on you from second position. He would be required to satisfy the principle on the loan from the first position lender (which in this case is your private lender).  It's pretty standard practice with banks. 

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    9y

    @Benjamin Shaw - are you clear on this now, or would you like me to step in?

    1Reply
  • Michael Beeman
    Casey, IL · Member since 2017 · 175 posts · 308 votes
    9y

    @Benjamin Shaw,  I don't know why it wouldn't link your name on this. 

    But, I hope that I have explained @Ben Leybovich's concept simple enough.

    1Reply
  • Benjamin Shaw
    OP
    Danbury, CT · Member since 2017 · 56 posts · 10 votes
    9y

    @Michael Beeman Thanks!

    @Ben Leybovich I could use as many angles on this as are available. Feel free to give your spin on it. I was hoping for a specific breakdown of that one sentence. For instance, what does it mean to hold both a note and a mortgage?

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    A note (promissory note) is the piece of paper that says you promise to pay.  It is not recorded.

    The mortgage/deed of trust is recorded and puts all on notice there is a lien on the property with power of sale.

    Whether it's a 1st mortgage or 2nd mortgage (for the most part) depends on the timing.  First come, first mortgage.  Unless the seller agrees to subordinate their position, allowing a later mortgage to take 1st place.

    Sorry if I am out of line @Ben Leybovich.  Not trying to speak for you :)  Please correct me or take me to the wood shed as necessary!

    1Reply
  • Benjamin Shaw
    OP
    Danbury, CT · Member since 2017 · 56 posts · 10 votes
    9y
    Originally posted by @Steve Vaughan:

    A note (promissory note) is the piece of paper that says you promise to pay.  It is not recorded.

    How does this tie into the concept of buying and selling notes?

    0Reply
  • Benjamin Shaw
    OP
    Danbury, CT · Member since 2017 · 56 posts · 10 votes
    9y
    Originally posted by @Michael Beeman:

    @Benjamin Shaw

    Basically just like a First Mortgage and second mortgage. If your private lender has a first mortgage, in the event that u stop paying, he has first position to foreclose on the property. 

    Now, the original owner of the property has what is essentially a second mortgage, So, he will have the option to foreclose from second position if you stop paying him as well. But, if he forecloses on you from second position. He would be required to satisfy the principle on the loan from the first position lender (which in this case is your private lender).  It's pretty standard practice with banks. 

     Why does the seller end up with the second position? Why are they responsible to pay off the first position if you stop paying them?

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    @Benjamin Shaw you referenced Ben's book called 20 Ways to Buy an Investment Property.  

    I guess nothing. I must have missed the buying and selling note part.  Just ignore me then.  

    1Reply
  • Benjamin Shaw
    OP
    Danbury, CT · Member since 2017 · 56 posts · 10 votes
    9y
    Originally posted by @Steve Vaughan:

    @Benjamin Shaw you referenced Ben's book called 20 Ways to Buy an Investment Property.  

    I guess nothing. I must have missed the buying and selling note part.  Just ignore me then.  

     I was curious as to how the note could be bought and sold since you described it as being a promise to make payments. 

    0Reply
  • Michael Beeman
    Casey, IL · Member since 2017 · 175 posts · 308 votes
    9y

    @Benjamin Shaw

    Holding a note (mortgage) are basically the same thing. They are a lien from a certain position on a property. Maybe it will help if i take a property i recently purchased and give you an example of how to use this. As in all instances, definitely do not try to do this without consulting and using a qualified real estate attorney. 

    @Ben Leybovich please step in if the following example does not follow your meaning. You're certainly a more qualified and experienced teacher. 

    Example:   I want to purchase a 4-plex. I have already evaluated the deal and recognized it is a great deal. And I have multiple exit strategies at the end of it. I know that I do not have the financing. So I find a private lender who is willing to finance 60% of the property cost, but only if he has a first mortgage (note) on the property.  

    Now I have 60% of the total property financed.  Next I approach the seller and say, "I would like to buy your property, and I can give you 60% of your asking price up front, and I will need you to give me a loan for the other 40% as a second mortgage against the property"  

    The seller may not like this. But, you can help "sell" the idea to the seller in this manner.  "If you (seller) would do this, you will still hold a lien against the property that I intend to manage and handle all of the day to day operations and maintenance issues. You will no longer have to be involved. Plus you will be receiving the asking price (or whatever negotiated price can be agreed upon) in full. With basically 60% of the money up front, and interest plus the balance on the rest of the money."  .. I might also tell the seller, it's kind of like he refinanced his property to get 60% of the value out of it, and he still has no more burden of running the day to day operations.

    There are a lot of different way of "selling" the seller on this concept. And, you will probably have to. Most sellers want all of their money up front. But, many sellers realize that there aren't a lot of buyers for their particular property.  And getting 60% up front, plus a 2nd mortgage and interest on the other 40% is an interesting option.  

    I hope that helps. Ben is certainly a better teacher than I am. I would recommend really diving into your studying of his and other real estate teachings before making a leap of this kind.  

    3Reply
  • Michael Beeman
    Casey, IL · Member since 2017 · 175 posts · 308 votes
    9y
    Originally posted by @Benjamin Shaw:
    Originally posted by @Michael Beeman:

    @Benjamin Shaw

    Basically just like a First Mortgage and second mortgage. If your private lender has a first mortgage, in the event that u stop paying, he has first position to foreclose on the property. 

    Now, the original owner of the property has what is essentially a second mortgage, So, he will have the option to foreclose from second position if you stop paying him as well. But, if he forecloses on you from second position. He would be required to satisfy the principle on the loan from the first position lender (which in this case is your private lender).  It's pretty standard practice with banks. 

     Why does the seller end up with the second position? Why are they responsible to pay off the first position if you stop paying them?

     The seller ends up in the second position, because your private lender is going to want the first position. Check out my example in my other post.

    1Reply
  • Benjamin Shaw
    OP
    Danbury, CT · Member since 2017 · 56 posts · 10 votes
    9y

    Thanks @Michael Beeman This really clears things up!

    1Reply
  • Michael Beeman
    Casey, IL · Member since 2017 · 175 posts · 308 votes
    9y

    You're welcome @Benjamin Shaw. Glad I could help. 

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    9y
    Originally posted by @Michael Beeman:

    @Benjamin Shaw

    Holding a note (mortgage) are basically the same thing. They are a lien from a certain position on a property. Maybe it will help if i take a property i recently purchased and give you an example of how to use this. As in all instances, definitely do not try to do this without consulting and using a qualified real estate attorney. 

    @Ben Leybovich please step in if the following example does not follow your meaning. You're certainly a more qualified and experienced teacher. 

    Example:   I want to purchase a 4-plex. I have already evaluated the deal and recognized it is a great deal. And I have multiple exit strategies at the end of it. I know that I do not have the financing. So I find a private lender who is willing to finance 60% of the property cost, but only if he has a first mortgage (note) on the property.  

    Now I have 60% of the total property financed.  Next I approach the seller and say, "I would like to buy your property, and I can give you 60% of your asking price up front, and I will need you to give me a loan for the other 40% as a second mortgage against the property"  

    The seller may not like this. But, you can help "sell" the idea to the seller in this manner.  "If you (seller) would do this, you will still hold a lien against the property that I intend to manage and handle all of the day to day operations and maintenance issues. You will no longer have to be involved. Plus you will be receiving the asking price (or whatever negotiated price can be agreed upon) in full. With basically 60% of the money up front, and interest plus the balance on the rest of the money."  .. I might also tell the seller, it's kind of like he refinanced his property to get 60% of the value out of it, and he still has no more burden of running the day to day operations.

    There are a lot of different way of "selling" the seller on this concept. And, you will probably have to. Most sellers want all of their money up front. But, many sellers realize that there aren't a lot of buyers for their particular property.  And getting 60% up front, plus a 2nd mortgage and interest on the other 40% is an interesting option.  

    I hope that helps. Ben is certainly a better teacher than I am. I would recommend really diving into your studying of his and other real estate teachings before making a leap of this kind.  

     Yes, so basically the reality behind owner-financing is that it happens for one of three reasons: A - property is defective in some way and owner-financing enticement is absolutely necessary in order to attract a buyer; B - owner's taxable event implications; C - owner wants to convert the face value of CF from rental income to note income. Or some combination of the three...

    The second position lien bit is a function of the reality that if another entity participates in the financing package, he/she/it is unlikely to accept anything other than first position lien, which pushes the owner into 2nd.

    The only other option (and I say that with a laugh since there are only about a billion  options) is either bridge financing, unsecured financing, cross-collateral with or without blanket notes, etc. But, all of these have to involve something you already own...

    I think I broke a sweat...

    3Reply
  • Todd Schaefer
    Real Estate Agent · Fernandina Beach, FL · Member since 2017 · 11 posts · 3 votes
    9y

    Out of curiousity on lien positions... This all has to assume that any exisitng lien on the property (i.e. the owner's mortgage) has to be paid off by the private lending 60% in order for it to take first position, is that correct?  Or is there another way to get this recorded?  It seems unlikely the primary mortgage would accept second position if not paid off.

    0Reply
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