As I progressed in any career as a Realtor I became very interested in Real Estate Exchanges – Exchanging one property or properties for another.  If you are not familiar with this technique I will give you a brief explanation how it works.     Section 1031 of the Internal Revenue code states that if you exchange a property that you hold for business or investment for another property that you intend to hold as a business or investment - then you do not have to pay taxes on your gain; your taxes are not forgiven, they are deferred.  However,  if in the exchange a party receives an “unlike property”, such as cash, mortgage relief, etc., then that “unlike property” is taxable.  Cash received in an exchange, is like Kryptonite is to Superman.

Now, I am not a CPA or Tax Attorney so please don’t take any statements that I may make as gospel.  I am not in any way, shape, or form giving tax or legal advice.  What I want to do is relate to you an example of how exchanging can work as an investment tool.  I am going to do this with the following story from my experiences.

At the time of this story I had a listing on a 40 acre, 200+ space Mobile Home Park in Southern Arizona for, as best I can recall, about 2 million dollars.  You can tell this was a while back.  The price today would probably be around 5 or 6 million.  Taking my property information with me, I attended a Society of Exchange Counselors market session.  These sessions happened 5 or 6 times a year and lasted usually 3 to 5 days.  The average headcount at my session was probably around 50 exchangers.  This group, which is still going strong, was made up of around 100 Realtors from all over the country.  I was a member of this group for 15 years and during that time I met and learned from some of the brightest minds I have ever encountered in the Real Estate industry.  The group has a website: www.SocietyOfExchangeCounselors.com.

One humorous thing I remember about this group was a comment made by our secretary who, among many other things, was responsible to find a meeting place for the Marketing Sessions which were held at various cities around the country; from Hawaii to New York.  Her comment was, “It’s difficult to find a room large enough to hold all these egos.”

As a tag on the commission bit, it turned out when we were almost ready to close ALL these transactions, the Riverside investor needed $50,000 to close his end of the deal.

  After a lot of haggling, I reluctantly agreed to use $50,000 of my commission in exchange for a 10% interest of the equity in the Mobile Home Park.  In less than a year I sold my 10% interest for $90,000 to the investor’s brother.  As you can tell, I like successful and unusual stories from professionals in Real Estate or Investors.

I would like to hear your story.  Maybe we could publish it on my Blog, giving you credit as a guest writer.  If interested, email me at jr1@RealEstateJack.net.

A thousand years ago (more or less) I was a newly Licensed Real Estate Agent in Sierra Vista, Arizona.  The only knowledge and “Skill” I possessed was what I had learned in the classes I took to get my License.   This particular day I was doing floor duty.  All you Realtors know what floor duty is, right?  That’s what you do to get business - until you get your “Farm” built.  If you would like some of my ideas on building your farm, please view my article post, “Real Estate’s Building Your Farm” in the Broker Corner of my Blog http://RealEstateJack.net.

Anyway, back to my “Easiest Deal” story.  This fellow, Mr. Smith, came into our office wanting to sell a property.  He was directed to me wherein he explained that he had this Triplex he wanted to sell.  The Triplex, he explained, had been converted from an old church building and was located in a small town some ten miles from Sierra Vista called Nicksville.  So we signed-up a Listing Agreement, right then and there.  At this time I don’t remember the price he wanted for the property.  Also at that time I had not even seen the property and being on floor duty, I could not go do that until a later day.

So after exchanging a few pleasantries, the gentleman left.  I would guess that this was probably in the late morning.  After he let I got back to doing what Realtors do when on floor duty; answering random telephone calls and handling walkins – like the gentleman who wanted to sell his Triplex.

Sometime later, probably around mid-afternoon (this is the same day), Mr. Smith comes back into the office.  Another gentleman, I’ll call him Mr. Allen, was with him.  Mr. Smith explained to me that Mr. Allen wanted to buy the Triplex.  Needless to say, I was ecstatic!  Mr. Smith further stated that they had already been to the local bank and arranged for Mr. Allen to get a loan on the Triplex.  I wondered later how they managed to get that loan; especially after I had seen the property, which was somewhat “rough”.

Anyway we drew up the Purchase Agreement with Mr. Allen agreeing to pay full price.  At the time I just could not believe that this deal would ever close.  There had to be something I couldn’t see or understand.  However, my fears were unfounded.  As soon as the title work was done, the deal closed.  I received both the Listing AND Selling commissions.  I came to find out later that all deals weren’t going to be this easy.

The rest of this story is that Mr. Allen became a regular and fruitful client of mine.  I think that eventually I sold that same Triplex at least three times.  So there you have it - my “Easiest Deal”.

I want to invite any and all of you readers to email me your “Easiest Deal in Real Estate” story.  You don’t have to be a Realtor to do that.  Who knows, I may publish your deal as an article on my Blog, with your permission, giving you credit.  Email me at jr1@RealEstateJack.net

When we ended Part One of this formula, we had figured out how to find paper to buy so that we can “Flip” it and get some of that Cash Flow.  Just as we discovered how to find and buy Real Estate paper, which we will refer to as “Notes”, we will more or less use the same tactics to find someone that we can flip these notes to, for a profit.   Good sources are Realtors, Real Estate Attorneys, CPAs, Financial Planners, Stock Brokers, Loan Officers, etc.  However, the best probable way is the old “Ad in the Newspaper” formula.  You could advertise with words like “Real Estate Note For Sale” or “Investor Needed To Purchase Real Estate Notes”.  Check the newspapers and Yellow Pages for ads like “We Buy Notes” and/or “Top Dollar For Your Notes”.  In other words, look for the same ads we saw and used to find Notes to buy & flip. 

When you find an Investor or Note Buyer, you need to determine the requirements and perimeters of the Note Buyer, such as: 

What kinds of properties will they accept as security for the note?  For example, Single Family houses, Land or Lots, Apartments, Commercial Property, or Mobile Homes with or without Land.

What kinds of minimum yields do they want from the notes they buy?  This will vary based on many factors, such as security for the note.

Investors will want greater yields on higher risk notes.  For example, a note secured by a Single Family, Owner-Occupied (with excellent pay history) would probably require the lowest yield, let’s say 12% return on the investment.  On the other end of the scale might be Raw Land, wherein an investor may require 18% or 20%.  In this article I’m not going to get into how to calculate yield.  I will, however, recommend that anyone interested in these types of deals purchase a good financial calculator or software.

Examples of other things an investor may require are Title Insurance, Appraisals, Credit Reports, Casualty Insurance, etc.  These things discussed above need to fit the investor which you may be dealing with.

OK, so now we have found a note to buy on a Single Family house.  The face amount of the note is $80,000 with 10% interest payable monthly over 20 years.  You know that the “Going” investor yield requirement for this type of note is 12%, which you could sell this note for $70,115.  So for you to make a profit of , say $4,000, you offer and get accepted a bid of $66,115.  You should actually get a written contract to buy the note from the owner, preferably an “Option To Purchase”.  You have to keep in mind who is going to pay things like Title Insurance, Closing Costs, etc.  If you are going to pay for these costs, you better subtract the amount of these costs from your offer to the owner of the note.  Investors do not normally pay these costs.

What you are going to do is have a “Double” or almost simultaneous closing wherein you will close with the owner of the note first.  Then a few minutes later you close with your investor who is buying the note.  The closer(s) will then disburse the funds; $4,000 to you, and $66,115 (less Title Insurance fees & Closing costs) to the note seller.  Actually, I found it works better if I paid these costs and bought the note at a lesser price, say $64,500.  Sometimes when people go to a closing they become unhappy when they realize they’re receiving less money that they thought they were going to.

I know I’ve covered a lot here that seems complicated, and it is – a little; however, once you’ve done a few deals it becomes routine.  I remember when I first started trying this.  I became discouraged and it took me a few months to close my first deal; however, since that time I would estimate that I’ve bought and sold over 6,000 notes – And most of those, one at a time.  Of course once my volume increased I hired people to help me. 

The note business is a great and very interesting career; Something new or different all the time.  One thing I want to stress is that it is very important to have that double closing so that you actually own the note, even if only for a few minutes, before you sell it to your investor.

I will be publishing a book in the future, showing in detail how to thrive in this great business.  I will be selling the book for a nominal price, which at this time I haven’t determined.  It will depend on how much time I put into it; however, I want it to be as complete as I can make it.  I’ll tell you this, if a person enthusiastically gets into this business, the business will always be there with excellent financial returns.

You’ve heard of flipping houses, haven’t you?  This has become well known over the past years, mainly because of many Real Estate “Gurus” teaching seminars, writing books, selling tapes, etc.  There’s even been some bad connotations from various forms of government; primarily because they don’t understand it, instead they believe & do whatever the Banking Industry tells them to do.   I don’t mean to get off on a political soapbox; however, the kind of house flipping I know about and have written about is perfectly legal and if done right, benefits all parties.

So what about this “Flipping Paper” thing?  Well, it’s a lot like flipping houses.  It is also quite similar to being a Bird Dog for house-buyers, as I discussed with you in one of last week’s articles. 

What I’m going to discuss with you now is exactly what I did when I first got in the paper business.  I took a seminar taught by Mike Meeker, a well known and excellent teacher, who I believe is now retired from teaching.  I also believe he is living in Florida, or was when I last had contact with him.

Anyway, back to our story.  This was back in the late 1980′s and I had no money available for investing.  Here is the concept:  You want to find Real Estate “paper” (Land Contracts, Trust Deeds, Mortgages, Notes) that is “For Sale” or will become for “For Sale”.  To make it simple, let’s just call all these different types of paper, “Notes”.  You are looking for Notes that were created in an Owner-Financed sale of Real Estate.   Because of today’s market, these types of notes are plentiful; however, in any kind of market there will always be these “Private” Notes available because many buyers can’t qualify for Bank Financing and many properties won’t qualify for Bank Financing.  To give you an idea of today’s market, just take a look at any major newspaper’s “Real Estate For Sale” section, and look for those ads that state “Owner Financing”, “No Bank Qualifying”, “Special Financing”, etc.

Trust me on this point; there will ALWAYS be Private Notes available and many of the owners of these notes would rather have a large chunk of cash Now rather than monthly payments over X number of years.  Also, there are and always will be Private Investors (and sometimes big company investors) who buy these notes.  Why?  Because almost ALL Private Notes can be bought at a substantial discount.  Why?  Because of the greater risk involved in these non-qualifying buyers and/or properties.  In fact, I have never seen or heard of anyone who would pay 100% on the dollar for a note.

So let’s start putting this together.  Remember, you are going to function as a “Middle Man”, not unlike the “Bird Dog” mentioned earlier.  Here’s how we get started: 

Find the Notes.  There are numerous sources; such as Realtors, Title Companies, Real Estate Attorneys, etc.  You can run a short ad in your local paper, such as – “I Buy Real Estate Notes” or “Top Dollar For Your Real Estate Note”.  If you scan the ads you may see other people looking for notes.  Don’t worry – There are enough to go around.

You could also look for ads offering “Owner Financing” in order to sell a property.  Call the person, then ask them if they might want to sell their note after they close on the sale.

So let’s say you find a note for sale, what now?  You need to have funds available to buy the note.  Where do we get that?  How do we know how much to pay for the note?  In our next article we will get into answering these questions and how you can get that cash into your pocket. 

To Be Continued -