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Investing Strategies

Creative Dealmaking: Sell the Head; Keep the Tail

fishJack Sternberg – the man who brings us The Noteworthy Newsletter – has been kind enough to rip back the veil shrouding the note business, helping Mogul readers get a full-on immersion into one of the hottest, least-known profit centers in real estate today.

During the last few months, Jack has told us about a variety of his favorite creative dealmaking strategies (each with its own creative name), including:

In today’s main event, Jack puts a creative twist on his “Double Your Pleasure” strategy by introducing a process he likes to call “Selling the Head and Keeping the Tail.”

If you need a refresher course on any of Jack’s previously-discussed strategies, then this is the perfect time to pause and revisit his last few lessons.  And if you share our fascination with clever tricks-of-the-trade, then today’s lesson will be perfect for you!

strategySell the Head; Keep the Tail

Jack:  “Selling the Head and Keeping the Tail” refers to the partial sale of a note.  First you create a note, and then you sell just a piece of its future cashflow, thereby generating a little bit of quick cash in your pocket and financing your next deal.  In order to do the deal, you simply sell enough of the note to generate the immediate cash you need, and then you keep the balance – which reverts back to you after a period of time.

JP: Hmmm… This is difficult to conceptualize without an example.  Can you give us an example of this sort of transaction?

Jack: Sure. Suppose you want to do a $100k deal, but you need $50k in order to (i) create a $100k note and (ii) acquire the real estate.  How much of a $100k note do you need to sell upfront, in order to get the $50k you need?  In my experience, it is reasonable to assume that you could raise the $50k you need by selling the first fifteen years of monthly payments from the $100k note.  That way, somebody else receives monthly cashflow for the first fifteen years – but then it reverts back to you.

JP: So somebody pays you $50k upfront, in order to receive the first fifteen years of monthly payments from the $100k note?

poemJack: Exactly. Or, of course, you could structure the deal in numerous other ways.  Instead of selling all monthly payments from the first fifteen years, you could sell half of the monthly payments for a full thirty year term.  For example, if the $100k note generates $1,000 per month for thirty years, then you could sell fifteen years of $1,000 payments or thirty years of $500 payments.  Although the numbers in this example are arbitrary, I think they help to illustrate the general concept of “Selling the Head and Keeping the Tail”.

JP: But why would somebody want to pursue this strategy, rather than simply creating two separate notes, as described in our earlier lesson about Doubling Your Pleasure?

Jack: It’s really just a matter of personal preference.  For me, personally, I like this approach best, where I only have to deal with one note.

JP: Got it.

Jack: Now, on a cautionary note, anybody who pursues this strategy must be sure that their deal includes enough of a spread, which is a vital prerequisite for “selling the head”.  You must have enough profit upfront in order to do this successfully.

JP: Right. If you bought the house for $90k then you wouldn’t have as much flexibility as you would have from buying the house for $70k.

Jack: Well, I suppose it would be possible, but the note’s buyer would have to give you a much larger downpayment.  So it would be possible, but unlikely.  However you do it, just make sure that you’ve got enough of a spread!


Do It To It! Immediate Action Steps

Create – Create a note.

Allocate – Sell a portion of the note’s future cashflow, thereby generating a little bit of quick cash in your pocket.

Deal – Use your pocketed cash to finance your next deal.

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