As a real estate investor, you are probably pretty clear on the value of having a source of private money and funding. Many real estate investors work very hard to develop relationships with private capital lenders so that they do not have to rely on traditional lenders like banks and mortgage companies. Having a source of private funding enables real estate investors to work quickly to secure good deals and obtain properties that otherwise might be out of reach if they had to wait on traditional lenders.
However, there is another way to work with non-traditional lenders in real estate that many investors do not factor in. When a lender (any lender) loans money, the money owed is called the note. That note is technically worth the sum of the money loaned, so if a private lender loans a real estate investor 20,000 dollars, then the note is worth 20,000 dollar. The real estate investor will pay that note back over a period of months or years. Until the note is paid off, the lender usually holds the deed to the property as collateral.
That collateral can be the key to finding great deals. Sometimes it can result in your getting your hands on seriously discounted property, while other times it can just end up getting you a really good return on a monetary investment. Here is how it works:
Often, note holders (the people who lent the money) really would prefer to get their money back faster rather than waiting for years to get the entire sum.  This can be due to financial stress or just because they find that they have another preferred use for the money. When this happens, you can often purchase the notes at a discount if you are able to pay a lump sum. At the point in time that you purchase the note, you hold the deed to the property as collateral against the loan. Should the borrower pay back all of the money borrowed, then you have collected more money than you paid against the note. Should they fail, you could end up owning a property worth many times what you paid for the note.
One of my colleagues uses this system to good effect on a regular basis. He has developed relationships with many private lenders, and when they begin to suspect that their loans are going to “go bad,” they often work with him to sell him the notes on the property. If the situation is right, he buys the note, and then forecloses on the property if or when the note goes unpaid. The lender gets out of dealing with the foreclosure, and my colleague ends up with great deals on properties. Of course, you have to be very careful when you are conducting this kind of transaction. It’s not simple, and the foreclosure process needs to be done to the letter of the law to protect you, the borrower and the state of the property. When done correctly, however, the results can be incredibly profitable.
Peter Vekselman has been successfully investing in real estate since 1996. He has completed over 1200 real estate deals, owned a construction company, been a private lender, and owned a property management company. Peter currently works with clients all over the US helping them achieve riches in real estate investing. For more information please visit www.CoachingByPeter.com.