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Commercial Paper Mortgages, Promissory Notes -- Buyers, Investors, Brokers --
An Introduction to Notes & The Paper Source
Buyers, brokers and investors in commercial paper mortgages and other cash flows find them to be high-yielding investments. Notes, also called cash flows, income streams, debt instruments or paper, are thought by many to be limited to bank notes or discounted seller carryback mortgages.
Today, however, the terms mean much more. Not only are smart money managers investing in and brokering receivables and discounted paper like private seller carryback mortgages, trust deeds and contracts for deed, but almost any other debt that is paid over time, not necessarily secured by real estate, can be a marketable cashflow.
This includes annuities, leases, insurance benefits paid in installments (called structured settlements), retirement accounts and royalties, even lottery winnings -- and much more. Even such esoteric financial instruments like tax lien certificates, contractor's liens, medical receivables and commercial accounts receivable ( factoring ) can provide you, or smart institutional group investors, with multiple streams of income.
In other words, today the term cash-flows can mean any marketable I.O.U. that represents a promise to pay over time.
Notes provide cash flows. They are usually secured by something of value that can be foreclosed on or otherwise claimed by the note owner if the payments are not made. They are normally sold at a discount from their balance. For example, a $10,000 note may be sold for $8,850.00.
why are notes discounted?
Because of the time value of money: dollars in the future are worth less than dollars today. Suppose you are offered your choice of a $10 bill and a $100 bill. You can have the $10 right now, but if you choose the $100 you'll have to wait a month to get it. Almost everyone will choose to wait for the $100. Suppose you can have the $10 now, but have to wait a year for the $100? Or 5 years? Or 10 years? At some point you'll say, "I'll take the $10 now." You've just discounted a $100 bill to under $10!
In the same way, a note is discounted because the money is paid over time. A financial calculator is used to determine the value of a note, based on the investor's desired yield.
how can you make money with discounted notes and cash flows?
Innumerable ways. You can buy them for investment at yields above bank CDs and money market funds. Or, you can buy them at one price and sell them for a higher price. You can even contract to buy them, sell them for a profit, and never have a cash outlay doing it!
how does a note seller and a note buyer get together?
The kinds of notes that are the easiest to find and work with are privately created when someone sells a property or business and "holds" or "takes back" some or all of the financing. For example, someone may own a house on which they have paid off their bank mortgage. They sell their house for $100,000, receive a $20,000 down payment from the buyer and take back the $80,000 balance in the form of a "seller-held mortage" In some parts of the country it's called a "seller carryback mortgage" or "owner financing" or similar terminology. It all means the same thing: The buyer makes payments over time to the property seller. In other words, the seller acts just like a bank.
One day the seller decides he needs more cash than the monthly payments are giving him. Since you've advertised that you buy such notes, he contacts you for a quote on his mortgage. Maybe it has a $60,000 balance. You calculate the value (we'll teach you how) and offer him, say, $51,266.23. He sells the note to you and now you collect the monthly payments. Your investment produces a nice double-digit yield on your money, and if the payor ever defaults, you get a $100,000 house (perhaps worth even more than that by then) for your $51,266 investment, plus a couple thousand for closing costs, less the payments you already received.
Of course, you could also broker that mortgage by selling it to an investor at a higher price than you paid for it (and you use the investor's $51,000 to buy it in the first place!). Most people get started in notes by brokering and hope to become an investor someday; some have.
This is only one of dozens of examples of how notes work. Real estate notes are only part of the story. Notes can be created with anything of value as the collateral (there are also unsecured notes, but we don't recommend them) . However, real estate notes remain the backbone of the note brokerage business.
who buys them?
There are about 50 firms in the country that buy notes on a national or regional basis, and hundreds of private investors. Selling notes to private investors can be risky. We recommend that you deal with reputable national investment firms. An up-to-date listing of the major firms and what they buy will be sent to you when you become a PAPER SOURCE JOURNAL subscriber.
is note investing and cash flow brokering just another "get-rich-quick" scheme?
Yes, it is - if you fall for the hype of some folks who are in the seminar-selling
business, not the note business. When we started THE
PAPER SOURCE in 1987, we did so because we were successful in buying
and selling notes, there was no publication and very few books or tapes
devoted to the subject, and we thought we'd have fun (and maybe make a
few dollars) teaching people the note business.
In the last few years the suede shoe and pinky ring crowd have shown up
selling note "seminars" and "boot camps" on TV infomercials, in slick
magazines and mass mailings, promising people that notes are the sure
path to riches. They tell people: "The note business is easy." "There's
almost no competition." (The biggest seminar company actually puts this
in big letters across the screen in their infomercial! In case you didn't
know, that is an outright lie. There's a LOT of competition in the note
business.) Other claims frequently made: "Many of our graduates make over
$100,000 a year." "You can spend all day on the golf course when you're
a note broker, just take your cell phone, make a couple of calls, and
boom! You've made $10,000!" They charge anywhere from $5,000 to $10,000
for a few days of "training," (which tells you why they think notes are
the sure path to riches - their own!). To sweeten the pot, you receive
the bogus title of "certified note broker" or something similar when you
take their course. The fact is, there is no certification recognized by
the note industry. The Federal Trade Commission is going after the seminar
pitchmen. One of these days you'll see them on another TV channel -- this
time on "60 Minutes" covering their faces and running away from Mike Wallace.
"Paper Source Recouped Our Subscription Costs Incalculably...Business Grows Phenomenally""THE PAPER SOURCE has recouped our subscription costs incalculably over the years. What we've learned and the contacts we've made through it and the annual Conventions has made our business grow phenomenally. Obviously we wouldn't be without it! -- Tom Hennigan, President, EscroServ, Inc. |
the note business / the note industry: what's the truth?
The facts are: The note business is not a get-rich-quick scheme. It can be a get-rich-slowly plan. It is not easy. Like any other business, it takes time to get off the ground.
According to a recent study, almost 100% of the graduates of these expensive seminars fail!
That says more about the methods of the fast-buck artists than it says about the potential of the note business.
There is competition, and only those who are truly motivated and who are commited to keeping up with changes in this fast-moving business survive. Most people who start don't have the staying power to make it. Most of the few who do make less than $100,000 a year, probably less than $50,000. A small number eventually make more, and we know a few who have been in the business for a number of years who apparently make a lot more.
where can I learn more?
First, spend lots of time looking around our website, and visit often, as it is frequently updated with new information. On it you'll find a copy of "How To Make Money In Notes Without Using Your Own Funds," a $15.00 guide that is our gift to you for visiting us. Visit the Notes Lounge and read the hundreds (thousands?) of messages on almost every conceivable topic relating to notes. Be sure to sign up for our FREE newsletter below, and subscribe to the monthly PAPER SOURCE JOURNAL.
If you're serious about being a note buyer / cash flow broker, get the home study course Profits in Discounted Notes: The Complete Beginning Course and by having the time of your life on the most unique event in the Industry, the Note Boat Seminar/Cruise.
Sign up for "the Cash Flow Express" -- our FREE newsletter full of tips about the note business. We cover finding them, screening them for marketability, negotiating with sellers, finding the perfect investor (if you don't want to keep it yourself), and the closing process. You'll learn about new kinds of notes you can buy and re-sell, and even where to get the contracts and forms you need for just $1.00 each!
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