Profit Strategy #1 – OPTION THE NOTE
As you learned in an earlier blog, a very common technique in the buying and selling of paper is to tie a note up under an option to buy it at one price, and then have a back-end note investor buy it from you at a higher price. In other words, if we were discussing Pretty Paper (performing notes), you would be able to get a price from your note investor, then sign an Option to Purchase Agreement to buy the note from the note-seller at a lower price (discussed at length in my book, The Paper Game).
While the technique is the same, in this instance we are not talking about pretty paper. Instead, we’re talking about ugly paper. Note investors don’t buy ugly paper, but real estate investors do!
In other words, why not tie the note up under an option (telling the seller that you reserve the right to buy the note at a certain price at some point in the future, depending on your due diligence), then wholesale it to a real estate rehabber?
Think about it: the note is non-performing (ugly), so you probably won’t find anyone to buy it from you at its full retail value. On the other hand, real estate investors who fix up properties for resale (rehabbers) would be very interested in picking up a note at pennies on the dollar.
Why? Because it allows them to control the real estate for pennies on the dollar!
Finally, feel free to think outside the box when it comes to optioning, then reselling a note. After optioning the note, you could, if you so chose:
- Sell the note to a rehabber for cash (which he would provide to close the transaction), and also take an equity position in the deal. In other words, you could split the potential profit when the property eventually sells.
- Sell the note to a rehabber for some cash now (which he would provide to close the transaction), and some more case cash (a predetermined amount) when he resells the property. This differs from option one in that you are agreeing to accept a set amount of cash, rather than take an equity participation. For instance, you might agree to have the rehabber fund the note acquisition, then pay you an additional $5000 when he eventually resells the property.
