The Forgotten Art of 'Private Financing' - Being on the Correct Side of Debt

Investing in Debt

I know you “Financial Guru’s” know what I mean when I use the term, Private Financing, but most of us haven’t had your education. And, sadly, our primary and secondary institutions of learning spend little time, if any, on preparing students for the world of credit and debt. Most young people learn about credit, and don’t understand what it means, until they graduate high school and get to college.

The bankers and credit card companies meet freshmen during college orientation and pass out their cards. The first time our students swipe those miraculous pieces of plastic and get what they want, their feeling of financial power is awesome. After all it will be 30 days before they’ll see the billing and interest due for their purchases.

This is, of course, the wrong side of the “debt equation” as I see it. One should want to be on the side of the banker and not be the debtor. But how does one accomplish that?

My, Late in Life, Education

You see, I had no formal education in financing and therefore I was always on the wrong side of the debt. My education in Real Estate Financing started much later in life than it should have. In fact I met Frank, my instructor, about a dozen years ago when I answered an ad about “Investing in Debt”.

Just the ad caption intrigued me enough to call the number and set up an appointment. At first I didn’t understand the idea but after our conversation, the process became more clear. I had never heard the term “Private Mortgage” before that day, at least not by that term.

Private Mortgage Notes

Simply stated, private mortgages are exactly the same as loans you get from the local bank which lends money to buy a real estate. The banker lends the money and the mortgagor (you) pay back the money plus interest over time. You own your house and the bank’s depositors are happy to make interest on their money. Everybody wins!

Private Mortgage “Holders” are little private banks. For instance, your next door neighbor might be a private financier who lends a buyer the money to buy a home. In fact, I found out that my parents bought their first home with a private mortgage, financed by our next door neighbor. They were, by no means financial experts, but they accepted his generosity and bought their first home. What did they know that I didn’t?

A Pleasantly Rude Awakening

My conversation with Frank opened up the extraordinary world of Private Financing and Creative Financing. But before your eyes glaze over and you stop reading, listen to Frank’s story about a farmer, who needed money to buy seed for his fields.

“Having no cash available, he surveyed a piece of his property and offered to sell it for $10,000. A neighbor agreed to buy the property on which to build a house. Between them they created a promissory note or promise to pay $10,000 plus interest over a certain period of time. The purchaser would build his new home on the property. The farmer had just invested in debt by becoming the bank and by receiving payments with interest.” Sound familiar? But there’s more....

Notes Are Negotiable Assets

With no money out of his pocket, the farmer had turned one type of asset, land, into another, a mortgage note, which would provide monthly income (principle and interest) for the life of the loan.

But that was not his plan; he wanted to seed his other fields. So he went to the nearest “Note Broker” and sold his promissory note for about $8,500 and then bought seed and planted a crop which he harvested the next Fall and sold for $20,000, a $10,000 profit over the market price of the land.

Using My New Knowledge

After more conversation with Frank, I caught on and asked a question. “I’m not a farmer, but I own a home which has equity, (market value minus debt) let’s say 50% equity. If I sell my home and create a note for the 50% equity, I can get paid with interest until the loan is paid off?” Let’s say when I want to retire.

All Frank did was smile at my answer. I then realized that I owned a “farmer’s field” right under my own roof. I could become the bank and lend my equity to a potential buyer of my home for principle plus interest or I could “sell the note” and get my cash now.

The Forgotten Art, Revisited

Since that time I have sold two houses using a lease purchase agreements and private mortgages to develop income. One of those was my mother’s home when she moved into a retirement residence. Her earnings over the past 4 years have been over $80,000 which she uses to fund her rent and living expenses, her personally funded retirement fund.

What If They Don’t Pay?

By this time you “Financial Guru’s” and some Attorneys, who are reading this article, are busting to tell my readers that there is a “risk” that the person who borrowed the money won’t pay off. However, government statistics show that about 4%, of the millions of outstanding mortgages, go bad. And that means that, in 96% of the millions of mortgages, the borrowers Do Pay!

Yes,, 96% of mortgagors Do Pay. And you’re rights, to get paid on a “Private Mortgage”, are protected by the law in every State, just like the loans the banks give.

So, what if we actually taught our children about “The Forgotten Art of Private Financing”? And about being on the correct side of the “debt equation”. How much better off would their futures be?

Robert J. Sivori Business Therapy

By way of introduction, I work with start-up as well as established businesses to increase business profits, assist with business planning and expansions using my small business and Corporate America experiences , in other words, I provide “Business Therapy”.

I will help you perform business profit analyses and develop marketing programs and help you obtain business financing. I operate under the premises that as business owners you want to maximize your sales, your profits and achieve your short and long term business goals.