The following is a transcript of a chat room session hosted by John D. Behle. John is one of the foremost educators and practitioners in the field of discounted paper investment.
His innovative strategies and techniques have shaped the industry. With over two decades in the industry and an extensive background in real estate and finance, John Behle adds a wealth of knowledge and experience to his creative money-making techniques.
John holds an National Council of Exchangors “Gold Card” and an EMS designation. He is also listed in Who’s Who In Creative Real Estate.
Host JohnBehle says:
The topic is paper all aspects – but special topic of improving paper. This is a tricky one to tackle from a chat room perspective – I’ll try to avoid the numbers and focus on the concepts.
There are two articles posted that I referenced on the newsgroup for your later information. I’ll research some posts too and reference them.
My major philosophy about paper is the upside potential – not just the yield you buy it at. Most of my portfolio yields 40-100%.
Some are created at high yields and others are created to be high yields.
The simplest example is an “Early Payoff” – in the CMO industry they refer to it as refunding. For them it is a nightmare, for us it is a windfall profit.
So, I buy a note that is based on thirty years – what do I pay? A high discount because of the length of the loan.
Lynn_AL says:
Do you have a hard time convincing the note holder to sell to you with such a high yield?
Host JohnBehle says:
They rarely sell at that yield. It is a yield I create later.
I may buy at 18% and turn around and re-structure the note with the payor to yield 40%
Example – I buy a 30 year note and go to the payor and ask if they would like to lower their interest.
Lynn_AL says:
15-18% average purchase yield?
Host JohnBehle says:
I lower their rate – cut it in half – they double their paymentsThe loan shortens dramatically – and my yield skyrockets. Generally – I let the others fight for the low yields. Balloon payments are one of my favorite situations.
You show them 2 benefits–1) cut the interest rate in half and 2) show them how they cut down the term.
Host JohnBehle says:
The payor is usually quite concerned and if he isn’t I am. Right, JP. They save thousands in interest. Example – 10,000 note thirty year term 10%.
JP-Vaughan says:
John–explain how the time value of money skyrockets your yield…
JohnBoy says:
Can most people afford to double up on their payments?
Host JohnBehle says:
I lower their rate from 10 to 5 and they raise their payments from 87.76 – 175.52. My rate goes up – because I am getting my discount back quicker.
Paris says:
John, what could be a down side of holding paper long term. With the market being as strong as it seems to be nationwide, are flips are selling at a discount another option?
JP-Vaughan says:
One of the “miracles” of paper!
Host JohnBehle says:
Notes sell and discount based on the time – the length of the note – a long term note takes a large discount a short term note takes a small discount.
CarolFL says:
Time value of money.
Host JohnBehle says:
When I shorten the term – my discount comes back quicker and my yield goes up – the two articles I referenced show examples. Holding paper long term is fine – I am usually locked in on my spread. My cash is for the short term deals – I finance much of the long term paper.
If yields and interest rates fluctuate – my spread remains the same – long term notes with long term financing and a set spread. So, I buy a note at 18% and may have financing at least 2-4% below that. My cash flow is set. The challenge becomes re-investing the cash flow.
Questions?
Lynn_AL says:
Is it easy to find financing to borrow to purchase a note?
Host JohnBehle says:
I use private investors – It is easy – just a matter of knowing how.
Lynn_AL says:
Run ads?
Host JohnBehle says:
There are people out there that need to lend you money.
drew says:
Do you recommend any books or courses on working with private investors?
WilliamGA says:
How do you find them?
Host JohnBehle says:
Ads are risky – securities laws concern me – especially since I’ve had them call me.
Lynn_AL says:
Do you just walk into a bank with a note and see what they will loan you?
Host JohnBehle says:
I don’t know of any other than my videos.
Private investors are much easier than banks.
Host JohnBehle says:
You have to have a personal relationship with them and cultivate it.
Host JohnBehle says:
Banks loan against people – private investors.
DanMC says:
John—-If you cut the interest on the long term note in half, double their payments…and increase your yield…..What is your next step after they have paid it off (early)?
Host JohnBehle says:
They can be convinced and educated to loan against the collateral.
Re-invest.
David_A says:
Do you spend more of your time refinancing people or restructuring the notes?
Host JohnBehle says:
To me, paper is very liquid.
Host JohnBehle says:
In the market the last while, there is more refunding going on.
Host JohnBehle says:
We run people in for a refinance and a quick profit.
Lynn_AL says:
Do you suggest running an ad looking for a loan, find out how much they will loan and at what rate, then call them when you find something?
Host JohnBehle says:
I don’t suggest ads – it is a very grey area.
Host JohnBehle says:
I ran an ad one time and the real estate division was my first call.
Lynn_AL says:
How do you find these investors?
Host JohnBehle says:
It educated me on public and private offerings and said to get my ad out quick
There are many posts in the CFF about “Equity Arbitrage”. That is one of my primary ways I find investors.
The investor has equity and could use cash flow and a better rate of return. They borrow against their equity and loan at a higher rate secured by paper.
They are well collateralized.
One of the safest investments they could make.
Host JohnBehle says:
Now – restructuring – is one of the main reasons I teach people to hold paper instead of broker.
I can buy a note at a discount – finance it 100-120% or more, put cash in my pocket and still profit long term.
100% paper is as easy – possibly easier than 100% real estate financing.I’ve done both – paper is less brain damage – it stimulates my brain – instead of frying it.
So, I buy a 10k note for 6k, finance it for 7500 and make as much as someone else might have made brokering it, and if it pays off early – I make an extra profit of 2500.
Build a million dollar portfolio and you can retire – even if it is financed 100%
Host JohnBehle says:
I am buying with a good LTV and at a discount.
Lynn_AL says:
What’s your max LTV?
David_A says:
So you don’t deal in high LTV seconds?
Host JohnBehle says:
The investor has the advantage of that low LTV – let’s say 75%
I deal in anything that makes a profit and is legal and safe.
I would look at a high LTV second – if I want the property.
I don’t risk my capital or that of an investor.
Lynn_AL says:
What’s the difference in LTV and ITV?
Host JohnBehle says:
LTV is Loan to Value – ITV is Investment to Value
Lynn_AL says:
Can you explain?
Host JohnBehle says:
I could buy a 100% LTV note and still have a 70% ITV and be happy and safe – if it is a first.
100k property – 100k first loan = 100% LTV – I buy the first for 70k -= my ITV is 70/100 or 70%
Lynn_AL says:
So you don’t look at LTV, just ITV?
JP-Vaughan says:
You wouldn’t mind getting the property, right?
DanMC says:
So if it’s a property that you would not mind owning, if it came to that….you would look at a second. is what you are saying?
Host JohnBehle says:
So, paper can be nothing down, with a cash flow and a long term or short term large profit potential.
I don’t buy a note if I wouldn’t want the property – personally – or know that it is liquid.
Clark-_Ohio says:
OK, sorry I don’t understand. I apologize.
Host JohnBehle says:
Questions?
Lynn_AL says:
Do you actually go out and look at the property before buying the note?
Host JohnBehle says:
Always.
Host JohnBehle says:
I’m pretty picky that way. I don’t even rely on an assistant.
MarkHOUTX says:
John, on the $7500 you borrowed in the example above can you give me an example of the terms from your investors?
Host JohnBehle says:
They may do the preliminary data, facts, preview, etc., but I review everything including the collateral.
That is why I don’t do notes I can’t or won’t get to easily.
JohnBoy says:
So you buy a $100k note for $70k………lets say the rate is 10% on the $100k note…….what rate do you borrow at to buy that note?
Host JohnBehle says:
The collateral – I mean the best I can.
Paris says:
John, seems the profit is made in buying right in the beginning. If the deals doesn’t make sense you just walk from it. Is this correct?
Host JohnBehle says:
Maybe 12% in this market.
We have some lines as low as 9%
I don’t ever walk.
Paris says:
Run??
Host JohnBehle says:
I guarantee the investor and solve and handle problems.
Host JohnBehle says:
This is a long term business – for me.
Lynn_AL says:
You’ll ALWAYS make AN offer?
JohnBoy says:
So how do you make money borrowing at 12% when the note is paying only 10%?
Host JohnBehle says:
Not on everything.
JP-Vaughan says:
Yield, JB.
Host JohnBehle says:
I may buy to yield 16% and borrow at 12% – the face rate of the note is at 10% – that is irrelevant.
It’s the discount that makes it fun and profitable.
Lynn_AL says:
So, we shouldn’t be too concerned with interest rate…but yield?
Host JohnBehle says:
The yield is what’s important. I discount to a certain yield – my yield that suits me.
WilliamGA says:
What if they will not take the lower rate and double up on the payments?
Host JohnBehle says:
That ranges 14-20+ percent on discounted paper right now and 20% + for hard money loans. They don’t have to. There are over 117 ways to improve notes.
Not every one will.
As they say SWSWSWSW.
JohnBoy says:
OK……but what if the payer never pays off early and then can’t afford to make a higher payment to restructure the note?……eventually the $30k gets eaten up with the offset of the higher rate you borrowed at? How do you prevent that from ever happening?
Host JohnBehle says:
That’s not how it works.
JP-Vaughan says:
JB–He gets the initial yield on the DISCOUNT when he buys.
Host JohnBehle says:
Forge the face rate of 10%
I buy at a discount – like a bond – to yield 16% to me.
I borrow from an investor at 12% – I have a 4% spread on 100% borrowed money
drew says:
I’ve heard of people specializing in “small” notes…what is considered “small”?
David_A says:
Are you in a constant state of turning your money over to increase your yield?
Host JohnBehle says:
so – 10,000 10% note – I invest 10,000, my rate = 10% – I invest less – my rate or yield is higher.
drew says:
<$10K ?
Host JohnBehle says:
David, yes.
Lynn_AL says:
You make a 4% profit, but if they pay off early, that when the numbers increase?
MarkHOUTX says:
John, does your course cover how to find these investors?
Host JohnBehle says:
Drew – I go as low as $1200.
Host JohnBehle says:
Mark, yes.
Host JohnBehle says:
Yes.
We do some commercial paper, too.
I do a collateral conversion – I substitute the personal property for more desirable real estate collateral.
Or – we do a rollover.
That is where you make a small consumer loan and then upgrade them with a debt consolidation or HIP loan , etc.
MikeWood says:
HIP?
Host JohnBehle says:
Home Improvement
Or, for hip replacement.
We’ll do that.
Host JohnBehle says:
Plastic surgeons are a good source of paper.
MikeWood says:
Repo is kinda hard.
SandyFL says:
Finance your tummy tuck.
Host JohnBehle says:
Repossession is hard, as in cemetery paper.
If you don’t pay the exorcist – you get repossessed.
Host JohnBehle says:
Questions?
MikeWood says:
Can you talk about how to find non performing paper?
Roni says:
How can you pay full price for a property and use notes to make money?
David_A says:
Yes, finding Non Performing Paper?
Host JohnBehle says:
Foreclosure notices, attorneys, banks, collection companies (servicing), do your own collections, Notices of Default, and legal papers.
JohnBoy says:
Ok, I think I got it……Lets say the note was just created for $100k at 10% for 360 months……that’s $877.57 per month……..you buy for $70k and borrow at 12% $75k……you put $5k in your pocket and your payment to the investor on $75k at 12% is $771.46 per month…….you get $106.11 cash flow plus the $5k up front and that’s with doing nothing more with the note and letting it go the full term which is unlikely…..and if it pays off early you can.
Host JohnBehle says:
Exactly!
JohnBoy says:
THAT IS NICE!!!
Host JohnBehle says:
If it pays off early – I pay the investor their 75k and a bonus and pocket 25k windfall profit.
Lynn_AL says:
John, how does a early payoff on a partial get divided up?
David_A says:
A Bonus, Nice name for prepayment penalty? LOL.
David-S says:
I like the up front cash…. 100% financing just ain’t enough… LOL.
Host JohnBehle says:
Lynn – there are many ways to do partials – most do it wrong – if there is an early payoff – it is mine to keep.
Lynn_AL says:
All of it?
JP-Vaughan says:
John, do you usually write a new note secured by the other note?
MikeWood says:
Can you elaborate?
Host JohnBehle says:
There are three ways to do partials – most use the contract method – I don’t it is unsafe, flawed, legally questionable and, most importantly, UNPROFITABLE.
I use the compensating note technique.
I write a note to the note seller that mirrors the part of the note that I did not buy.
Yet I buy the whole note.
Seller financing of seller financing.
JohnBoy says:
So this would be a great way to save someone in foreclosure if you can buy their defaulted note at a good discount and restructure their payments to bail them out AND save their credit?
Host JohnBehle says:
And I give them some other property as collateral. If there is an early payoff I smile and they continue to be paid. I re-invest the profits and an way ahead.
Lynn_AL says:
You buy the whole note and write another note for the difference?
Host JohnBehle says:
You’ve got it.
Host JohnBehle says:
I call it the foreclosure guarantee.
JP-Vaughan says:
Good marketing, John.
Host JohnBehle says:
The ultimate nothing down note purchase. You just guarantee the payments and take over the note.
My down may be the back payments or nothing at all.
I then take the payor to lunch and solve the problem.
A very expensive lunch for the note seller.
JohnBoy says:
Dang! Why would anyone want to look for properties to buy when you can buy all that paper out there that’s in trouble???…….I’ve been doing the WRONG thing! 🙂
Lynn_AL says:
You’re buying the note from the mortgage holder?
Host JohnBehle says:
Yes.
So – mortgage brokers and companies call you when they have a default.
jason_ga says:
How do you locate the mortgage holder, courthouse?
Scott_OR says:
Do you find they are willing to let you take offer the note easily, or do they normally want down payments?
Host JohnBehle says:
You solve the problem, make the profit, and they make more loans – and stay in business.
Courthouse sucks.
Lynn_AL says:
Instead of calling on the property owner, who’s going into foreclosure, call on the mortgage holder and try to buy the bad note?
jason_ga says:
John, where do you go?
Host JohnBehle says:
I just posted some info related to that on the cash flow newsgroup.
Financial planners, CPA’s, bankers, etc.
MikeWood says:
John give us a quick example…ABC Mortgage Co. calls and says they have an 80K loan in default…..it is 18 mos old….walk us/me through your approach.
Host JohnBehle says:
Scott – about 50/50.
Host JohnBehle says:
I like personal meetings in a case like that, at least at first, to establish and strengthen the relationship.
JohnBoy says:
So you could run an ad that says something like:……….Facing Foreclosure?……..We can help you save your home and credit at NO COST TO YOU!…..Call XXX-XXXX……right?
MarkHOUTX says:
John, can you go through that again.
Host JohnBehle says:
I find out how far in default it is and shoot for discounted buy if they want or offer them that they can take a note. Secured by that note or another piece of collateral they usually want something else.
Host JohnBehle says:
JB – ya.
David-S says:
John, what are the lenders requiring from you? do you qualify in any way?
Host JohnBehle says:
Mark – which part?
Host JohnBehle says:
David – sometimes – usually not – that is part of the tradeoff.
Host JohnBehle says:
The problem with banks is I start solving their problem and they start getting picky.
Host JohnBehle says:
That’s the hard part of it all.
David-S says:
John, so if the lender gives you any “stuff”, you use your private money?
David_A says:
What about when the equity you have is usually above the 80% mark? Will they take that for trade as collateral?
MikeWood says:
What do you mean picky?
Lynn_AL says:
How would JB’s ad get us notes. It’s geared to the home owner who’s in trouble?
Host JohnBehle says:
Picky – as it.
JohnBoy says:
The home owner is……..you call their lender and negotiate to buy the defaulted note saving them the hassles of foreclosing.
Host JohnBehle says:
For example – we structured a deal with a large bank to buy 1 million in foreclosures, assuming they would take paper (we bought at a discount).
At first, they are astounded that their problem is being solved, then they start getting picky about the paper – want it FNMA grade – I have to tell them – excuse me, but if it is FNMA paper – what the heck do we need you for?
DanMC says:
John…..can someone who has no cash do any of this, for example, through financing from a bank/mortgage Co./private lender?
Host JohnBehle says:
Banks are tough to start with.
Private investors are the way to go – but it really helps to have a track record – so you broker a deal or two and show that as your track record.
You show the investor the collateral and that the worst case scenario is they end up with a property that is worth much more than their investment.
That’s part of why LTV’s are SO important.
Lynn_AL says:
You “want” high LTV’s but low ITV’s?
Host JohnBehle says:
I’ve had banks finance me, but usually it is the small ones. Thrifts, credit unions, etc
JP-Vaughan says:
No, Lynn
WilliamGA says:
I thought it didn’t matter if the LTV was 100% as long as the ITV was good.
Host JohnBehle says:
The lower the LTV and ITV the better.
Host JohnBehle says:
ITV rules.
JP-Vaughan says:
You don’t “prefer” high LTVs Sometimes you can work with them…
Host JohnBehle says:
Right.
WilliamGA says:
I see.
Host JohnBehle says:
Except -sometimes they are notes that no one else wants.
DanMC says:
So a first with a low LTV at a discount is a fairly safe proposition?
Host JohnBehle says:
Those are my favorites and the most profitable.
Safe and low yield with much competition.
Lynn_AL says:
What sorta yield do you look for in a 2nd?
Host JohnBehle says:
I look for the deal that others don’t know how to do, the best I can get.
Lynn_AL says:
Higher than a first, right?
Host JohnBehle says:
Usually – but it depends on many factors.
Host JohnBehle says:
Questions?
Bert_ND says:
Do you have any opinions on the on-line note services for finding notes?
Host JohnBehle says:
Yes.
Bert_ND says:
And they are—?
Host JohnBehle says:
Some real players – many wannabes.
DanFink says:
John what success have you had trading notes for reo’s and at what discount?
MikeWood says:
How can you tell the difference?
Host JohnBehle says:
Stick with the major funding companies.
JohnBoy says:
I have a lender that says he will sell me his bad paper at a discount and finance it for me at a 100% of my purchase price on the note……how does that work with them having collateral on that note they sell and finance to me?…..I assume they use the property in question as the collateral……then how does that work if I restructure the note with the home owner or sell to someone else?……are their going to be 2 notes against the property…..the
JP-Vaughan says:
Forget brokers, deal with principals.
Host JohnBehle says:
Exactly – “broke brokers” will take you for a ride – and cost you.
Host JohnBehle says:
Deal directly with the money people.
If it isn’t their own funds – find someone else.
JP-Vaughan says:
I cannot tell you how many times we get the same package Terry is selling offered back to us! On one deal, it was about 15 times…
Michael says:
What is the test to be sure you are dealing with principals?
Host JohnBehle says:
JB, the lender can create a note against that property or if you have another piece of collateral to offer
Then you can use the situation to finance some dead equity out of a property.
Bottom line is if you solve the lenders problem – it has to be profitable and they have to be flexible.
Remember, most other options are better for them than foreclosure
Host JohnBehle says:
Sometimes, you can have lender A finance lender B’s deals and vice versa.
they may have provisions or reservations about financing their own REO
JP-Vaughan says:
John, thank you soooo much for sharing your vast knowledge and experience with us tonight!