There will often be times as a Note Buyer or Note Broker where the Note Sellers sold their property which has an underlying lien. Instead of carrying back a second, the property was sold via a wrap note, or contract for deed (CFD); sometimes called a land contract. Both the CFD and wrap note have their own issues with structure and legalities, but in this issue I am going to address only the number crunching.

To refresh your memory, a wrap note is a form of financing where instead of taking back a second, the property seller will create a "wrap note" where the underlying note will remain in place, and the wrap note will in a sense "wrap around" the underlying lien.

When the property buyer makes the wrap note payment, the property seller will take that payment, then make the underlying note payment. The remainder is the property seller's profit. For example, a property has a value of $100,000 with an underlying lien of $70,000 at 5% with 20 years remaining and payments of $461.97. The property was sold for $100,000 with $10,000 down and the seller carried a "wrap" note of $90,000 at 8% interest for 20 years with payments of $752.80.

In this example, the borrower would pay the seller $752.80 a month, and the seller would pay the underlying lien of $461.97 a month. The remainder of $200.83 is the profit the note holders receives. (The note holder actually enjoys a yield of 16.83%, but this is a topic for a different discussion.) How wraps increase yields is covered in THE NOTE PROFESSOR NOTEBOOK

The note holder needs cash and wants to sell his/her wrap note. Let's assume that the credit, property and note are acceptable to a Note Buyer. Let's further assume the Note Buyer is requiring a 11% yield. How much would the wrap note be worth? Let's look.

N = 240
I/YR = 11
PV = -72932.
PM = 752.80
FV = 0

But hang on. Remember there is an underlying lien of $70,000 that has to be addressed. All things being equal, Note Buyers will require the underlying lien to be paid off so they will be in first position, as well as not have the risk of the due on sale clause being activated. Under this scenario, the Note Seller will receive $2,932.04. If the cost of selling the note is factored in, it is not uncommon for the Note Seller to be in a negative position. Can your purchase a wrap note and leave the underlying in place. YES. (This is an advanced technique I discuss in my Advanced Note Class)

As a Note Buyer or Note Seller, you should be aware of how wraps are purchased. The possibility that the Note Seller will have to come to the closing table with cash should be addressed at the initial contact. I have transacted a few wraps where the Note Seller had to bring a few thousand dollars to the closing table. Why? Because the primary purpose for selling the wrap was not to receive a lump sum of cash, but rather to relieve the Note Sellers from the liability of being responsible for the underlying note, or to get this loan off their name and credit report.

There are many other issues and Do's and Don't's when dealing in wraps which I discuss in my Advanced Note Class, but this is not a good forum to cover wraps because of the time and lack of space.

However, I will address one "wrap trap" that I have encountered on frequent occasions and twice in the last 30 days. Do Not Get Upside Down on the underlying lien with either the size of the loan, the length of the loan.

Two quick examples to avoid. First DO NOT construct your wrap note where the underlying lien is more than your wrap note, no matter how much down payment your receive. I recently had to turn down a wrap sale where the wrap note was $168,000 and the underlying lien was $175,000. This is what I call "a bug looking for a windshield".

Question: What is the Note Holder's position if the borrower sells or pays off the $168,000? The $13,000 is going to have to be paid by somebody?

The second trap to avoid is having time period of the wrap note less than the underlying lien.

Using the above as an actual example, the wrap note had a balloon due in 2017. The wrap note balance will be $158,000, while the underlying note payoff is $172,000. See the problem?

A "time trap" which happens more frequently that makes selling the wrap a big problem is having the terms of the wrap note for 15 years while the underlying note has a 25 year term. Under this scenario, the borrower will have paid off his wrap note in 15 years, but the underlying note still has 5 more years ago. None of my note investment strategies entails having payments going out, but nothing coming in.

Why would anyone get into this situation? There is sometimes the illusion that getting a large down payment, or having a large payment spread in the wrap note as being beneficial. Do not fall into this trap. In both these situations I gave the note holder suggestions as to how to correct the problem, but the point is not to get into these situations in the first place.

Wraps can be very lucrative and advantageous. Just be aware of how wraps work, whether you are buying, selling, and more importantly, if you plan to take back a wrap note as an exit strategy for selling real estate. Act out of knowledge; not ignorance or fear.

CONTACT ME And remember, if you know of someone who has a note to sell, I DO PAY REFERRALS.

Copyright © H&P Capital Investments LLC
All rights reserved
Tom Henderson
a.k.a. THE NOTE PROFESSOR

If you have not attended a Note Professor "How To Get Rich with Notes" class, be sure and purchase the Note Professor Note Book manual to enhance your knowledge of creative real estate financing and note buying and selling.

"I got your news letter. It was great, purchased your (Notebook) and it was awesome. I used your renter technique and it worked also. I am getting 41% return thanks to your expert advice. I have spent hundreds and not able to do any thing thru other gurus" Gary W. Garland, TX

"It blew me away what a powerful tool notes can be. Lots of great information, worth every penny! Highly recommended."
Jeff C. The Colony/Investor

"Your manual is short and straight to the point, it's rare to buy something today that gives you your money's worth. Thank you" Stephan B. Phoenix, AZ

You will learn at least one new usable concept to increase your profit in buying or selling notes and real estate.
Tom Henderson, author

By popular demand, THE NOTE PROFESSOR NOTEBOOK is now available in easy, downloadable E- book form for a the low, affordable price of $39.95.

Other products are also available, including HOW TO MAKE OBSCENE PROFITS with SMALL MONEY, and GUIDE FOR SECOND LIENS. There is also a FREE download of CHECK LIST FOR OWNER FINANCING.

Simply go to the NOTE BUYERS STORE. I can think of nowhere that you can find such information packed products at such incredibly low prices. We are still working out the bugs, so if you have any problems, be sure to contact me.

Another year has gone by, and 2015 is beginning. A few of you wanted to know my predictions for the coming year for economics in general, real estate in specifics. As I have pointed out in previous articles, the Latin phrase, Ceteris Paribus, or "All things remain the same" is frequently used when explaining or forecasting economic events. The problem is nothing will remain the same as long as politicians continue to intervene into the market or take resources from productive uses.

For example, gasoline is down from $3.59 a gallon to $1.71 where I filled up yesterday. (I am not sure for the reason behind this price reduction. I have heard everything from the Saudis are trying to bankrupt the small oil producers to a monetary manipulation with the dollar. If I get "a good handle" on the cause of the rapid and deep price reduction in oil and gas, I will let you know.)

Be that as it may, the fact is it now takes $34.20 to fill up a 20 gallon tank, where only a few weeks ago it took $71.80. This translates into a $37.60 a tank increase in money the consumer has to spend on other goods and services. Multiply by 4 weeks and in essences this is the same as a $150 month raise, TAX FREE.

If you multiply this savings by the millions of cars
that fill up each week, it is easy to realize the enormous amount of money being put back into the economy by either spending or saving. This should be a vitamin B-12 shot in the arm for our economy as more money to spend or save will result in growth, and therefore, more jobs. Of course, more people working and producing means housing will once again start to increase.

But, alas, politicians see this reduction in the gas price as an excuse to extract more money from us. Raising the gas tax is being seriously considered. If the gas tax is raised, it will negate the effects of the lower price of gasoline. (The fact that the Highway Trust Fund is raided time and time again to pay for politicians' pet earmarks will not be discussed by politicians; only that they need more money for our roads and bridges.)

The point is as long as politicians from both parties do not come to the realization that consumption cannot exceed production, and that collectivism, along with government interference in the market place is counterproductive to economic growth, "all things" will never be equal.

If we look at what we do know, the government has record breaking tax receipts. Yet, there is always a clamor for more money. This is the essence of all collectivist systems. More money is always needed. The Federal Reserve can continue to keep interest rates artificially low and increase the supply of money, but at some point rates will have to rise. Should the Euro devalue, then it might take longer for the artificially low interest rates to materialize, as investors move out of the Euro into dollars.

Artificially low interest rates could also "pump up" real estate again, just as it has the stock market. Just know that sooner or later, the bubble will burst. Why? Because consumption cannot exceed production, and things that cannot continue to happen, will not continue to happen.

With this in mind, there are only two things I know that will remain the same and be put into any economic forecast:
1. Politicians will continue to consume our resources under various excuses
2. Consumption cannot exceed production.

This leads to my prediction on the economy in general and real estate in specific. Keep your powder dry. Invest in only sure things in real estate. I teach my students to purchase at dirt cheap prices using all cash, or seller financing with favorable terms and exit strategies. Always have a prudent exit strategy that will not necessarily include banks, should money become expensive and scarce. Act out of knowledge, not out of ignorance or fear. Keep track of the money supply and Federal Reserve.

Now that you have my predictions, how about yours. Send me a short prediction. I will print a few and we will see how we did next year at this time. Of course, your name and email will remain anonymous.



If you have questions or comments, CONTACT ME Tom Henderson /a.k.a. THE NOTE PROFESSOR Remember: If you know of someone who has a note to sell, I DO PAY REFERRAL FEES.

Copyright © H&P Capital Investments LLC
All rights reserved

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