It is time to set those all too familiar New Year’s resolutions. I challenge all cash flow professionals to participate in one of my favorite wealth building strategies in the upcoming year. In the stock market wealth is built on the age old investment strategy of “Buy Low – Sell High.” While this investment strategy sounds simple in theory the practical application can be challenging. Fortunately, we have an equivalent wealth building strategy in the cash flow business with a much simpler and reliable execution plan “Buy Full – Sell Short.”
This strategy is relatively simple. You purchase the full payment stream available on a cash flow product from the holder/seller and sell a shorter payment stream to an investor. This enables a cash flow professional to earn a commission on the initial sale of the partial payment stream to the investor AND keep the future payment stream or remaining payments as a personal wealth building vehicle. This can be accomplished with only an investment of time and without the investment of personal capital.
At Diversified Investment Services we utilize a variety of methods to purchase private mortgages including credit lines, private funds, IRA’s, and institutional funds. We are constantly on the look out for opportunities to purchase the full payment stream from a note holder and sell a shorter payment stream or partial to an institutional investor. To illustrate the power of “Buying Full and Selling Short” I would like to share just two of the real-life transactions completed last year.
The Church Note
We were approached with a well-seasoned note secured by five retail strip mall commercial units purchased by a religious organization for utilization as meeting facilities. The particulars looked like this:
|Terms||10% interest payable in 360 payments of $1,096.96 per month|
|Remaining Term||306 months|
We negotiated to pay $92,804 for the full purchase of the remaining 306 monthly payments. We took a full assignment and purchased the entire note payment stream from the seller. We subsequently negotiated to sell a partial of 186 monthly payments for a purchase price of $95,046. We realized an immediate profit of $2,242 on the sell of the note AND retained the right to receive 120 monthly installments of $1,096.96 each commencing in 15 ½ years.
(Author’s Update: Wondering what happens when a note pays off early? Well that is what happened on this deal and you can read all about it at: http://noteinvestor.com/note-brokers/buying-brokering-notes-residual-income/.)
The Mobile Home Note
A large percentage of our product involves seller financed notes purchased at the time of their creation though the use of a simultaneous closing. There are frequently investment limitations on a newly created note as simultaneous closings frequently involve a purchaser or property that do not qualify for traditional bank financing, making them a prime candidate for this strategy. In this instance the seller financed note was secured by a double wide mobile home permanently attached to a one acre lot as follows:
|Down Payment||$9,000 (5% cash plus a 5.6% second)|
|Terms||12% interest payable in 360 payments of $781.74 per month|
|Remaining Term||360 months|
We negotiated to pay $63,858 for the full purchase of the remaining 306 monthly payments. We took a full assignment and purchased the entire note payment stream from the seller. We subsequently negotiated to sell a partial of 240 monthly payments for a purchase price of $66,027. We realized an immediate profit of $2,169 on the sell of the note AND retained the right to receive 120 monthly installments of $781.74 each commencing in 20 years.
(Author’s Update: This note went into default and the investor had to foreclose. We did not receive our remainder interest but we were happy with the referral fee made at closing when selling the mortgage note.)
While we utilized personal credit lines to fund the seller and subsequently sold the partial to an investor, a cash flow professional could easily set-up a double closing with an investor enabling them to utilize the investor’s funds to pay the seller. The purchase agreement between the seller and the broker would be for a full purchase while the purchase agreement between the broker and the investor would be for the partial purchase. An assignment and note endorsement are executed from the seller to the broker and then from the broker to the investor to complete the chain of title. At Diversified, we frequently prepare this documentation for brokers desiring to use our company as the investment vehicle.
It is easy to see the long-term benefits you can realize by applying the “Buy Full – Sell Short” investment strategy. While a future income stream is the intended goal, the benefits are amplified in the event of an early payoff. As you set your goals for 2001 consider applying this strategy at least 4 times during the upcoming year. It is just one of the many tools available to cash flow professionals that enable you to secure your financial independence.