Newsletter Title
February 2016
MONTHLY
CREATIVE REAL ESTATE
What is a Discounted Note? By Mike Jacka
A Discounted Note is basically what it’s name suggests, a Note that is sold at a discount. Discounted Notes used to be very popular back in the 1980-90’s, but they faded away in the 2000’s when financing became so easy to get that all forms of creative financing virtually disappeared, including Discounted Notes and Note Buyers. This was a very popular form of selling a property with Seller Financing and still cashing out of the property.
at the time was not as difficult as it is today, but it was still not easy for most buyers because of either not having enough for a down payment or because of their credit.
The seller can take back a 2nd mortgage for the difference of 1015%, thus allowing the buyer to buy now rather than having to wait till they were able to save the remaining 10-15% for a down payment. These seller carry back mortgages usually have a balloon date 3-7 years in the future, so eventually the buyer has to refinance to pay off the mortgage to the seller.
One of the biggest questions I get about Discounted Notes is “What Discounted Notes worked for is the discount rate the note buySellers because it gave the Seller ers are looking for”? That is a a tool to sell their property in a buyer’s market. They worked for Lastly, Discounted Notes worked question that cannot be answered, because the note buyers Buyers because it gave the buyer for the Note Buyers because it provided a great alternative to the are not looking for a discount, the ability to buy a house without volatile stock market and provided they are looking for a yield, or a having to get a bank loan, which the note buyer with a steady respecific rate of return. turn and a relatively safe investContinued on page 6. ment. Monthly Motivation Opportunity is missed by most people because it is dressed in overalls and looks like work. -Thomas Edison
Discounted Notes work when a Seller offers seller financing on their property and carry back a note and a mortgage. These notes can either be a first mortgage, were the seller has financed the whole purchase price, less the down payment of course or in the form of a second mortgage. A second mortgage would occur when the buyer was able to get a 1st mortgage for say 80% of the purchase price, but only had say 5-10% for a down payment.
WHAT’S INSIDE Work for Equity Offer.……………2 Welcome New Members……….3 NoteSchool with Joe V.………….4 Ask The Expert……………………….7 MnREIA Member Success…..8,10 January’s Main Meeting……….12
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Minnesota Real Estate Investors Association www.MnREIA.com
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CONGRATULATIONS! January 2015
Darrin Hebert Emmanuel Ajayi
Jerry Vallery
Dana Henjum
Brad Veech
Cole Robertson Michael Campbell
Joel Hogan Janelle Holte Duyen Lieu Taylor Belk An Lieu
Jennifer Kate Sam Hodgett Lynn Cheang Brandon Carter Ken Wood Tommy Vo Don Hoff
Brian Shablow Darlene Cochran Craig Schaper
Max Tran
Geoff Markham
Kristina Mohlin
Xu Som
Eric Gullickson
Richard Som
Caroline Ejiya
Jake Johnson
Jim Barker
New Member Orientation: Feb. 6, 2016 9a.m. to 4 p.m.
A MnREIA Membership extends far beyond attending meetings.
Early Session At this Quarterly Member Orientation you will learn: How to get the maximum value out of your membership; Network with other MnREIA Members; How to receive steep discounts at Office Depot & Office Max; How to activate your free Personal Real Estate Website; How to market your properties to other MnREIA members; How to get the 2% Rebate from Home Depot; and What the Professional Housing Provider from the National REIA is and how it benefits you.
Afternoon Session Special Training Class for MnREIA members only with Ron Aho He will be covering: Business Maintenance
How to keep your Business well tuned with proper maintenance
QuickBooks
QuickBooks Basics for Real Estate Businesses QuickBooks desktop version vs QuickBooks Online
Real Estate Taxation
How to report to taxing authorities Primer on taxation of entities Types of deductions Tips and Traps
Ryan Hatton
Kathryn Voller
D. Ahmad
Phil Reinking
Pre-Register at www.MnREIA.com
Minnesota Real Estate Investors Association www.MnREIA.com
TO THE NEWEST MnREIA MEMBERS
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Recap of January’s Saturday Workshop Minnesota Real Estate Investors Association www.MnREIA.com
Newsletter Title
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We loved having Joe Varnadore from Note School from sunny Florida here to frozen Minnesota. With the exception of a small slip and fall by Joe in the hotel parking lot everything was wonderful. Our members really enjoyed getting to learn from a master of the note business.
Joe loved MnREIA so much we were even able to get NoteSchool to do a Rich Rewards 3 Day Class in Minneapolis, February 19-21 so this will be your only chance to attend a class in our back yard! Call us at 763-432-2809 for more information.
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Reach more than 1,000 active real estate investors monthly! All ads need to be submitted by the first of each month. Email submissions to Alison@mnreia.com or call (763)432-2809 for more information.
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What is a Discounted Note? Continued from Front Cover Minnesota Real Estate Investors Association www.MnREIA.com
Newsletter Title
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Yield or rate of return does not correlate into a discount The discount comes from the difference of the original interest rate that the note was written at versus the yield spread the note buyer is looking for. For example, the usury here in Minnesota is 8%, so let’s create a $25,000 note at 8% amortized out over 30 years. If the note buyer is looking for a 12% rate of return on their money, the discount will come from the difference of the 8% and the 12%. The way to determine the value of the note that we just created at a 12 yield, we first need to use a financial calculator like the HP12c or the HP10b. I will be using the HP12c for all these calculations, but you can easily use the HP10b as long as you know the differences between the two calculators.
Original Note: $25,000 (hp12c = 25000, CHS, PV) – CHS makes the PV a negative number so that we end up with a positive number for PMT
Once we have all that information, we can then determine the value of the note of the note buyer wants a 12% yield. To do that, all we have to do is change the interest rate to 12% on the calculator and then find the PV (Present Value). 12% (hp12c = 12, g, i) To find the PV (Present Value), simply hit the PV key on the hp12c. That gives us $17,833.84 Present Value. That is what a note buyer would pay for this note today given the numbers we used for this note. The discount actually works out to be 28.66% Now let’s through in a new twist… What we are really talking about here is the Time Value of Money. In our previous example, the note was amortized out over 30 years. That is why the discount was so large, because the note buyer would have to wait 30 years to receive all their money back plus their desired interest. What if we create the same note as before, but through in a 5 year balloon payment? What would that do to the Time Value of Money using all the same figures as before? Original Note: $25,000 (hp12c = 25000, CHS, PV) – CHS makes the PV a negative number so that we end up with a positive number for PMT
hp12c. That gives us $183.44 monthly Payment. Now let’s find the FV (Future Vale) of the loan in 5 years, or in other words, what is the balance of the loan in 5 years if the buyer made every payment on time?
LEARN MORE Next Monthly Meeting Discounted Notes with Mike Jacka Ramada Plaza 1330 Industrial Blvd. N.E. Mpls Tuesday, February 2nd 2016 6:00pm-9:00pm To find the FV, we need to set the time to 5 years (hp12c = 5, g, n) then hit the FV key to determine the loan balance in 5 years from now. That gives us a $23,767.46 balloon payment. Now let’s enter the Note buyer’s desired yield of 12% and see what the note is worth. To do that, all we have to do is change the interest rate to 12% on the calculator and then find the PV (Present Value). 12% (hp12c = 12, g, i)
To find the PV (Present Value), simply hit the PV key on the hp12c. That gives us 8% (hp12c = 8, g, i) $21,329.40 Present Value. 30 Year Amortization (hp12c = That is what a note buyer 8% (hp12c = 8, g, i) 30, g, n) would pay for this note today 30 Year Amortization (hp12c = given the numbers we used for To find the monthly payment, this note with a 5 year balloon 30, g, n) simply hit the PMT key on the payment. The discount now hp12c. That gives us $183.44 To find the monthly payment, works out to be 14.68% monthly Payment. simply hit the PMT key on the
What is a Discounted Note? Continued from Page 6
Discounted Notes is an industry that was thriving 20 years ago and is on its way back now. It is not here in full force just yet, but with time and a few creative and ambitious investors, the Discounted Note business will be the norm again in the near future.
Ask The Expert: Hendrie Grant If a 1st mortgage forecloses and the 2nd doesn’t redeem, does the 2nd just go away? Generally, yes. All junior liens that do not redeem are "foreclosed", meaning that they are removed from title when title transfers to the foreclosing lien holder at the end of the redemption period. Usually the foreclosing lien holder is the bank or mortgage company. This, however, does not mean that the debt owed by the borrower on the junior lien is extinguished, simply that the lien is removed from that piece of real property. The debt can only be extinguished in a bankruptcy.
If a 2nd mortgage forecloses, do they have to cover the first?
3. How does a bankruptcy affect a foreclosure?
If a 2nd or junior lien forecloses and the redemption runs out, the junior lien holder now owns the property subject to any senior liens. Water bills, assessments and taxes are always senior. The foreclosing lien holder never owes the amounts for the senior liens, but the amounts are still stuck to the property. For clear title they need to be paid. The junior lien holder always needs to pay attention to the senior lien holders so the junior is not foreclosed out if the senior forecloses their lien.
The answer has two parts: before the sheriff sale and after the sheriff sale.
DISCLAIMER: There are always variables and one should always consult a professional of your choice regarding these issues. That said, my opinion is never do a deal and close with a foreclosed homeowner when they are still living in the property. Ever.
After sale, there is the 60 day stay which runs along with the redemption period, it does not delay or stop it. So if the borrower filed the day after the sale, there would be no benefit. if they file the last day, they would get another 59 days, 60 is a safer rule of thumb.
Before the sale, the foreclosure is stopped. The process for initiating the foreclosure after the bankruptcy starts has too many variables to address here, but simply put, keeping in mind the 60 day stay, one must usually petition the court to restart and that often results in a Chapter 13 restructuring. If there is a Chapter 7, the debt is extinguished remembering that the lien is still on title and can almost always be foreclosed.
Minnesota Real Estate Investors Association www.MnREIA.com
By adding a 5 year balloon payment to the note, we have increased its present value because of the Time Value of Money principle and in this case the discount was cut in half from 28.66% to 14.68%. There are more advanced strategies that I will cover in future articles to creatively structure notes and sell them or even just sell the payment streams without selling off the entire note.
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MnREIA Member Success Stories Newsletter Title
Minnesota Real Estate Investors Association www.MnREIA.com
Dawn Kern Member since 2006
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My Name is Dawn Kern, I have been attending MNREIA since 2006. In 2008 I did acquire a MN Real Estate License for the purpose of personal investing. I was asked to share information on a project that I have completed in the past and give a little information on the transaction. This house was a twin home, HUD owned property in Eagan MN. It was a 4 bedroom 2 bath and 1550 Square feet. The purchase price was $103,100 and I closed on 10/02/2013. I did partner with another MNREIA member on this project as well that provided the funding and I managed the project and we split the profits 50/50. The total project expenses with acquisition costs buying and selling, repairs, and holding costs were $138,055.00 when we personally staged and listed the property just 5 weeks after the initial purchase and listed it for $174,900. We had 3 offers after the first 2 days on market! A purchase price was accepted for $175,000 cash offer and we closed 2 weeks later. Total profit was $27,500 after closing costs paid and funding returned. As a MN licensed agent, I also received commission when the property was purchased before any repairs were started, and received the sellers side of the commissions as well which was an additional $7500.00 in my pocket. I would encourage any investor to do the same that intends to rehab properties! Share your success story for a chance to win a Home Depot Gift Card monthly! Email your story and photos to Alison@mnreia.com
January’s WINNER
Recap of January’s Real Estate Trivia Game Trivia Question 1 How can you originate your own notes? A) Give rehab loans to fellow rehabbers B) Give rehab loans to yourself from your self-directed IRA C) Borrow money at a low interest rate and lend it out at a higher rate D) None of the Above Answer: (A) Give rehab loans to fellow rehabbers Trivia Question 2 What is a Nonperforming Loan (NPL)? A) A loan that is either in default or close to it B) A loan in which the debtor hasn't made a scheduled payment for at least 90 days C) Both A and B D) None of the Above Answer: (C) Both A and B Trivia Question 3 What is it called if a debtor starts making payments on a nonperforming loan? A) A reforming loan B) A re-performing loan C) A repositioning loan D) None of the Above Answer: (B) A re-performing loan
Sheri Lahn
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Trivia Question 4 What can you do after purchasing a nonperforming loan? A) Offer a loan modification to the borrower B) Get a "Deed in Lieu" from the borrower C) Foreclose on the borrower D) All of the Above Answer: (D) All of the Above Trivia Question 5 What is a Sub-Performing loan? A) An account that requires a lot of collection effort to get the borrowers to make their payments. B) A loan that doesn't give a high rate of return C) A loan that gives a negative rate of return D) None of the Above Answer: (A) An account that requires a lot of collection effort to get the borrowers to make their payments. Trivia Question 6 How many notes can you buy without having to be licensed? A) 5 per year B) 8 per year C) Depends on the state you live in D) None of the Above Answer: (C) Depends on the state you live in
WHAT’S NEW WITH MnREIA
From Mike Jacka Why Should I Learn the Note Business? That is a question that many people have asked me lately, and all I can say to them is if you don’t learn the note business, then you are limited to rehabbing, land lording, wholesaling and just the basic aspects of real estate where everyone else is also limited to as well. Learning the note business will open the door of opportunities everywhere, as long as you recognize the signs. Even if you don’t get involved in the note business directly, having a thorough understanding of notes will make you more confident when dealing with bankers, hard money lenders and private lenders, just to name a few.
NEW– Follow Mike’s hat on his travels. Bring your guesses to February’s Meeting for a chance to spin the prize wheel!
Cheers, Mike Jacka
TAKE ADVANTAGE OF YOUR MNREIA BENEFITS OfficeMax is the National REIA preferred vendor for office supplies, furniture, technology, paper and print services. Their mission is to meet your supply needs for the long term while offering savings up to 65% off list. Investing in the right technology creates a lasting impact on the success of your business. OfficeMax has the ideal mix of technology expertise, product options and pricing to keep your business performing at optimum speed. The Home Depot is the fastest growing retailer in U.S. history and we are committed to helping you grow your business! Get exactly what you need with knowledgeable store associates, where you need it with in-store special orders, advance order pulling and job site delivery. Get guaranteed low prices and more for less with Volume Pricing and Bulk Pricing. And get in and out quickly with dedicated Pro cashiers and truck loaders. With value-packed Pro-only vendor programs and exclusive services, make your job easier with The Home Depot! The Home Depot offers BOMA members excellent pricing, service and the opportunity to earn a 2% annual rebate on all qualifying pre-tax purchases at The Home Depot and Tool Rental locations. MnREIA’s affiliation with National Real Estate Investors Association is designated to support each member’s investment goals and needs. Home Depot and Sherwin Williams are just a couple outstanding benefits extended through the MnREIA Membership.
Minnesota Real Estate Investors Association www.MnREIA.com
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MnREIA Member Success Stories Newsletter Title
Minnesota Real Estate Investors Association www.MnREIA.com
Hendrie Grant Member since 2010 THIS MONTHS EXPERT (see page 7) Panic! "I have a lot under contract, it expires in less than a week, I have 12 grand in non refundable earnest money, and my loan just backed out!" This is the call I got. From the edge of a cliff. Thank the stars that there was a guard rail and the guard rail was Prairie Capital, Inc. I am Hendrie Grant owner of Prairie. I got the call from the gentleman who had a nice lot at a nice discount, locked up at a nice price and was intending to build a spec house on it. The previous financing fell apart. So we figured out that even though Prairie does not usually like to fund builds, Prairie certainly could save the lot. Within a week or so the deal was structured, closed and the cash and equity was saved. Hurray! Share your success story for a chance to win a Home Depot Gift Card monthly! Email your story and photos to Alison@mnreia.com
Market Update
Median Sales Price: ▲ Increased from $219,340 in November to $219,900 in December Months Supply of Inventory: ▼ Decreased from 2.8 months in November to 2.1 months in December New Listings: ▼ Decreased from 5,951 in October to 3,395 in November Pending Sales: ▼ Decreased from 4,192 in October to 2,962 in November
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Closed Sales: ▼ Decreased from 4,632 in October to 3,301 in November
Minnesota Real Estate Investors Association www.MnREIA.com
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Minnesota Real Estate Investors Association, Inc. 7040 Lakeland Ave. N #200 Brooklyn Park MN 55428 (763) 432 2809
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www.Mnreia.com Happy Valentine’s Day!
NETWORKING
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TRAINING
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FEBRUARY MEETING: Discounted Notes With Mike Jacka We'll learn how to sell a property with seller financing, and cash We will discuss the inner workings of Notes and how the world of buying and selling notes can help you buy and sell more real estate using none of your own money or credit
How they Work How they are Created How to determine their Present Value How the Principle of Time Value of Money affects the Present Value
How to Structure Notes to receive Top Dollar How to Calculate the Yield Spread How to determine the Discount How to Sell them to Note Buyers
EDUCATION Tuesday, February 2nd 2016 6:00pm-9:00pm Ramada Plaza 1330 Industrial Blvd. N.E. Mpls FREE for MnREIA members FREE for First –Time Guests $30 Door fee for Non-Members
UPCOMING EVENTS
2/2/16
6pm-9pm
Discounted Notes Ramada Plaza Minneapolis 1330 Industrial Blvd. N.E. Mpls
2/3/16
6pm-9pm
Wholesaling 101 Ramada Plaza Minneapolis 1330 Industrial Blvd. N.E. Mpls
2/6/16
9am –4pm
New Member Orientation, Holiday Inn / St Paul East 2201 Burns Ave St Paul
2/10/16 7pm-10pm
Cash Flow 101&102 Game Night Knights of Colum. 1114 American Blvd W. Bloom
2/16/16 6:30pm-7:30pm
Millennial Investors Focus Group RE/MAX Results Cafe 1221 W Lake Street Mpls
2/18/16 11:30am-1:30pm Beginners in Real Estate Luncheon Undisclosed Random Locations
2/24/16 11:30am-1:30pm Active Investors Luncheon Undisclosed Random Locations
2/25/16 7pm-9pm
W.I.R.E Women in Real Estate, Keller Williams Office 3464 Washington Dr Eagan