USING IRA’S AND OTHER RETIREMENT ACCOUNTS TO BUY NOTES
Posted by admin in A and B, Leverage, Sale Lease Back, Uncategorized on April 9th, 2009
The biggest hurdle to get over for note investors is the problem of the discount. For the most part, the note holder has done little or no due diligence before agreeing to carry the paper. Yet they expect the note buyer to ignore underwriting the risk by paying them “full price” for the note. I even had one seller who multiplied his payment ($475.57) times the number of remaining payments (113) and insisted he deserved $53,739.41 for his note. Obviously the concept of the Time Value of Money was simple beyond his understanding.
We have reasonable success in overcoming this objection by using the following in our marketing:
WE CAN PAY YOU FULL PRICE FOR YOUR NOTE, IF YOU WILL GIVE US A TIME CONSESSION ON SOME OF THE MONEY!
If I may digress for just a minute, we use a contract with local investors and or our IRA sources that do not require any personal liability on our part. The investor looks to the underlying collateral to make him/her whole in the event of default. Email me at hdvorken@wf.net and I will be glad to send you a copy of the contract without any cost. Make the subject FREE CONTRACT.
As you no doubt know, growth inside a retirement account is either tax deferred or if it is a ROTH, it is TAX FREE for ever. Since there is no tax, IRA owners will accept lower returns. Think of the low rates on TAX FREE municipal bonds. Look at the chart below:
Yield on the Note Tax Bracket Tax Bracket Tax Bracket
10.00% 28% = 13.89% 32% = 14.71% 35% = 15.38
In other words, if income taxes are involved, the yield has to be the greater amount in order to net 10%. One note of caution even though they might except less then 10%, never sell a note for a yield less then the note rate, as there could be a problem in the event of an early pay-off.
You find the following note:
| N | I | PV | PMT | FV |
| 240 | 10 | 80,000 | 772.02 | 0.0 |
16 payments have been made on time
| N | I | PV | PMT | FV |
| 224 | 10 | 78204.78 | 772.02 | 0.0 |
After a long discussion with the note seller, he admits that $37,500 would solve his problem. You offer to buy ½ of the note for ½ of the remaining payments. “I know you only need $37,500, but I’ll pay you $39,102.55. Will that be OK?”
| N | I | PV | PMT | FV |
| 112 | ?? | 39,105,22 | 772.02 | 0.0 |
I = 19.96
You offer an IRA a yield = to the note rate of 10.00% and they agree. You now have several choices
-
Sell all the payments to the IRA and make $16,967.92
| N | I | PV | PMT | FV |
| 112 | 10 | 56,070.47 | 772.02 | 0.0 |
$56,070.47 - $39,102.55 = $16,967.92
-
Keep $150 per month and make $6,073.68 up front and get $16,800 in payments over time.
Remember if you buy the note inside your own IRA, and then sell it to an investor, the profit goes NOT TO YOU, BUT YOU’RE IRA. If you buy the note and then flip it to someone else’s IRA, you can keep the cash flow and profits for yourself.
There is literally over a TRILLION Dollars in IRA’s Using these funds will make you more competitive in the note and real estate game.
Henry Dvorken
Get Rich With Old Mobile Homes
Posted by admin in Mobile Homes on February 2nd, 2009
USED MOBILE HOMES, THE KEY TO GETTING RICH
I have known Lonnie Scruggs for many years. I first met Lonnie at a seminar in Florida. Lonnie was invited to come up to the stage to explain to the audience what he did. “Just what do you do Lonnie” asked the session’s leader. “Well, I fool around with used mobile homes” said Lonnie putting on his country boy persona. “How ya doing with em” asks the leader. “About $10,000″ said Lonnie. “Lets hear it for Lonnie he’s making $10,000 a year with Mobil homes” said the leader starting to clap his hands. The crowd took up the beat. “Wait, wait” said Lonnie pulling on the man’s sleeve. “What’s the matter?” asks the session’s leader. “It ain’t $10,000 a year” said Lonnie, “Its $10,000 a month!”
I would see Lonnie at various meetings with his Lovely wife. I realized very early that he was not a country bumpkin, but a very shrewd entrepreneur. He has just written a new book called “Taking the Mystery Out of Money”. This book is a must read for anyone reading the NoteWorthy newsletter. Lonnie provided me with a copy of his book in a swap for my “Sallee-Bop-TB” book. He wrote on the flyleaf that he was sure I already knew everything in his book. Wrong! I got at least three new ideas that I intend to put into action starting now.
Lonnie has a reputation in his area as a used mobile home dealer. He gets offers to buy mobile homes from individuals as well as banks and mobile home finance companies. After reading his first book “Deals on Wheels”, I started developing an interest in mobile homes by running a small adv. in the mobile homes for sale section of the classifieds in my local newspaper. It looks like this:
WE FINANCE OLD MOBILE HOMES.
Maximum loan $9,000.
Call for information
940-322-5291
Usually the caller is the buyer. “I saw your adv in the paper”; what’s your interest rate?” “Tell me about what you are trying to do”, I ask. “Well the home is a …” here follows a description of the mobile home. “Where is it”, I ask. If it is in a mobile home park I am interested. I do not make loans on homes on private property unless I can get a lien on the land. This avoids having to move the home if there is a default. If the home is in a park, my note has a clause that the home can not be moved without paying off the note. Usually, since I will leave the home where it is in case of default, I can sometimes get the park to grant me a few months free rent. As you note from the adv, my maximum loan is $9,000. This price home is easy to sell if there is ready financing available. Homes above $10,000 represent more risk in my opinion. If I keep the loans small, I can spread my money around since diversification reduces risk.
“What kind of a payment can you make”? Two hundred to Three Hundred Fifty is the usual range. “How much money have you set aside to buy this home”? Five Hundred dollars is my minimum down payment. Wherever possible I require an escrow for Taxes. There has to be a policy on the home at closing. I use a title clerk at one of the local mobile home dealers to do the paperwork. She gets a fee of $100.00. Here is a typical deal:
Purchase price $9,000
Down Payment $ 750
Note for $8,250
Lonnie taught me that 12.75% is a good rate because it doesn’t sound like a “teen” rate like 13% would. So I start with that. Get your calculator out and do the math with me. The buyer’s level of comfort is $275.00 per month.
|
N |
I |
PV |
PMT |
FV |
|
? |
12.75 |
(8,250.00) |
275.00 |
0.00 |
|
37 |
12.75 |
(8,376.94) |
275.00 |
0.00 |
|
37 |
13.79 |
(8,250.00) |
275.00 |
0.00 |
The HP12c always rounds up the payment to the next higher number if there is a small residual payment. When I push 37 months again you will see that the loan could be as much as $8,376.94. Well that’s a red flag, so I just change the interest rate to 13.79%. Lonnie says that most buyer don’t care, they will buy if the deal can be budgeted within their level of comfort. In this case $275 per month with a $750.00 down payment.
So far so good, but I want a better yield then 13.79%. In his book Lonnie discusses the difference between yield and discount. If I could discount the note say 5%, then I could increase my yield. Let’s see how much.
|
N |
I |
PV |
PMT |
FV |
|
37 |
17.35 |
(7,837.50) |
275.00 |
0.00 |
*$8,250 - 5% (412.50) = $7,837.50
Where does the $412.50 come from? From the Seller. I get the name and phone number of the seller and permission from the buyer to contact him/her. “Mr. Seller, this is Henry Dvorken with Courtman Mortgage. We are trying to arrange financing for Mr. Buyer on the mobile home he wants to purchase from you. While things have not been finalized, we are very close. The loan committee has told me to charge 5% of the loan in points. That $412.50. If you would pay that amount at closing in order to get cash for your home, I think we are very close to making things work.” That works out to $8,587.50 cash less your share of the paper work to transfer title. Is your home “free and clear”? If not, you will have to pay off any liens on the property for back taxes and any unpaid payments.
Almost always they will agree to pay the points. Sometimes they just refuse, if so I ask the buyer if he will add the points to his loan. In this case if I added $412.50 to the loan, and there were 40 payments, the yield would be 17.82%. Try this for yourself.
Great you say, but who has $8250.00. I only have $3.000.00 available. Let’s say you can get $5,000 from a local investor. Let’s say you offered a local investor 9%.
|
N |
I |
PV |
PMT |
FV |
|
21 |
9.00% |
$5,000.00 |
$250.00 |
$186.36 |
Notice the investor would get $250.00 for 21 months and you would keep $25.00. The 22 payment would only be $186.36, so you keep $88.64.
What is the present value of these cash flows at a 17.35% return?
|
N |
I |
PV |
PMT |
FV |
|
21 |
17.35% |
? |
$25.00 |
$88.64 |
|
|
|
$515.58 |
|
What is the present value of the 15 future cash flows? First calculate the value as if they started now
|
N |
I |
PV |
PMT |
FV |
|
15 |
17.35% |
? |
$275.00 |
|
|
$3,684.56 |
Since they really don’t start for 22 months, let’s calculate the real present value
| N | I | PV | PMT | FV |
| 22 | 17.35% | $2,463.90 | 0 | $3,684.56 |
So let’s summarize. You got $412.50 in cash at closing from the points. Then you got $25 per month for 21 months, and the one payment of $88.64. Then 15 payments Of $275.00 for a total cash flow of $5,151.14. (Present value of the cash flows $3,391.94) YOUR INVESTMENT IN THE DEAL WAS $2,837.50.
Lonnie is correct, it is better to create notes then trying to find them in the court house. Buy this book and follow the instructions and with hard work you can be as successful as my friend Lonnie Scruggs.
They All Lived Happily After
Posted by admin in Sale Lease Back on February 2nd, 2009
AND THEY ALL LIVED HAPPILY EVER AFTER
“Henry, there is a man on the phone and he is very upset” said my secretary.
“What is his problem”, I asked. “He’s yelling about the book you wrote about Teeny-Boppers”, she said. “Teeny-Boppers? “Oh well put him on”.
“Henry Dvorken, may I help you?” “Are you the man that wrote that book about Teeny-Boppers?” “I think it is disgusting”. “Have you read the book sir?” “No, but I heard about it”. “Sir I wrote a book call Sallee-Bop-TB, it’s about. . .’ “That’s the one, a book about a Teeny-Bopper named Sally”.
After a long conversation I was able to calm my caller down and convince him I was not a pornographer. I offered him an opportunity to come by my office and look at the book. He declined but did agree he must have been mistaken if I had made that kind of offer. The world is strange sometimes.
People who have read my book ask me about risk. I have done over 30 deals, and have had five problem cases. Three were solved by resale at a profit, one needs to be rehabbed before it can be sold, and one is in contract and will be closed by the time you read this article. Let me tell you about my 14th street deal.
Minerva Cantu said she needed cash for medical treatments for her daughter. It turned out she didn’t have a daughter, but that’s another story. Anyway I purchased her property (on the tax rolls for $19,950.00) for $11,500.00. If you’re from California multiply by 4 if you are having trouble with my Wichita Falls, numbers. If you’re from Arkansas divide by 2. We entered into a sale-lease back-option back agreement in February of 2003. Ms. Cantu was to pay $300 per month including $90 per month for Taxes and Insurance escrow; everything was great until she missed the September 2005 payment. We never could get her on the phone, and certified letters were returned. After 3 missed payments we started an action to evict her from my house. A constable served the notice.
I received a phone call from a very worried young woman. She introduced herself as Jennifer Solis, and explained she was purchasing the property under a Contract for Deed and had lived there since September of 2003. Cantu had sold a house she didn’t own to this unsuspecting young woman. We held a meeting and I agreed to sell her the house and carry the note at the same price as she owed Ms. Cantu. If Cantu had been timely with her payments, she could have exercised her option and repurchased the house for $9,800 cash. The new note is at 9% for $17,700.00. Sixty-seven payments of $340.00 give me a yield of 35.84% if I use the cash option price.
My investor is pleased to see her payments start again. She agreed to renew and extend her note in return for a greater payment and a new interest rate of 8.5%. I will have Helen Aldrich paid off in 29 months. In the meantime I receive a net of $50.00 per month cash flow and will receive an additional $12,920 from Ms. Solis after I have paid off Mrs. Aldrich.
The title of this article is not quite correct. Ms. Solis is happy, I am happy, Mrs. Aldrich is happy. Only Ms. Cantu is unhappy. She tried to pull a sneaky and didn’t get away with it. Oh well “truth will out” as they say.
Sallee-Bop-TB is about using the commercial real estate technique of Sale, Lease-Back-Option-Back to buy SFR’s for 60 cents on the Dollar and have management free cash flow. The book is available (see the product link above).
The names have been changed to protect the privacy of the people involved
USING LEVERAGE
USING LEVERAGE
“OK, OK, I got it up Henry”, said my father. “Now get the long crow-bar and stick it on top of the little rock and under the big rock as far as you can”. “Good, now pull down on the end of the crowbar as much as you can”. “See it moved about 6 inches”. “Let’s rest a minute”, he said. “We only have a few more feet to get the rock in position”.
This little event took place over 62 years ago as I helped my dad position a decorative rock to be used as a focal point in a new area of his garden in our backyard in Roselle, New Jersey. As far as I know, the rock is still there. We used leverage to move the rock. (Archimedes said he could move the earth if he had a fulcrum (the little rock) and a lever long enough.) However, this article is not about using leverage to move rocks.
Let’s say you can buy a four unit rental that rents for $750.00 per unit. How much should you pay? Below is a mini operating statement for the property.
Gross Projected Income 4 x $750 x 12 $ 36,000.00
Less vacancy (about 10%) 5 x $750 $ 3,750.00
Gross Operating Income $ 32,250.00
Less Operating expenses 45% of GOI $ 14,500.00
NET OPERATING INCOME $ 17,750.00
Every investor wants two things: A return on his//her money, and a return of the money. Let’s build an Investment rate of return
Return on the Money 8%
Return of the Money 100/ 15yrs 6.67%
Total rounded 15%
Less reduction for annual appreciation 2%
Net rate of Investment 13%
Years ago I was introduced to IRV
I
____________________________________________
R V
Income/ Rate = Value Income/ value = Rate Rate x value = Income
So $17,750 ( I ) divided by .13 ( R ) = a value (V) of $136, 550.00 (rounded). Or in other words if you paid that much cash, you could expect a return of 13% plus appreciation annually of a conservative 2%. On the other hand say you went to the bank and they agreed to lend you 80% of $136,550 ($109,250) for 18 years at 9% (put it in your calculator, but the payment will be $1,026.00 rounded.
NOI $17,750
Less total of payments $12,312
CASH FLOW FROM THE INVESTMENT $ 5,438
$5,438 divided by $27,300 (your investment) = $20.0% return
You see, the use of leverage increases your rate of return. In addition if the property appreciates 2% annually (an average of $2,842) for total annual return of $8,280, your return is over 30%!!
I don’t flip notes. I use local investors for part of the money and leverage my investment. SO SHOULD YOU.
Let’s say you find this note and it is for sale
|
N |
I |
PV |
PMT |
FV |
|
152 |
8.75 |
41237.1 |
449.75 |
0 |
The seller agrees to sell you the note for 85% of the present loan balance
|
N |
I |
PV |
PMT |
FV |
|
152 |
12.01 |
35501.6 |
449.75 |
0 |
You find an investor who will partner with you on the note by lending you $33,000 for a return of 10.5%
|
N |
I |
PV |
PMT |
FV |
|
152 |
10.5 |
33000 |
393.4 |
0 |
This means you must invest $2,051.56. You will collect the $449.75 and send the investor $393.40 leaving you $56.35
|
N |
I |
PV |
PMT |
FV |
|
152 |
??? |
2051.56 |
56.35 |
0 |
|
|
2.70 |
|
|
|
Gee you say, what’s so great about that. Wait a minute 2.70 is the monthly return x 12 equals 32.38%!!
So if you use leverage for moving rocks that’s great. But if you use it for investing in real estate or notes, YOUR INVESTMENT PORTFOLIO WILL REALLY ROCK!
PS Email me at hdvorken@wf.net and I will send you a free copy of the contract I use with local investors as an attachment to the return email.
WHAT IS THE DIFFERENCE BETWEEN “A” and “B”
WHAT IS THE DIFFERENCE BETWEEN “A” and “B”
That’s a funny question you are thinking. “A” is the first letter of the alphabet, and “B” comes next. Everybody knows that. True, but I am thinking about A bigail and Betty, two real estate sales associates that were licensed under me when I was active in the brokerage business.I opened my own office in March of 1965. (Gosh he must be older then Methuselah by now) Almost. Anyway about August of that year Abigail asked me to sponsor her for a salesman’s license. She stayed with me for 20 years and almost every year was the top or close to the top among what later became 25 agents.
A few years after she came to work she married a nice man named Jim, and they moved into a rented house in a modest part of town. Every few years they would move to a larger more prestigious home. On many occasions Abigail would call my attention to a “bargain” in a residential property. “Why don’t you and Jim buy this for yourself”?, I asked. “Oh no” she would say, we live in a much better property. “Besides we want to get our car payments paid off before we buy”. To make a long story short, “A” was very successful. If the truth were known, some years she had more net income then I did. Unfortunately she and Jim never invested in Real Estate. Jim passed away several years ago and Abigail had to slow down. She left me in 1985 when I closed my office and worked for other brokers over the years. Today she is living in very reduced circumstances on social security and a small pension from Jim’s company. She was a good associate, but she never prepared for her retirement, and she never possessed any entrepreneurial spirit.
And then there is Betty. She was working for another broker and had not made a sale in 6 months when she approached me to ask if I would let her “move her license”. It was always a toss up who was going to be salesman of the month between Betty and Abigail once Betty learned the business.
After about five years Betty came to see me. She came in the office, shut the door and began to cry. “I’m sorry Henry”, she said, “you have been so good to me, but I am going to open my own office in a few weeks.” Most Realtors are entrepreneurs, and Betty was only following the pattern. I had a choice to become angry or to breathe a deep sigh and wish her well. I choose the latter.
Betty and her husband Al opened an office on the ground floor of a downtown office building. They both worked hard. Betty did the selling, and Al even after he got his broker’s license did the follow through so necessary in a successful real estate office.
Because of their success, they soon attracted many of the town’s top salespeople, and within a few years had outgrown the 5 room downtown office. A widening of a major cross street near ColonialPark left a reasonable sized but triangular tract of land that Al and Betty purchased for very little since no one could figure out what to do with it. They built a very prestigious two story office building on this tract for their Realtor office.
When Betty first started with my Realtor office, she and Al owned a small brick ranch home in Fountain Park. Betty worked hard in that subdivision of about 500 homes and was soon known as “The Queen of Fountain Park“. It became almost impossible for anyone else to get a listing in that sub-division. When their home was paid for, they began buying other SFRs, and used the income from the unencumbered properties to pay off their latest acquisitions as quickly as possible.
Later after they built the office building near Colonial Park, they were able to buy a bigger house in that subdivision. While I am not exactly sure, today they own about 15 deluxe fully paid for single family homes and other property worth well in excess of $2,750,000. Remember this is Wichita Falls, TX. If these properties were in California they would be valued at over $5,550,000. On the other hand if they were in Arkansas they might be worth $1,250,000. Either way they bring in a net of over $25,000 per month.
Al is ill these days with a debilitating disease. Betty and Al closed their own office, and rented the building to another business. Betty worked for another agency for a year or two and was one of the leaders in that office. She has since retired to take care of Al, whose health continues to decline. Unlike Abigail they have more then enough income to provide Al with the medical help he needs.
While I understand that everyone does not have the entrepreneurial spirit, if you do, for goodness sakes begin investing in notes and real estate for yourself. If all you ever do is “flip” notes, or act as a factor referral agent, you may make an excellent living like Abigail and Jim, but you will never build independence and wealth like Betty and Al.
Now that you know the difference, what are you going to be, an “A” or a “B”?
Welcome
Thank you for coming to our web page. We are a small firm that invests in CASH FLOWS and brokers commercial loans. We invite you to contact us by phone or email. If you call most times someone will answer the phone. No “push 1, push 2″ in our office. If you should get our voice mail, leave a message and we will get back to you ASAP.One of the problems people have who invest in CASH FLOWS is they run out of money. We use a contract with local investors to buy cash flows. Email us at hdvorken@wf.net and we will be glad to send you a FREE copy of the contract we use with local investors “to have all the money you will ever need to invest in Notes, Real Estate and other cash flows.