Big Returns on Small Money

I constantly see questions like, “Will this method work for me in my state?” Or, “I like this technique, but I’ve never seen this kind of opportunity in my area.” Or, “Is this really legal?” Somehow, people are more ready to disbelieve than to believe! All that any of us who teach creative techniques are really trying to do is pass on what we’ve learned.

The methods and techniques most of us use have been around for many years. The pros of today, for the most part, simply adapt yesterday’s techniques to fit to today’s marketplace. But the principles never change. You just have to learn to adapt to your local market to get the results.

Case in point

Ed, a close friend of mine (of more than twenty-five years), owns a mortgage company and has been a successful real estate investor for many years. He likes warehouses and owns many of them around the country. Although Ed is one of the best lenders I know in the business, he somehow has never allowed himself to see the “note” side of the business.

Working notes is different from making loans. Similar, but different. For years, I’ve tried to get Ed to partner with me on several different note deals, but Ed has always said, “No, that’s not my kind of deal.” Recently, Ed read the How I Made a $100,000 Profit for One Dollar on our Success Stories page and gave me a call:

“Maybe I better read your book again,” he said. (I had given him a copy of Paper Into Gold back in 1992 when I first published it.) You see, numbers like $100,000 are more noticeable to experienced investors than smaller numbers. I took advantage of the call and offered to take Ed to dinner the following day.

When I picked Ed up at his office. I told him I needed to go look at a mobile home in a park in San Bernardino, and after that we would go to dinner and get caught up on things. I handed Ed the package on the deal and drove while he read.

Here’s the deal

Current Balance:

$24,635.38

Interest Rate:

11%

Monthly Payment:

$258.05

Months Remaining:

189

Collateral:

1977 Skyline 24×56

Payment History:

Late every month.

Ed asked me why I was fiddling with a little note like this. I told him the deal had been sent to me by one of my finders, and after I noticed the consistently late pay history, I thought there might be an opportunity for a quick profit, with no real work.

He asked me what I had the deal under contract for. (He knows that like him, I won’t waste my time unless I have control of the deal.) I told him I would tell him after we had seen the collateral and the park. He smiled.

When we got to the park, both Ed and I were pleasantly surprised to find the park an extremely clean, manicured, obviously well-managed place. We were almost immediately stopped by the security guard (in his golf cart) to ask if he could give us directions. A very good sign of safe, well-run park. The management was on top of things.

With the guard’s help, we found the home and parked right in front. The home was beautiful! Very well kept, very clean and in excellent condition! Ed walked along with me as I went to the front door and knocked. The man who came to the door confirmed he was the payor on the loan.

I explained I was with a company that bought mobile home loans and that we were considering the purchase of his loan. I asked if we could talk to him and his wife just to confirm some information about the loan. He agreed and offered us a seat at the kitchen table.

Turning a problem into an opportunity

Both the man and his wife were very nice. The home was immaculate and extremely clean and well cared for. After confirming the normal numbers, like balance, payment amount and interest, I asked why their payment history reflected a consistent late payment. They explained that the husband was paid once a week at his job.

Although they made enough money to get by, they had encountered some difficulties about a year earlier, had gotten behind a couple of months and, because of the way their paychecks came in, it meant that the space rent had to be paid first and then they would have to wait until the next two paychecks came in before they had enough money, including the late charge, to make the monthly payment. They were just never able to catch up.

Ed immediately saw what I had seen–an opportunity to change the pay schedule and turn this poor history note into a good paying (and more valuable) note just by changing the payment schedule. He couldn’t help it and quickly introduced himself as my business associate.

He asked the couple if they would happy if the payment date could be changed to the fifteenth of each month instead of the first. Would they be able to make the payment on time and enable themselves to build a better credit history, if we (we?) would be willing to change the date?

I laughed quietly to myself. My close and dear friend has always been a natural at dealing with people. The payors were astonished that we could make such changes. We assured them that we could make the changes once we owned the note, which should happen the following week.

If they were agreeable, I would send them an amendment to the note which, once signed, would put the changes into effect. They heartily agreed and shook our hands as we left.

“I’ll take half”

Once in the car, Ed asked me, “Okay, what are you going to pay for this note?” I asked, him what he thought the collateral was worth. He looked around the park and said, “Well, even if you got the home back, you should be able to blow it out fast for $15,000.” I told him I agreed. Then I told him the price for the note: $5,000.

Ed almost choked. “5,000!” “5,000 dollars?” I nodded. “What’s the yield on that?” he asked. I told him, “About 64%” Ed, laughed and said, “Well, I’ll take half of that deal! I’ll put up $2,500 and you put up the other half.”

It was my turn to laugh. “Ed”, I said, I can’t afford to sell you half of this note.” “Why not”, he asked. “Because, where can I get that kind of yield for such a small amount of money?”

Ed had to agree. It’s hard to put out small amounts of money for such a great yield with such little risk. The trick is to find the same deal for $50,000 to $250,000 with the same risk. Hard to do. Or is it?

That night over dinner, Ed wanted to know more about the note business and what we might do together. (Finally, after all those years!) I told him we might watch for a portfolio of these notes and then do something. I would let him know. It was a great dinner, even though I paid.

Your money doubles every thirteen months

If you have some cash sitting around in a retirement account or earmarked for investments, you can find a little mobile home note and get the same kind of great return. At 64% annual yield, your money DOUBLES every 13 months! If you’re short of cash, and can find an investor who would like a 20% return, you could flip this note for a $10,000 profit.

I’m always looking for notes to buy, especially from banks, and I’m happy to pay a percentage of the deal to anyone who brings me real estate notes. Email me at tlv@creonline.com

About the Author:

Terry L. Vaughan

terry vaughanTerry L. Vaughan has been investing in real estate for over 30 years. He has taught, advised, and inspired over 20,000 real estate students and investors throughout the country. Robert G. Allen, best-selling author of Nothing Down, has introduced Terry as “The man who knows more about creative financing than all the experts combined.”

He is the author of the home study course, Paper Into Gold.