Stepped Payments — The Most Useful Tool You’ve Never Heard Of

by Bill Broadbent, S.E.C. – CCIM

If you are a note broker, note investor, real estate
investor and/or real estate broker and you’re not using stepped
payments, you’re missing out on one of the most useful tools in
the mortgage marketplace.

Hardly anyone knows about this — which puts you
light-years ahead of your competition.

If you make presentations to real estate agents you
can help carry the message of stepped payments to the real
estate industry. The widespread use of stepped payments should
increase the number of seller-held mortgages.

If you are a private investor in mortgages, or if
you work with them, you will find stepped payments make
longer-term mortgages much more attractive investments.
A long-term note (20 to 30 years at the beginning) with
stepped payments that increase annually is worth more than
a level payment note that runs for 20 to 30 years.

Long-term notes with stepped payments can provide
a retirement income that may keep pace with the
decline in purchasing power of the dollar. They often yield a
higher return than alternative investments available to the
average person.

And, since protective equity is built faster with
stepped payments than a level payment note, stepped payment
notes are safer to hold.

If someone wants to sell a stepped payment note you
will be in a position to help them if you have the software
(see below).

If you are an agent representing a seller who carries
back a note you can use stepped payments to avoid the
uncertainty of a balloon payment.

A real estate agent representing a buyer and negotiating
stepped payments can help the buyer avoid a costly, forced
refinance.

And it improves the chances of a seller being
willing to carry a longer-term mortgage.

What is a stepped payment note?
It is a note in which the regular payment (usually
monthly) increases annually by a fixed percentage or dollar amount.
The rate of interest on the note remains the same. The result is a
shorter amortization period. Let’s see how it applies in a
specific situation and what advantages might accrue.

Bob Buyer purchases a home from Sam Seller for $200,000.
Bob pays $20,000 cash down and takes out a new loan at
Insecurity Bank for $160,000 and asks Sam to carry a second
mortgage for $20,000 payable at $161 per month including 9%
interest, all due and payable in five years. (These are the
typical terms for many seconds.)

The terms of Bob’s first mortgage at the bank are a
30 year term at a fixed rate of 7% which means Bob’s payment
will be $1,065 per month.

When the balloon payment comes due on the second
mortgage in 60 months the balance due will be $19,170.
Experience has shown it is very unlikely that Bob will have
saved money to meet the balloon obligation on his second
mortgage to Sam. Unless Sam will extend his note Bob
will be forced to refinance and will need a new loan of about
$170,000 to cover the payoffs on the first and second, plus
prepayment penalties on the first mortgage and finance
charges on the new loan.

What if current interest rates on first mortgages are 8% at
the time of the refinance? His new first mortgage payment
will be $1,247.40 per month for the next 30 years.

If Bob had been able to get Sam to carry the original
second for $20,000 with starting payments of $161 per month
including 9% interest and stepped payment increases of 12% per
year (a forced savings plan) the second mortgage would fully
amortize in 118 months (a little less than 10 years). Bob would
have $20,000 more equity in his house and only 25 years left
on his first mortgage at an attractive 7% interest rate.
Sam would have all of his money back plus interest on the
mortgage he carried and thereby avoided uncertainty of a
balloon payment.

In Chapter 5 of “OWNER WILL CARRY: HOW TO TAKE BACK
A NOTE OR MORTGAGE WITHOUT BEING TAKEN,” George Rosenberg and
I point out the pros and cons of balloon payments and how to handle them:
http://store.papersourceonline.com/how-to-find-notes-book-software/

Why aren’t stepped payments used more often?
Most real estate agents are not familiar with seller-held
mortgages in any form. They have been taught to list property,
look for a buyer with a cash down payment, then send the buyer to
Insecurity Bank to apply for a new loan for the balance of the
purchase price. Unfortunately, this simplistic formula doesn’t
always work. Sometimes the buyer fails to qualify, sometimes the
property fails to qualify. Property owners who will carry the
financing find that more buyers are takers. Their property
sells faster than if they waited for that elusive “all cash” buyer.
Some buyers with reasonable credit still don’t qualify, or, they
just don’t want to put up with Insecurity Bank’s “picky policies.”

The biggest obstacle to stepped payments may be that
it has been difficult to produce an amortization schedule.
T-Value software can do it, but the procedure for setting up
the stepped payment calculation is cumbersome.

Instead, you should use the simple and very inexpensive
program we offer that calculates stepped payments either by a
flat dollar increase (periodically) in the regular payment or by
a percentage increase (periodically) in the regular payment.
It also computes any future balloon payment and produces an
amortization schedule. It includes a column of boxes called
“Date Paid” which the note holder can use to record the
payments as they are received. This payment history is valuable in
the event the note holder ever decides to sell the note.

When the note holder decides to sell the note this program
will produce a schedule that discounts the note to the investor’s
desired yield. It will then amortize the discount over the life
of the note and print a schedule that assists the note investor in
reporting taxable income from his note investment.

Now that these mechanical problems have been solved,
more note and real estate brokers, property and note investors
should learn how to properly structure seller-held notes and use
stepped payments where applicable.

GET THE STEPPED PAYMENT AMORTIZATION SOFTWARE — THE VERY SAME
PROGRAM BILL BROADBENT USES

One of the best sources of notes is people who come into contact
with them every day. “OWNER WILL CARRY: HOW TO TAKE BACK A NOTE
OR MORTGAGE WITHOUT BEING TAKEN,” by Bill Broadbent and George
Rosenberg, is a book that will show you how to explain to agents
and sellers how to sell property faster using owner-held notes — who
will then think of you when they need to sell the notes! Complete with
forms and documents.

INCLUDES STEPPED PAYMENT AMORTIZATION SOFTWARE, NO EXTRA CHARGE!
You’ll get the Stepped Payment Amortization Software instantly as a download —
PLUS the e-book OWNER WILL CARRY;
PLUS Bill Broadbent’s contracts and forms;
PLUS bonus articles
Sold separately, all this would be $59.95, but we’ve cut the price in half to just $29.97.

The principles explained in this book also apply to carrying a
note secured by almost any asset, including but not limited to: a car,
boat, airplane, mobile home (w/o land), a business, stamp collection,
equipment, to name just a few examples.

GO TO http://store.papersourceonline.com/how-to-find-notes-book-software/ or call 1-800-542-2270.
Bill Broadbent has been an active real estate broker and
consultant in San Luis Obispo, California for over 50 years.
Bill is president of Creative Solutions Inc., a real estate firm
specializing in real estate investment brokerage and consulting.
In 1976 he became a charter inductee to the Exchangor´s Hall Of
Fame and has won state and national recognition for his
exchange transactions. Bill was the first broker in America to
achieve both the prestigious SEC and CCIM designations. An active
broker, consultant, investor, author and educator, he is best
known for his specialties of Exchanging, Consulting, and Buyer
Representation, all practiced under Single Agency, a term he
coined in the late 1970s.

Bill is a DOER of what he teaches. Insiders who have
seen his work consider him “one of the best” when it comes to
transaction structuring. He has used the techniques in his book
(co-authoried by George Rosenberg) “OWNER WILL CARRY: How To
Take Back A Note Or Mortgage Without Being Taken” for many years
to benefit and protect his clients. In addition to his real estate
investment brokerage and consulting practice, Bill has been buying
trust deed and mortgage notes for his own account in over 45 states
during the past 35 years.

Go to http://store.papersourceonline.com/how-to-find-notes-book-software/
or call 1-800-542-2270 to get OWNER WILL CARRY e-book, the Stepped Payment software,
Bill’s contracts and forms and the bonus articles at HALF PRICE, just $29.97