Over the last 30 years many sellers and businesses have taken back first and second mortgages (notes) on property they have sold. Often, these notes are sold to raise cash. Such notes have a FACE VALUE (the unpaid principal), an INTEREST RATE at which the note is being paid and a TERM (the amount of time left before it is paid off). Buying, selling and trading notes has become big business since we first brought this to the attention of our students many years ago.

Due to the "time value" of money which assumes a dollar today is worth more than a dollar at some future time, these notes are sold at discounted rates- often at 60-75 cents on the dollar. Some investors specialize in buying and selling such notes. Check the WANT ADS in your newspaper under MORTGAGES.

Keeping this in mind, let us see how we can benefit from this without the need for cash or credit.

Let's say you find a property valued at $250,000. The seller is retiring, owns the place free and clear (no mortgages) and wants to buy a condo in Florida for $150,000. You suggest that he invest the balance of his equity into seasoned mortgages worth $100,000 and paying 10% interest, with monthly payments of about $900 per month to supplement his Social Security. This income will NOT affect his Social Security. He agrees.

Now, locate one or more mortgages with a $100,000+ face value, at 10% or more interest with monthly payments totaling at least $900 (locating and obtaining discounted mortgages is discussed in detail elsewhere in this course). Offer the mortgage holder $75,000 cash, to be paid at closing. The note is to be placed into escrow along with signed a copy of the agreement (preferably notorized).

At closing, your bank (if YOU are buying the property) or your buyer's bank (if you are selling to a third party - see "Double Escrows") puts up the money for a first mortgage of 90% of the price, or $225,000 plus his $25,000 down payment - a total of $250,000. From this amount:

• you pay $75,000 for the note. The note seller goes home, happy
• you pay the seller of the property $150,000 (from the remaining $175,000 from buyer mortgage) and the $100,000 in mortgage(s). He goes home, happy
• There is $25,000 left "on the table". This belongs to you for putting the deal together.

If you bought and sold simultaneously at a double escrow, you would walk away with $25,000 cash.

Without any cash, and without any credit (if you double escrow), you have plucked $25,000 cash out of "thin air".

Do not limit yourself to using discounted mortgages in this way. Use your imagination and combine it with other strategies in the course. For example:

You are considering buying an $200,000 property with a first mortgage held by the previous owner. The mortgage has a current face value of $100,000. Without telling the mortgage holder that you are buying THAT property (if he knows this, he'll keep the note and receive full value when the property is sold), offer $75,000 cash for it, to be paid at closing. Your agreement and the note goes into escrow.

Assuming you are buying this as your own home, you get a first mortgage from your bank in the amount of $$175,000 - $75,000 to pay for the note (which pays off $100K of the purchase price) and the remaining $100K to pay off the seller's remaining equity ($200,000 - $100,000 paid off mortgage=$100,000 balance). You now own an $200,000 home for which you paid $175,000 - $75,000 for the note, plus $100,000 for the balance. You own $25,000 in instant equity, and made NO down payment. Really sweet!

Now get out your pencil and figure out the profit you would make on this deal if you used our double escrow and convinced both the SELLER and the BUYER to pay 1/2 of closing costs (you pay nothing). And, if $3,000 worth of cosmetics could raise the value of the property by another $10,000?

By combining these and other simple strategies in this course, you could reap as much as $50,000 or more profit from this one deal.

As an aside, once you have built up some ready cash, look for more mortgages to buy at about 65-70% on the dollar. Then, with these in hand, go to the owners of these properties who have to pay these each month and offer to sell his back to him at 80-85% on the dollar. He can refinance the house to eliminate a pesky payment and save thousands on his mortgage - a great deal for him. You make a quick 15% for a few hours work. Not bad!

What if an owner doesn't buy back his note to save money and reduce his monthly payments (he'd have to be insane!)? No worry - you own the note, and the payment he makes each month is yours, giving you a return of 20-30% - not bad, either! Of course, with a few of these notes, say, $30,000 face for which you paid $20,000, you can offer them as a $30,000 down payment on your next property, which gets your money back and saves you another $10,000 to put in your pocket.

There really is no end to the possibilities...

Want more ways to squeeze big profits out of mortgages? Read on - other sections of "The Simple Man's Guide to Real Estate" are loaded with ingenious, yet simple strategies that can quickly put cash in your pocket.