What is a note?
Investors in notes 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 discounted seller carryback mortgages. Today, however, the terms mean much more. Not only are people investing in and brokering discounted seller carryback mortgages, trust deeds and contracts for deed, but they buy and broker almost any other debt that is paid over time, not necessarily secured by real estate, that 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 multiple streams of income. In other words, today the term cash flows or cash flow notes can mean any marketable I.O.U. that represents a promise to pay over time. They are secured by something of value that can be foreclosed on or otherwise claimed by the note owner if the payments are not made.
You can make money brokering notes — using the investor’s funds, not yours — and you can make money investing in them. They are sold at a discount from their unpaid principal balance. Investors receive the payments on the notes at a yield far above bank CDs and money market funds. Others can make a nice income brokering these notes to investors. Many people do both: they buy the notes they like, and broker the others.
Why are notes discounted?
Because of the risks of owning a note, and because dollars in the future are worth less than dollars today. A note is not cash, it is a promise to pay in the future. 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 notes?
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 (since the value of a note is not fixed like a stock, it is totally negotiable). You can even contract to buy them, sell them for a profit, and never have a cash outlay doing it!’
The kinds of notes that are the easiest to find and work with are privately created when someone sells a property or business and “carries back,” “holds” or “takes back” some or all of the financing. All those terms mean the same thing. This type of note is known by several names in various parts of the U.S.: seller-financed note (or mortgage or trust deed), owner-financed note (or mortgage or trust deed), private note (or mortgage or trust deed), seller carryback note (or mortgage or trust deed) or purchase money mortgage (or note or trust deed).
When someone sells a property (it can be a house, apartment building, commercial property, land or even a business with no real estate) and “holds” some or all of the financing you can buy that note and either keep it or sell it to an investor.If your plan is to sell it, you can use the investor’s money to buy it and receive a commission.
Here’s an example: Someone owns a house free and clear — no mortgage. They sell their house for $200,000, receive a $40,000 down payment from the buyer and take back the $160,000 balance as a note, an IOU, from the buyer, where he promises to pay the $160,000 plus interest in installments. The note is secured by the house, so if the buyer defaults the seller can foreclose and get it back. In other words, the seller is the bank.
One day the seller decides he needs more cash than the monthly payments are giving him. He contacts you for a quote on his mortgage note. Maybe by now it has been paid down to a $150,000 balance. If you are a note broker, you get the details, check with the investor you’ve chosen (you´ll find the most reputable real investors (not brokers) in THE PAPER SOURCE REGISTRY OF NOTE INVESTORS) and offer the note seller something less than what the investor will pay.
For example, let’s say your investor quotes you $141,455.00 for the note. You offer the note seller something less, and that’s how you make your commission. If you offered $137,455.00 you would make $4,000. You don´t need the cash to do this. The investors will wire the funds directly to the title company handling the note sale. The title company then cuts you a check for the difference.
Or, you can be the investor, keep the note, 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 $200,000 house (perhaps worth even more than that by then) for your $137,455.00 investment less the payments you already received.
What can go wrong? Lots of things. That´s why you need the education we provide. This is only one of dozens of examples of how note buying and note brokering work. Sometimes you´ll buy a “partial,” which means you (or your investor) get the next X number of payments, then the note reverts back to the note seller and he collects the rest. Or sometimes you´ll buy half of each monthly payment and the note seller gets the other half each month. Or you´ll buy all the payments and he gets the balloon. Or you´ll buy half the balloon and no payments…the note buying combinations are fascinating and almost endless, but they all have one thing in common: PROFITS!’
Who buys notes?
There are a handful of companies that buy notes nationally, a few that buy regionally and many private investors who buy locally (I do not recommend that beginning note brokers sell to private investors — there is too much work and liability). These companies have sources of funds unavailable to note brokers, such as proprietary investors, pension funds and large lines of credit. The hundreds of others advertising that they are note investors on the Internet and elsewhere are by and large liars. They are only brokering to the companies mentioned above. Most of the real national and regional professional investors are in THE PAPER SOURCE REGISTRY OF NOTE INVESTORS.
What about all those investors on the Internet?
Again, 99% of them aren´t investors at all — they are brokers selling to the very few true full-time end investors. They just want other brokers to do all the work and take a piece of what should be the other brokers’ commissions.
What about private investors?
There are hundreds of private investors buying notes, but selling notes to private investors can be very risky. Until you become VERY experienced and understand the potential pitfalls we recommend that you deal only 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, plus you get access to the Internet Registry. See the Journal tab in the left margin for information.’
Are those internet note listing sites any good?
No reputable investor will touch a note listed on them. You are wasting your time and theirs if you ask them to quote a note you found on an Internet listing site.
Think about it: Mom and Pop Noteholder don’t even know their note can be sold, much less are they going to search the Internet for a listing site and post it there. These sites are marketing gimmicks used to sell “boot camps,” “coaching” and other gimmicks. They are dangled in front of prospects to seduce them into parting with thousands of dollars for “training” to become a cash flow (note) broker or “consultant.” The truth about the Internet note listing networks is that they are full of notes, alright — posted by note/cash flow brokers! 99% of the time they have no control over the note nor even any contact with the note holder. They got the note info from other cash flow brokers, who got them from other brokers, etc., etc. This is called the “daisy chain” and it’s the bane of the note industry. Don’t fall for it!
What’s the truth about the infomercials?
A few years ago the suede shoes and pinky ring crowd showed up selling cash flow “seminars” and “boot camps” and “coaching” 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 put this in big letters across the screen in their infomercial! In case you didn´t know, that is an outright lie.) 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 and more 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 sometimes receive the bogus title of “certified cash flow broker” or “consultant” or become their “apprentice” or get exclusive access to their lists of notes (all phony, by the way — see the FAQ above) or something similarly bogus 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 infomercial pitchmen, and several of them have already paid big fines and gone to jail.
What makes a good note?
The value of a real estate note depends ultimately on the economic conditions that support the value of the property. An owner-occupied single family house in a good neighborhood located in an area with a diversified, long-term stable economy is the best collateral possible. It is further enhanced by a payor who has an excellent credit record and unblemished payment history. Less desirable collateral, in descending order: owner-occupied (owner lives in 1 unit) duplexes/triplexes; non-owner-occupied single family houses; non-owner-occupied duplexes/triplexes; other non-owner-occupied multi-family units; improved land; commercial (non-industrial) properties; resort properties; subdivided but unimproved lots; raw land (some investors would use a slightly different hierarchy). Due to the current regulatory environment in the U.S., industrial properties and properties with underground fuel tanks have many hidden liabilities. Notes secured by such properties should be avoided. Cooperatives, time-shares, mobile homes and personal property are not real estate and by themselves are not adequate security for notes. There are a few corporate investors for such notes, however. The higher the investment-to-value ratio, the riskier the note (ITV = amount paid for the note + senior lien balance/market value of property). If there is little or no appreciation in the property, the loan-to-value ratio is a barometer of the likelihood of default. Notes on property purchased for $1,000 down or less often default. The higher the downpayment, the better. An amortized note is more valuable than one with a balloon, since the payor may not be able to make the balloon payment. The single most powerful financial aspect determining the value of a note is the amount of the monthly payment. For example, all else equal, a 10 year note with a large monthly payment and no balloon is worth more than a 10 year note with a smaller monthly payment and a balloon. A note in the first lien position is more valuable than one in the second lien position. Third lien or lower notes are worth very little. A second lien note with a huge balance first lien should be avoided. In case of foreclosure, the owner of the second lien would have to make the payments on the first. A seasoned note (one with a payment history of several years or more) is better than a green note (little or no payment history). The payor´s credit history or credit score is important to help determine the character of the payor and likelihood of default, but it is not infallible. Everyone, even those with the best credit, can lose their incomes, have medical emergencies or suffer other unforeseen catastrophies. The best use of a credit report is to identify a potential bankruptcy candidate. A second note behind an assumable first is always to be preferred over one behind a non-assumable first. Again: The value of a note depends ultimately on the economic conditions that support the value of the property. These are just some of the factors to weigh when considering a note. For an in-depth treatment of this subject, see Lorelei´s Legal Lessons, by Lorelei Stevens
How do I find notes?
Unlike other FAQ´s, this one can´t be answered in a few paragraphs. See Finding Notes from the menu above.
Where do I get the contracts & forms?
Go to www.cashflows.org).
What are the questions noteholders ask?
“I saw your ad. What do you mean you buy mortgages?” Your best strategy is to ignore the question and ask one of your own: “Are you receiving payments on a mortgage now?” Otherwise, you may find yourself explaining mortgage investments to someone who is simply curious. Don´t waste your time with people who don´t have notes for sale.
“What do you pay for mortgages?” Again, don´t waste your time. Make sure they understand that you are only interested in beginning a conversation if they have a mortgage to sell. Ask, “are you receiving payments on a mortgage now?” It´s amazing how many people think they can sell a mortgage they´re paying on! If they say yes, the answer to the question of what you pay is, “it depends,” and you then proceed to ask them the questions from the intake sheet.
“How much of a discount will I have to take?” “As little as possible. Each note is different.” Then ask your questions.
“How long does it take before I get my money?” “Once you furnish me with all the documents I need, the process will take a few weeks.” (It may not, but you now have the time if you need it).
“Why does it take so long?” “The title search and appraisal are what takes the longest, and we have no control over those. It may very well be shorter.”
“Are there any points or fees I´ll have to pay?” “No, there are no points, and we´ll pay all the closing costs.” (Of course, you pencil in those costs when you quote the note.)
“What documents do you need?” “Not many, really. I´ll go over that with you when we meet to complete our agreement to buy the note. Would 3 o´clock this afternoon be all right, or would 7 o´clock tonight be better?” (Note that you give them an “A” or “B” choice, not a “yes” or “no” one.) “What if I can´t find all the documents?”
“The original note is the most important one. The others are either recorded at the county courthouse or on file with the title company or lawyer who handled the property settlement.”
“Can I use my own lawyer?” “I would insist on it. I strongly encourage you to have your lawyer review everything in advance. Of course, I can´t pay your lawyer´s fee, that´s your responsibility.” A note seller who asks this question is afraid you´re going to take advantage of him. The best way to dispel this is to do what he doesn´t expect — insist he consult his lawyer before he acts. “Whosoever shall compel thee to go a mile, go with him two miles.” (Matthew 5:41) “
Can you get a credit report without permission of the creditor?
Lorelei Stevens, the president of Wall Street Brokers, Inc., has been spearheading this question on behalf of the note industry for years — unofficially, of course, since there is no organized “note industry.” (Reminds me of Will Rogers’ comment, “I’m not a member of any organized political party. I’m a Democrat.”) She’s corresponded with credit bureaus, state regulators, hired attorneys and has engaged in a continuing dialogue with the Federal Trade Commission over the legalities. Lorelei faxed a copy of the Associated Credit Bureau’s analysis of the Fair Credit Reporting Act. It says: “Section 604(a)(3)(E) creates a permissible purpose for potential investors, servicers or insurers of credit obligations to obtain consumer reports for the purpose of evaluating or assessing the credit or prepayment risks involved in existing credit obligations of consumers. For example, an entity that plans to invest in a mortgage loan transaction would have a permissible purpose under this section to obtain a consumer report on the borrower in that transaction.” The industry owes a debt of gratitude to Lorelei Stevens for her tenacity in monitoring this issue.’
How can I spot a rip-off?
The cash flow/note business is not a get-rich-quick scheme, despite what you may have been told. It can be an excellent get-rich-slowly plan. The hucksters use mass marketing techniques to sell it as the latest road to fabulous wealth. It IS making THEM wealthy. One of those pitchmen, whose conscience got the better of him, confided to me that another cash flow pitchman was always introduced as follows: “Now, ladies and gentlemen, here is a man who has made millions with the information he´s about to share with you!” Pretty impressive, right? Here´s the rest of the story: Yes, he made millions with the information he gave the marks, I mean, the audience (in case you don´t know, a “mark” is a carnie (carnival) term for a sucker). But it´s not what you think. Those backstage got a big laugh when he was introduced that way. Why? The “information” his millions came from was his sales pitch for his products and “boot camp”! No one has the secret to getting rich quick. If they did, why would they tell the world about it? They´d be too busy using their secrets to get rich. Count on it: ANYONE WHO SELLS ANYTHING PROMISING EASY RICHES IS CONNING YOU. “The plans of the diligent lead surely to plenty, But those of everyone who is hasty, surely to poverty.” — Proverbs 21:5 Instead of trying to get rich quick you should be trying to (in the words of Jimmy Napier) get smart quick. And smart people are much more likely to get rich than others.
Help! I’ve been ripped off!
If you’ve been victimized by a seminar promoter, contact your local and state consumer protection agencies and your state Attorney General. You also may file a complaint with the Federal Trade Commission online at https://www.ftccomplaintassistant.gov/ or call 1-202-FTC-HELP or write: Consumer Response Center, Federal Trade Commission, Washington, DC 20580. Although the FTC cannot intervene in individual consumer disputes, the information you provide may indicate a pattern of possible law violations requiring action by the Commission. You may also wish to consider filing a class action lawsuit. Contact an attorney and discuss the possibilities.
Should you be a full-time or part-time cash flow note broker?
IF YOU ALREADY HAVE A JOB: Don’t give it up now! Do not try to be a note/cash flow broker without having another source of income. Brokering commissions come in slowly and are usually few and far between at first. I tell people to plan on making NO money for the first 6 months. Cash flow note brokering is a part-time business for all but a very few. You´ll make a nice side living as a broker, and maybe someday you´ll go full-time. Let your brokering business tell you when that time has come. How will you know? When you discover that you´re making more money as a note broker than in your regular job, and that you enjoy being a note broker more. Then give that situation a year or two. If nothing changes, then, and only then, make the jump to being a full-time note broker. In other words, when you´re starting out, “don´t quit your day job.” IF YOU DON´T HAVE A JOB: Look for one while you broker notes.
Should You Broker Lotteries and Structured Settlements?
You very likely will not be able to create a viable business brokering only structured settlements and lotteries. Every broker I know of, and that is a lot, depends upon real estate notes for the vast majority of their business. There are no courses because for the broker, unlike real estate notes, it is much less complicated because the investors want to do most of the work themselves. It is a matter of finding the lotteries and structured settlements and then contacting an investor, who will tell you what to do from there. You certainly don´t have to pay someone thousands of dollars to learn it. The mainstay of virtually all successful note brokers is real estate notes. Structured settlements, lotteries, annuities and other non-real estate paper can be a lucrative addition to brokering real estate notes. To learn more about brokering lotteries and structured settlements, go to THE CASH FLOW DOLLAR STORE “Cash Flow Niches” aisle (in the left margin, click “Training/Home Study” then “Cash Flow Dollar Store”or visit www.cashflows.org).’
Can you make a living as a note broker?
If you listen to the pitches for the multi-thousand dollar seminars, you will retire rich from your first deal. Unfortunately, it doesn´t work quite like that. The first thing you need to understand is that the note business is simply another small business. A very, very good one for some folks, true, but still a business, not the magic bean that will make you rich without working.
Suppose instead of opening a note brokering business you decided to open an accounting practice. Would you think you could do this without having any training to be an accountant? Without investing any money in starting your new business? Without investing money in advertising? Would you expect to start making a profit immediately? Would you think you´d make $100,000 your first year? Would you think you might be making half a million or more real soon?
Pretty ridiculous, right? You probably know that something like 90% of new businesses fail in the first five years. Here´s our dirty little secret: The failure rate for people who take the expensive cash flow brokering courses, seminars, boot camps, mentoring, coaching, etc. is 99% in the first year. (That´s not a figure I just pulled out of a hat. It comes from a study by NEWSWEEK.)
HOWEVER, the reason for that statistic is that nowadays the majority of people trying to broker notes heard about it on a TV infomercial, they were sold on notes as a get-rich-quick scheme and made all sorts of promises, so their expectations are wildly inflated. When they find out that it, like any small business, is hard work, they quit. There are no studies, but my 20-some years of experience tells me that the success rate for people without such expectations, who approach this as the serious business it is, and who have some financial or real estate background, is much higher.
A final thought: Please, please, please, do not try this without having another source of income. This is a part-time business for all but a few. You´ll make a nice side living and maybe someday you´ll go full-time. Let your note business tell you when that time has come. How do you know? When you discover that you´re making more money doing notes than your regular job, and that you enjoy it more. Then give that situation a year or two. If nothing changes, then, and only then, make the jump to full-time.
It´s a tough business, and only the most driven, most of whom have another source of income, survive to become full-time note brokers. They find it is one of the most lucrative businesses there is. They make a good to a great living, and the potential is huge. The top 10 brokers for the biggest note buyer averaged $8.3 million in volume in real estate notes in a recent year. At an average 5% commission, they grossed $415,000. This figure does not include profits from brokering lotteries, structured settlements or annuities, the major categories of “alternative paper,” which typically produce windfall commissions of tens of thousands and very occasionally over $100,000. At this level these brokers have a small staff and the typical overhead of a business of this size. Plus they spend a lot in advertising and marketing. These are brokers. Investors make more, sometimes much, much more. And every broker´s goal is to become an investor as soon as possible.
Who are you guys & how do I know I can trust you?
Let’s see…Would it convince you if I said, “Hey, we´re different! We´re not in this for the money, we do it because we love you!”?? No, I didn´t think so. So how do you know that we´re not a bunch of con artists? One way I check people out is to look at their feedback on eBay if they have it. Feel free — my username is reformedelder.
The fact is that we’ve been in business longer than anybody else publishing in this industry. We also put on the first national convention for the industry. We published the first directory of cash flow note investors (and still publish it). My wife Alison and I are the only employees — low overhead means low prices for you. We started buying & brokering notes in the early 1980s and published the first issue of THE PAPER SOURCE JOURNAL in 1987 and have been publishing ever since. And it´s a fact that more cash flow note professionals read THE PAPER SOURCE JOURNAL than any other publication in the industry.
We’ve been quoted in The Wall Street Journal, Newsweek/Jane Bryant Quinn´s national column (several times), USA Today, several national columnists for Gannett and other newspaper chains and more. I could tell you about being inducted into the Mortgage Report Hall of Fame in 1997. I could tell you about receiving the first and only Founder´s Award from the Mortgage Report Hall of Fame, “For Pioneering The Original Industry Newsletter; Establishing The First National Convention For Note Brokers; For Leading Where Others Have Followed; And For His Significant Role In A Developing Industry; This Founders Award Is Conferred Upon William J. Mencarow…” yada, yada, yada. I could tell you about being inducted into The Note Buying Industry´s Hall of Fame (yes, there are two halls of fame; must be a big building) and the crystal obelisk sitting in my office bearing the inscription: “In appreciation of his many years of unwavering dedication and outstanding contributions, William J. Mencarow…,” ditto yadas.
Are you bored yet? Don´t get me wrong, I am very humbled by all this, and I cite them only to put you at ease that we aren´t interested in stealing your money. What we are interested in doing is teaching you more about cash flow notes and giving you more for your money than you will get anywhere else. But you have to decide for yourself if this is true. How do you do that? John T. Reed, publisher of Real Estate Investor´s Monthly newsletter, wrote a great article called “The Real Estate B.S. Artists´ Detection Checklist.” Read it, then test us and everyone else against the checklist. It´s on his website at www.johntreed.com Also check me out at his “gurus rated” page: https://johntreed.com/blogs/john-t-reed-s-real-estate-investment-blog/63395139-real-estate-b-s-artist-detection-checklist-part-1). If you want to know more about us, click the tab “About Us.”
How should you study all the information on the website?
1. Read everything on this website.
The purpose of the e-course is to explain cash flow/note brokering and investing in detail — I took my 3-day course and distilled it to the bare-bones essence and made it the 7-part free e-course. When you have finished it you will have a good idea of whether or not you want to proceed.