In Part I, I gave you the definitions and perspective of paper I learned and developed over many years. In Part II, I gave you a real Paper case so you could get a handle on, present value concepts, discounting, Givens, and Ns and PMTs, which form annuities that make you money. Today, in Part III, let me show you through my experiences, why buying Paper at discount has always been far better for me than lending money.
BUYING EXISTING PAPER VERSUS MAKING LOANS:
Here is a list of the pros and cons of lending money versus buying existing Paper at a discount. When have finished the list, you will understand why I abandoned lending money and went back to buying Paper at discount.
FACTORS:LOANSDISCOUNTED PAPER
Payors need cash nowyesno – making payments Payors under pressureOftenNot borrowing money
Payor loan constantsCan be highUsually much softer Payors Used to Making PaymentsNot yetYes
Payors used to areaoften notHave a history in area
Track Record of PMTsNoYes
Equity Build upNoMost of the time
Property maintained wellNo historyOwner is/not taking care
Property AppreciationNo historyMost of the time
Low Interest Rates on noteMarket interest rateYes (owner financing)
High YieldsMarket Interest rateMuch higher
Cash Invested in the Paper105 40 70
Availability of the PaperYesLess
ProfitableMostlyYes
Usury LawsYesNo
My Experience to DateProblems (YES!)Fixable
When you make a loan to a new borrower, there is now a payor often with no history in the property, no payment record, no equity build up in the property, and no appreciation or renovations. The payor is not used to making payments, often the payor is new to the property and inexperienced with its problems, and I have no equity in my loan. My yield is close to the interest rate for with the payor has contracted. This is not an idea situation for me. I do not like lending.
If I buy an existing note, the payor and the property and the seller of the note all bring their histories to the table for me to look at, study and evaluate. I get to see just how well the package is performing in all its many aspects. I can see that the property is worth more now than it was when the note was created. I can see that the payor cares about the property, cares about his finances, and cares to expand his property management skills.
The great benefit to buying discounted Paper rather than lending is that the yield (or return on my investment) can be many times greater than the interest rate any lender could ever charge legally. This is because I have less dollars invested in the than note than are owed to me on the note. Hence, I have built in leverage and more flexability with in the note. You need to understand the great difference between the terms interest and yield.
Just about everyone thinks that because the two terms, “interest” and “yield” have a sign after each of the them, Interest and Yield must be the same thing. Nothing could be further form the truth. They are in no way related. My yield is based upon my adjusted cost basis in the note; not the interest rate that the Payor has committed to pay. So my yield can be many times more than the face interest rate on the note. “Interest” applies only to the “Payor. “ “Yield” only applies to the “Payee” – the recipient of the payments.
So, for all of the above reasons, I gave up being a lender and returned to the world of discounted Paper only.
Good Luck and Good Hunting (especially if you are looking for a turkey. HAPPY BIRD DAY to each and every one of you.)
Jay
Author Resource:
Jay Turner has been involved with Real Estate, Paper and Small Business Counseling since 1965 and has been active as an investor, businessman, owner, teacher, lecturer, writer, and author on the subjects of real estate, paper and kitchen table entrepreneurialism as well as a counselor. http://www.OneUpRealEstate.com
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