"Note Hypothecation".

With property values low as they are throughput the United States due to the foreclosure crises, some areas are lower then others, investors are on a buying frenzy snapping up good properties at excellent values, many investors have but one goal (short term profits have turned into long term profit goals), to make as much money as possible and take advantage of the housing crises. It appears as though CREATIVE Financing concepts are on their way back again as they were during the late 70´s and 80´s. Investors are buying these distressed properties and using a variety of creative financing concepts including "Exchanging, Lease Options, Sale Lease Back, Seller carry back of second trust deeds, Equity Participation (Equity Share), Formation of Limited Partnerships (to generate cash for property acquisitions), and all these options have options within the options.

You must remember that commercial property falls into the foreclosure crises right along with single residential property (condo´s included) and these properties (commercial) can be purchased at reasonable prices. Once commercial property has been acquired, there are as many profitable ventures as there is in residential. The primary difference is the price you pay for it and the intentions of liquidation in the future.

Some of my friends and associates, even during this hard economic financial crises, still have second and third trust deeds that were created prior to the housing crises using various creative financing concepts. In order for them to preserve their financial position and maintain the equity in the note(s), they have opted to either extended the original note, sold it for a discount, used them as exchanges, or, in some cases, reduced the interest rate and forgave any late fees and held off on payments for a few years without penalty.

Looking at an alternative method in liquidating their note(s) to generate cash for other ventures in real estate, which is becoming an excellent investment in some areas of the country due to the low purchase prices, this alternative liquidation they chose mostly is referred to as "Note Hypothecation".

Note Hypothecation is an alternative method of receiving cash instead of selling a not (trust deed) at a large discount or using as collateral for a real estate loan. Most lenders are not concerned as to what the interest rate of the note is, or the length of time before the note becomes due, and usually prefer a straight note with a balloon payment due rather than a fully amortized note.

Note Hypothecation requires you to Pledge assets for a loan. In the case of a real estate loan, the property is pledged or hypothecated as security for the loan. When you borrow against a note you own, you assign the note to the lender as security for the money you are borrowing. The income from the note you assigned pays the payments on the money you borrowed. When the lender is paid in full, the note is assigned back to you.

A buyer can create a note that fits his needs more if the seller intends to hypothecate instead of selling the note at a discount following the acquisition.

Most lenders will lend between 50% and 60% of the face amount of the note. When the lender hypothecates the note, it will be amortized over a 15-year period with a due date that coincides with the due date on the collateral note. The lender will also charge the prevailing rate of interest on their loan with their payments equaling the payments received on the note. (In other words, if you are receiving $400.00 per month from your current note, then the amount you pay to the lender ((interest rate, term of the loan and amount of the loan)) will equal the same amount as you receive, in this example, $400.00 per month.

By note hypothecation, it will allow greater cash to the holder of a note then by selling at a discount, which gives the holder cash now, and cash when the note is due.

Example of note hypothecation:

Assume:

2nd trust deed face value of: $40,000

Interest rate: 12%

Due date: 5 years

Monthly payment received: (interest only) $ 400

The lender will charge 18% interest, amortized over 15 years, and will lend 60% of the face value of the note. $40,000.00 at 60% equals Lendable amount:

24,000.00

To receive the total cash out that would equal the $400.00 monthly income received from the note, the lender would lend up to $24,838.00 of the $40,000.00 face value of the note.

24,838.00 at 18% interest amortized over 15 years equals the monthly payment received from the holder of $400.00. The amount lent would be for 5 years, that which equals the due date of the note, and the loan amount would be secured by the note of $40,000.00 At the end of 5 years when the note becomes due, you would pay off the difference owed and receive the balance of cash. You would owe the lender 22,200.00, the remaining balance on the loan due to the holder.

Therefore, you received your: $40,000.00 Pay off to lender: $ 22,200.00 Net received: $17,800.00 Plus amount borrowed: $24,831.00

Total amount received: $42,631.00

If the note were to be sold at a 20% discount:

Face value of note: $40,000.00

Sold at 20% discount: $ 8,000.00

Net cash received: $32,000.00

Note hypothecation: (Total received) $42,631.00

Sale of note at 20% discount: $32,000.00

Gain by note hypothecation: $10,631.00

Now, with the notes liquidated (hypothecated) you now have cash for other investments, be it for real estate, debt consolidation, or any other reason. Owing to the great demand for new homes, and because so many new houses are being built today throughout the country, and more so in some areas, it has become increasingly difficult to sell some older homes and get the full value for them when the seller wants the equity cash out so he can purchase a new home.

If the owner is unwilling to reduce prices so that he can offer something tangible to the purchaser who can buy a new house or new income property for a relatively small down payment, then one course is open:

1. The owner can either sell the older property for a reduced price, and possibly receive a smaller down payment, use creative financing and carry back a small trust deed, sell using a lease option, sell using equity participation, or he can except the trust deeds at full or a reduced value thereby eliminating the note hypothecation theory.

Actually, it does not make any difference in the final analysis, what a person used as a medium, if he disposes of what he no longer wants to own for something he would better like to own. Think of this for a moment like a garage sale. Why do people have garage sales in the first place? Many times to get rid of things they no longer want to own.

There are as many seller´s of real property who will not deal in any type of creative offer, but that is ok, it is not that seller you want to deal with anyway. You want the seller who is willing to be creative in acceptance of an offer and that is knowledgeable enough to see the benefits (current and future) entailed. Just remember, not all offers are accepted all the time, and not all offers are accepted on the first presentation. Sometimes you have to re-analyze the situation and offer another solution to whatever problem you may have been presented with.

There are differences between mortgages and trust deeds. A trust deed is a mortgage, but a mortgage is not a trust deed. With a trust deed, there is a trustee. This could be a bank, an escrow company, or a trust company that sets itself up to be a trustee under state laws. When a trust deed is paid off, the beneficiary of the money paid off must issue what is known as an Order for Full Reconveyance. This means that a form is signed, where the beneficiary, who is the owner of the trust deed, certifies that he has been paid and that the obligations described has been fully satisfied. This form, accompanied by the original note, is a trustee´s authority to issue what is known as a Reconveyance. The Reconveyance is filed in the records of the County and the trust deed is thereby fully released.

A mortgage is a contract by which specific property is hypothecated for the

performance of an act, without the necessity for a change of possession.

To hypothecate means to pledge a thing without delivering the possession of it

To the pledge, it is a term of the civil law, is a pledge in which the possession

of the thing pledged remains with the debtor.