After completing a course at 1031 Tax Free Exchanges in the early 1970s, the first deal on this “revolutionary” means of doing business was a “NOT rated 1031 Tax Free Exchange” with a “pure starter”. This was not “like a property”. A builder had been building houses like crazy and suddenly the market turned south and no one was going to buy the finished houses. Buyers who had just paid a high price for these new homes and had since moved in would not have appreciated the builder selling off the remaining inventory at a large discount and therefore eroding the value of the entire subdivision on a basis of comparable selling price. The builder had been through many construction cycles and did not want to abandon the project leaving previous buyers in a lurch. Rather, it found new buyers, who had previously been turned away due to lack of funds to close, and offered to hold 10-20% LTV (Loan To Value) second mortgages. The terms were low and the interest rate was affordable on second mortgages. With a long history with local savings and loan banks, new first mortgages were arranged and underwritten using the tried and true handy guarantee; the only way to do business at that time. Potential buyers with a good work record, reasonable credit, and the ability to pay were able to move into their new homes with little money out of pocket, as the builder assumed most or all of the closing costs.

This particular builder, in addition to building single-family homes, had built 10 to 16-unit apartment buildings on a parallel stretch for himself and investor groups, and was working with the primary goal of accumulating long-term wealth and tax protection. . Being located in a state capital city and a major university meant that new-build rentals were in high demand. The vacancies were few and in some cases, depending on the locations, there were large waiting lists. Rents were accelerating in light of this high demand for rental housing. The builder offered each tenant in his system the opportunity to own their own home for, in many cases, a slightly higher monthly housing expense than they were currently paying with the added incentive of paying little or nothing of their pocket. The builder made it affordable. Most were held back by the upfront cash investment requirement. In less than 60 days, all the houses had been sold. The 20 homes in excess of inventory that had been completed and vacated were sold with the interest and expense counter ticking. The houses were scattered in four subdivisions. The builder’s earnings came in the form of monthly second mortgage checks. One year he had passes, most paid on time and they really appreciated the opportunity to own a home and were working very hard to maintain it.

Deja vu once again, build cycle after build cycle, builders are back in many areas of the country taking inventory and not knowing what to do. Many builders are tempted to go bankrupt or, in some cases, run away with buyers’ deposits before finishing during these downtime. It’s for the moxy builder to survive.

In this particular case, a list was taken from a 16-unit apartment building immediately across the street from a small metropolitan airport. All units had two bedrooms and were larger than the older complexes in the area. The flight paths were not on the property, but it was an excellent location between the university and the state capital and major employment centers.
There were no vacancies. A son had convinced his father, who was competent in other investments, to accompany the mortgage note to provide financial strength to the deal.
The son had to do all the administration and handle the daily needs of the property. After being on the property for a year, the son began to have marital problems and his business was in decline. The son moved to another state leaving dad with the bag in hand. The father was totally out of his comfort zone. The son had no investment in the deal, so he resigned and claimed his interest from his father. The wife also said goodbye. I wanted to get out of this situation as soon as possible. The builder and his agent came to call.

These days, mortgages were assumable with qualification. Another savings and loan bank in the area had this particular mortgage. The listing had been on the market for two days. The builder did an inspection and was aware of the work of the builder who had built the 16-unit apartment building three years earlier. First, he wondered if the seller (Dad left with the bag) would be interested in taking the second mortgage document as a down payment on the deal. As it turned out, at the time, the parent / seller was a heavily discounted paper buyer. It had a portfolio of discounted land contracts in the range of one million dollars accumulated over a fifteen-year period. Their normal modus operandi (modus oparandi) was to buy first-contract mortgages on land at a 20% to 30% discount. With nominal interest rates of 8% to 10% at the time, their returns were in the interest range of 14% to 15%. At the time, the state statute for usury was 11%. Keep in mind that if the note payment refinances or sells the property, the returns would skyrocket to more than 20%. He loved the notes. Run to the mailbox every month, “Walla” — checks. He had an attorney ready to write letters and foreclose if necessary, but he was able to resolve most situations with negotiations or the borrower would give up the claim and be on his way. Being a careful banknote buyer with a good equity loan to protect your investment, there was a certain comfort zone.

Now this was a different animal. The value of the loan was near the top, but there was a “seasoning” of the paper, meaning there was a history of on-time payments on part of the note payment. The father, the one holding the bag, was very eager to get rid of the property and the daily demands of dealing with 16 separate rental clients. To do? The father agreed to take on the role of the second mortgage with a nominal 10% discount and negotiated a two-year personal and commercial guarantee on each mortgage. Only 14 second mortgage notes were needed to balance the actions in the transaction between the purchase price and the mortgage balance. The builder paid the registration fees and closing costs for all instruments and assignments. Even the commission was taken in the form of a note. For a two-day quote and the low cost of sales involved, this was not bad. Those monthly checks were very well spent.

Also, if one of the notes suddenly went bad, the developer reserved the right to replace it with another second mortgage note should the need arise. You would then settle the difference in cash or substitute a monthly income stream for another promissory note to settle the delinquent amount and withdraw the promissory note. The builder was found to have an excellent credit rating and protected his subdivisions like a jealous lover. If a problem arose, he would step in and try to resolve the default situation, saving the often-used lender a foreclosure on the books and, in this case, the second mortgage. You would do this by paying the promissory note to move in and perhaps rent one of your properties and stop claiming the property while saving the borrower / buyer’s credit rating for use another day. Life is complicated at times and due to illness, divorce or job loss and the results of non-payment. Time has proven this builder’s utilization of this winning formula for success in becoming a billionaire many times in ascending or descending construction cycles. He always used paper to make a rescue when necessary, such as in a construction cycle. If I had to repossess a property, I would either rent it out until it was back on paper or sold it with long-term financing.

Today, home builders and homeowners are once again operating in a soft market. The “paper business” is a great way to make deals work. With the advent of corporate ticket buyers on the market, the opportunities for deep discounts may be limited, however there are still opportunities. If you end up on paper in a deal, hopefully at a discount, many creative professionals use them verbatim to put together buy-and-trade deals. There is more than one way to put together real estate sales. If a buyer owns a car, truck, semitrailer, semitrailer, boat, mobile home, motorcycle, vacant lot, gemstones (appraisals vary), diamonds, collectibles, personal property loan, commercial note, adjudication. , pending lawsuit for a car accident, life insurance annuities, inheritance, business inventory, equipment mortgages, or any number of combinations can be used to make the settlements work.

Yes, it is sticky sometimes, but if you can stay within your comfort zone and two parties agree after using professional appraisers and such, give it a try. The alternative is to do nothing and let the market crash like a freight train escaping, or you can make something happen. After all, this was how Manhattan was bought, traded, and traded. Already seen on the market today. Think outside of your comfortable universe and see an old way of doing new business. Sometimes the deals can be “like” properties and qualify for favorable tax treatment; other times, it will just be “starter” with no tax benefits. Other times it can be both. Already seen. Here we go again.

Leave a Reply

Your email address will not be published. Required fields are marked *