Get some real life lessons learned from my worst real estate note investment!

The note was secured by a small single family house in Arizona. The owners of the property ran a commercial cleaning business in Las Vegas and were planning to use the property in Arizona as a second home/ vacation home.

They purchased the home for $85,000 with a $20,000 down payment and the seller carried back a $65,000 note with $1,000 per month payments at 0% and a final balloon payment due after 24 months.

It sounded like a nice note with 8 months of on-time payments, a significant down payment and a final balloon payment paying off in 16 months.

What could go wrong buying this note?

Pretty much everything with this note did.

We knew that receiving the on-time balloon payment would be a bonus and went into the transaction knowing that we most likely would need to modify the note and extend the terms. The note had a balance of around $57,000 and we purchased the note for around $43,000 which gave us some flexibility in the terms we would be able to offer.

What we didn’t anticipate was having to modify the note well before the balloon payment became due. Unfortunately we only received a handful of monthly payments and then the payments stopped.

I contacted the payors and they asked for some extra time. They claimed they had a large cleaning client who was supposed to pay them soon and they assured us they would then pay us. After two months of more conversations and no payment we modified the note to a lower monthly payment that they said they could manage.

These payments continued for a while, but then they again stopped. The sellers asked to modify the note again with a lower monthly payment and another one year extension. We agreed. When the payors defaulted on this second modification we decided to foreclose and move on.

After the time consuming foreclosure process, we put the property on the market in February of 2011. We sold the house eight months later for $37,0000 and have so far received two on-time payments. While financially this has been one of our worst investments, educationally this has been one of our best. Here are the main lessons that we learned.

Lessons Learned on How to Buy Notes

Here are the key learning points gained from buying real estate notes:

Balloon Payments Very Rarely Materialize

While we knew the balloon was unlikely to pay off, we hoped the owners might have some cash on hand to diffuse the balloon. The fact is successful balloon payments are usually the result of the ability of the payor to obtain credit from someone else.

Note Modifications

If you require a note modification, know that a foreclosure is probably soon to follow. Prepare accordingly.

Credit

While we knew we were playing with fire on this note, we now have fully learned our lesson. We will never, ever get involved with a note where the payors have a credit score that starts with a 5. This shows you that the payors have a refined habit of not keeping their promises (other notes we hold confirm this too).

Consider Terms

Be cautious of owners who previously were able to negotiate 0% financing. You will come across this occasionally and buyers who negotiate this may be more difficult to deal with if you step into a transaction with them. We found this to be the case in both modification agreements we attempted.

Partials Protect

We should have moved ahead with a partial with the note seller which would have kept our investment lower and also would have kept the note seller interested in how the payors performed.

Non-payment Action

When a note investment stops paying, act quickly. When you hear the payor’s story, listen, but continue to move toward getting a payment in quickly. By giving a payor more time, it rarely solves their problem and only makes it more difficult for the payor to get caught up. They are more likely to bring the account current when the amount outstanding is within reach for them.

We lost a ton of time and energy on this note but at the same time we are better note buyers and investors today because of it.

About the Author: Greg Gehlen is the Principal at Canyon Capital, which specializes in the purchase of real estate notes and deeds of trust. He can be contacted at 702.515.7416 or online at www.canyoncap.com

You may also enjoy reading these additional articles on buying mortgage notes by Greg Gehlen:

How to Buy Real Estate Notes Without Going Broke

Transitioning from Note Broker to Note Investor

Real Estate Note Investing: “Wow, That Sounds Risky!”

Note Buyer Success Story

There are over 239 million users online making up 77% of the US population according to Internet Word Stats – and that number is only growing!

With potential customers online there are great reasons for note buyers and note brokers to build a website. Your site will:

Advertise Services
Provide Credibility
Serve as a Virtual Storefront
Generate Quote Request Leads
Supply Around the Clock Customer Access

While your goal is to create a web presence for your note buying company, don’t forget the number one purpose…

Fill the Customers Need By Solving Their Problem!

 It takes planning to build a successful website. So let’s look at the..

7 Steps for Building a Successful Note Business Website

 #1 Determine Primary Purpose

Take some time to decide on the primary function of your note business site.

Is it strictly a brochure or corporate style site that provides information about your company?

Will it provide educational content to help people understand the process of creating and selling notes?

Is the focus to motivate visitors to complete an online quote request worksheet?

Are you trying to attract visitors through online search engines or will you use offline advertising to drive traffic?

While a website can try to fill all of these needs the primary and secondary goals should be evident to users and the action you want them to take.

#2. Select Programming Platform

A brochure site is generally static with minimal updates. However an educational site or one designed to attract search engine traffic will need frequent new content.

This will play a role in selecting a programming platform. While web developers often have their own preference for programming we have found WordPress.org to be an excellent option. This content management system (CMS) is not just for blogs. Many companies are now taking advantage of its functionality using a combination of static pages and blog style articles.

#3 Purchase Domain Name

Many business owners default to a domain name that closely resembles their company name. However, there are benefits to selecting a domain name that includes keywords, which indicate you buy notes. Including words like note buyer, note investor, trust deed buyer, or contact buyer will clearly tell people what you do.

For example, when we started Diversified Investment Services, Inc. in 1997 we selected the domain name of diversifiedinvestment.com. We couldn’t shorten it to the initials DIS because it was already in use by Disney. Initially our selection worked fine because people were contacting us from ads, business cards, brochures, and other offline marketing efforts.

Over time we found our choice was long, hard to spell, and did not specifically describe note buying. As the number of web sites increased and search engines evolved we discovered there were advantages to using keywords in the URL. In 2001 we started using NoteInvestor.com for online traffic. We then switched the static site to a WordPress Platform in 2008 to make it more search engine friendly and easy to update.

For additional keyword ideas related to note buying you can use the GOOGLE™ Keyword Tool or refer to the SEO & Keywords section of the Finding Cash Flow Notes Training.

Ideally the business name and the website would both contain important keywords, but depending on timing and domain name availability they might be different. To research and register domain names we use:

• GoDaddy
• NameCheap

You should purchase, own, and control your domain name. Don’t leave this valuable asset in someone else’s hands. Also avoid using subdomains (where your website name is added onto a different main domain name).

#4 Find Reliable Hosting

Once you have purchased a domain name for your note business you will need to select a web hosting company. This is where the files that make up your website reside on the World Wide Web.

For most sites a shared hosting plan will fit the traffic demands. This is a much more reasonable option than using a dedicated server. We are using and including the services of Host Gator for all the Note Buyer Sites with great results.

Once the hosting company is selected you will need to update the domain registrar account with your new name servers.

#5 Plan Design

When planning a note business website be sure to keep these design elements in mind:

• Professional – The site needs to look like it represents a business. This includes photos and backgrounds. Use colors like blue, green, or maroon that invoke feelings of trust, reliability, and stability. There is a reason the banks and other financial companies lean towards these colors.

• Visually Appealing – Visitors should find the site inviting. If it contains excessive graphics, music, or content they will hit the dreaded “back” button in the browser window – never to return.

• Simple Navigation – Make it easy to move from one page or topic to the next using breadcrumb style navigation links. If you want them to first and foremost, Request a Quote, then make that a prevalent option or link on every page!

• Demographics – Take into consideration the age and preferences of the average visitor. For most it is easier to read black text on a white background in a San Serif style font (like Verdana) for online applications. Also bump up the font size of text to something above 12 point so it is easy to read.

• Less is More – It should be very clear what each page is about and the action the visitor should take next. Avoid clutter and break content into two to three lines per paragraph with good use of headings.

• Above the Fold – The most important items should be viewed on the top half of the page, before a user needs to scroll down. Like newspaper headlines, above the fold is gold on the Internet too.

• Behind the Scenes – The design should take into consideration load times and active links. Sites are penalized by search engines for broken links or slow load times.

• Useful – Give users what they are looking for. The design and content should all focus on solving their problem and meeting their needs.

#6 Write Content

Next up is the content. What will you include on your website? Here are the five most common pages for successful note buyer sites:

• About – This page tells people “Who We Are”. It should stress the benefits and credibility of your company. A photo of you can be helpful when building trust online.

• Services – This covers What We Do” or “How We Help” the customer. It should be benefits oriented and help the customer see what’s in it for them.

• Request a Quote – Clearly let visitors know how they can obtain a quote or free analysis of the note’s fair market value. Standard options are to have them call for a quote, download a form to print, complete and fax, and/or input the information online using a form that submits the information to you via email notification.

• Frequently Asked Questions – Common questions that people have when selling mortgage notes.

• Contact Us – How the customer can contact you. Include name, address, phone number, fax number, and email address. If you don’t want to display the email address then have a form they can submit or email information.

In addition to the five minimum pages there are benefits to including the following:

• Articles – Helpful tips and ongoing articles that let sellers know how they can improve the value of their note. Also provide updates on market conditions, tax time tips, or reminders to check tax and insurance status. Articles also help your site take advantage of using updated content to improve search engine rankings. Just don’t let the articles overtake the home page for a site that is focused just on note holders. The articles should be accessed from a link on the home page to a secondary page and/or show the most recent article titles in a side bar.

• Email Sign up – Collect emails of note holders by offering something in exchange for their email address.

• Testimonials – Including testimonials from satisfied customers or showing how a problem was solved on a transaction can boost confidence a note seller should contact your company.

• Privacy Policy – This page explains your privacy policy and is usually included with a link in the footer area.

• RSS Feed – The RSS (Really Simple Syndication) feed provides for easy notification of updates to websites.

While developing your content be sure to research what the competition is doing. Visit sites with top listings in the paid and natural search engine results to see how they are promoting their services.

#7 Get Help

Once you have a plan and content you are ready to create the site. It is possible to build the website yourself using ready-made templates and tutorials available on the Internet.  But unless this is your specialty or hobby, it is easy to end up frustrated and dissatisfied with the results.

If you are not comfortable with a do it yourself method, you’ll want to hire a web developer to install and build your site. If you approach a developer with an exact plan including content in hand, it is possible to have a basic site implemented for around $200 – $500 using an existing template.

Or better yet, tour the 5 sample Note Buyer Sites. These sites were designed specifically for the note business using top-level technology and provide all the design and content elements essential to finding cash flow notes. With these ready to go sites, 6 out of 7 the steps have already been done for you. Just purchase your domain name and leave the rest to our team.

Once your site is up and running commit to adding new content at least once a month to keep it relevant and fresh for both potential customers and search engines.

So does your note business need a website or maybe a new look?  Be sure to check out the introductory special at NoteBuyerSites.com!

In addition to buying real estate notes as a private investor she has provided marketing consulting to the nation’s top institutional note buyers.

The author of several acclaimed books published by McGraw Hill and a past board member of the National Association of Real Estate Investors, she will wow you with her knowledge and dynamic presentation skills.

To know Lisa is to have met the “Ever Ready Bunny” in person.  She is non-stop energy that would give any three-year old a run for their money. I’m honored to call her a friend and business associate. Oh, and if you ever catch her at a Piano Bar make sure to request her killer rendition of Hey Jude!

An Interview With Lisa Moren Bromma, Real Estate Investor and Note Buyer

What is the current focus of your company?

My focus is creating dependable passive income using both real estate and notes.

I am currently looking for a mobile home park where I can add additional homes that I sell on terms, and then continue to receive monthly lot rents, which will help accomplish my goal.

I have bought, sold and traded real estate assets and continue to believe that the combination of real estate and notes can help me and my business achieve its goals.

How did you get started in the note business?

I moved to Asheville, NC area in 1988 to semi retire. I thought I would acquire real estate investments in NC. I went to a local REIA (Real Estate Investor Association) and met people in the note business that introduced us to paper. We learned the business by going out there and doing it. I have continued to buy seller-financed mortgage notes since my days in NC.

What unique benefits does your company provide?

I am not an institutional investor. I do invest for my own account, and occasionally lend money privately out of my IRA to real estate investors with a track record. I have been doing a lot of equity participation deals lately where I receive income and have the potential of future appreciation at the time of sale.

I have two companies. Ocean Park Marketing, LLC provides marketing and consulting services to the financial services and real estate investment communities.

Wise Women Investor is devoted to helping women achieve their financial goals through real estate and cash flow investing. I have a radio show through Wise Women Investor where I feature experts to share tips and strategies to help other succeed. Recently, Tracy Z Rewey joined me on our show.

What type of real estate notes or deals do you like to target for your own investment?

I like both residential and commercial as long as the ITV makes sense. In commercial the ITV must be below 50%. I buy partials. I do not buy land or personal property notes.

What do you consider your best methods for finding note deals?

I like a combination of Internet and direct marketing, networking and teaching potential strategic alliances how to create marketable paper.

I am a big believer in working with third-party referral sources such as Realtors, Estate Attorney’s and CPA’s. I have developed programs that target these audiences specifically, including a CE program that helps professionals understand the benefits of why seller financing makes sense in today’s market, and these professionals get continuing educational credit hours towards keeping their licenses current.

I frequently attend real estate investor meetings in my local marketplace, as they can be a great source of notes and real estate.

I have written 3 books published by McGraw Hill. This establishes me as a credible expert with professional audiences. I use them as I would a business card.

You are well-known in the business as a leading marketing expert and consultant. What are the first things you look for when evaluating a marketing plan?

Thanks for saying this. I look to see if my potential client is really addressing the needs of the market.

• Is their plan specific, measurable, achievable?
• Are their goals realistic?
• Do they know who their competition is?
• How have they positioned themselves in the marketplace?
• What about building their brand?
• How do they get their word out and make sure to be remembered?

Finally, I look to see if they develop a unique selling proposition to make sure the message they want to deliver is one that will resonate with the prospect.

What advice would you give new professionals just starting out in the note business?

• Know your stuff.
• Get educated.
• Develop a network of experienced players in the industry.
• Make sure you know how to use a calculator and how to submit a package that an investor will bid on.
• Do not be afraid to get out there and market. Always present yourself as a professional.
• You can make money or you can make excuses but you can’t make both. When starting out, make no excuses, do what it takes to get you in the trenches, knowledgeable and confident that you have found your niche.
• How you present yourself is directly related to your success in this business.

What is the most common mistake you see note brokers make?

Not addressing the needs of the note seller. Frankly, most brokers want to tell them all about their company and themselves, when in fact the conversation should be about them the seller, not you the broker. Also, don’t rely on one option, one solution. Be in a position to offer multiple solutions to the seller’s problem. People do business with people they like and trust. When you are working for them, they will trust because you are responding to their need. Realize you will not close every transaction, and that is ok. Just keep marketing!

Given the economy, have you made any changes in the way you buy notes or real estate?

Yes, I am very careful with my own account. I not only do due diligence on the deal, I also research the market where the deal is coming from to see if it makes sense for me to invest in a market with little or no potential for improvement over the next few years. Right now I am only buying in Florida where I live or in markets where I have someone on the ground to assist me in my due diligence. I only buy notes on properties I would be willing to own.

Where do you see opportunity?

I see multiple opportunities. I believe seller-financing will continue to grow as our economy continues to be volatile, and banks will continue to be tight on lending. The foreclosure problem is real. To me it means real estate is on sale. There will always be situations where the seller must sell, and not necessarily for financial reasons alone. I look at the market like many did in the mid 80′s. People will have to create paper in order to sell a home.

Where can someone contact Lisa Moren Bromma?

My website www.wisewomeninvestor.com people can reach me there or through lmorenoceanpark@gmail.com

I am happy to answer any questions.

Is there anything else you would like to share?

The note business is not a get rich quick business. It takes education, perseverance, and patience. You must always be marketing and learning what others, investors and sellers require of you. If you treat this as a business, with the respect it deserves and if you are not afraid to go outside the typical channels of marketing, it is my belief you will be successful.

If you are investing for your own account, remember that no one will care more about your money then you. Be extra careful before you buy.

Would you like to meet a note buyer that has been investing in private mortgages since 1981?

Well I’m honored to introduce W. J. Mencarow, founder of the Paper Source, Inc. and the feature of this month’s Note Buyer Interview.

Bill and Alison Mencarow have been publishing The Paper Source Journal since 1987. It is both the first and longest standing newsletter in the note business.

Bill has also authored several guidebooks including “How to Get Started in Notes Without Using Your Own Funds” and been interviewed by NBC, The Wall Street Journal, and numerous media outlets.

I first met Bill at one of the note industry national conventions (something else he was the first to host)! Over the years I had the chance to explore Washington DC, Cancun, and even Alaska thanks to his events. I must also give credit to Bill for meeting Bill Clinton and the Pope (or at least a couple of guys that looked surprisingly similar…)!

Bill started in the note business during the 80’s when seller financing was at an all-time high due to sky rocketing interest rates and lack of access to bank loans. He’s now witnessing the next wave of private mortgages as fall-out from the sub-prime lending meltdown. You are sure to find his interview honest, thoughtful, and insightful.

Note Investor: What is the current focus of your company The Paper Source, Inc.?

Bill Mencarow: Training, networking and continuing education for note/cash flow brokers and investors.

How did you get your start in the note business?

I give all the credit to our tenants. In the 1980′s my wife Alison and I were buying rental houses and going to seminars taught by Jimmy Napier, John Schaub, Jack Miller, Pete Fortunato and Mike Meeker. We were trying to learn more about investing in houses and how to deal with tenants. We also learned about buying notes, and Mike also taught how to broker them.

We soon realized that when something breaks in a house, the tenant never calls the mortgage holder! We decided to concentrate on buying mortgages and brokering the ones we didn’t want.

What unique benefits does your company provide?

We have provide a no-hype, no-cost online seminar that people can use to decide if note brokerage and/or investment is for them. If so, we offer low-cost training and networking programs and put note brokers and investors together to do their own deals.

What type of notes do you look at buying for your own portfolio?

Currently, blue-ribbon firsts secured by property in our area. We also like Texas tax lien certificates.

What do you consider the best methods for finding cash flow notes?

1) Paying off notes on which you are the debtor. Try to negotiate a discount. Even if you can’t, you should do it anyway. Paying off a note is buying that income stream, because each month you’ll have that payment in your pocket instead of giving it to the note holder, which is the same as if you had bought a note that paid you that amount each month. Better, in fact, because you never have to worry about a missed payment!

2) Creating your own notes on property you buy wholesale and sell retail (see “Deals on Wheels” by Lonnie Scruggs; he uses mobile homes in his examples, but the concept will work with almost anything).

What advice would you give to new professionals just starting out in the industry?

1.  Never ask an investor for a quote unless you are in direct contact with the note holder;

2.  Never believe a website that claims to be an investment company unless you know independently that they are for real (95%+ are really brokers)

3.  Never buy anything from an infomercial.

4.  Get to know who the genuine institutional investors are — there are very few;

5.  Never use private investors unless you have done at least 100 deals with institutional investors and have learned all the pitfalls;

6.  Never look for notes on the Internet;

7.  You won’t make any money as a note “finder”;

8.  As a note broker, make it your goal to know at least as much about the note business as your investor;

9.  Gather as much information as possible about the note, property and payor before you contact an investor;

10.  Develop trust with the note holder by being a person who inspires trust.

11.  Verify everything you can about the note, property and payor, including what the note holder tells you, before telling your investor;

12.  Tell the investor everything you know about the deal, the good and the bad — hold nothing back — as you learn more, tell the investor;

13.  The bigger the deal the less likely it is to close — make it big on little deals (John Schaub’s golden rule);

14.  Make it your goal that for every X number of notes you broker that you will keep one for yourself (Mike Meeker’s golden rule);

15.  Sell investors partials and keep the back ends for yourself — and keep track of who owns the front ends;

16.  Devote at least 80% of your time and resources to marketing for notes.

17.  Nobody knows as much as you think they do.

18.  Keep learning — what worked last year may not work today.

19.  The reason most people fail in the note business is because they give up too soon. Perseverance is vital for success.

20.  This is NOT a money business. It is a people business.

What is the most common business mistake you see people make?

Giving up because they thought this would be easy. I tell people not to expect to make any significant money in your first year, so keep your day job.

Can you share one of the high points in your note buying career?

When my wife Alison left her Washington, DC association job to work full-time in our business.

What is one lesson you had to “learn the hard way”?

That good judgment comes from experience — and experience comes from bad judgment.

Given the current economy, have you made any changes in the way you look at private mortgage note deals?

There’s a hard rain a-comin’. Depression or inflation are both bad for a note portfolio. In a depression people can’t pay their debts, and during inflation dollars buy less and less. People think we are in deflationary times, but that is largely only true of the real estate market, and that’s because it was artificially inflated by government intervention (CRA, bailouts of Fannie and Freddie, etc.) and the subprime debacle. The latest official inflation rate (Aug., 2011) is 3.77%, but the government doesn’t count the cost of food and energy! Taking those into account, the current inflation rate is 11.1% (http://usawatchdog.com/true-inflation-rate-2011/).

I believe inflation, not depression, is our future. The chances of a depression are about as likely as me being the next Miss America.

Inflation is built into our monetary system. Due to out of control government spending, borrowing and printing of money, massive inflation is inevitable. Your dollar-denominated note payments will devalue at a faster and faster pace, so it is critical to have notes that compensate you for that inevitability, preferably with gold clauses or at least ARMS. I won’t buy a note without one of those.

I love notes, but I don’t have all my eggs in one basket. I also recommend that you invest a significant portion of your liquid assets, including retirement accounts, in gold and silver. I’ve been urging PAPER SOURCE JOURNAL subscribers to do this for years, back when gold was around $300 an ounce and silver was $5.00 (today gold is over $1600 an ounce and silver is $30.00). They are still bargains. For IRAs, I like Central Fund of Canada. To learn more, see www.the-moneychanger.com

I also recommend investing in farm land, and that you move out of urban areas and become as self-sustaining as possible, including food, water, electricity and self-protection.

All of these measures are essentially insurance. You buy insurance hoping you’ll never need it, just as you ought to take these precautions to protect yourself and your family and hope you’ll never need it.

Where do you see the greatest opportunity right now in the note businesses?

It’s difficult to sell almost anything in most parts of the nation. This makes it ideal for note creation by people who own things that can be secured by marketable notes, i.e., real estate developers who are going broke because they can’t move inventory — show them how to create notes to sell property and you buy/broker the notes.

Also individuals who own lots, land, houses, condos, apartment buildings, mobile homes with land, mobile home parks, cemetery plots (preferably vacant, not owner-occupied)…the list is almost endless. But the key word is MARKETABLE. Don’t (ahem) spin your wheels on car paper, for example.

What is the best way to contact you for more information?

The contact form at www.PaperSourceOnline.com

Is there anything else you would like to share with our readers at NoteInvestor.com?

Harrison Ford summed it up for acting, and it applies to the note business as well: “I realized early on that success was tied to not giving up. Most people in this business gave up and went on to other things. If you simply didn’t give up, you would outlast the people who came in on the bus with you.”

Ready?

Go…

What is the Note Industry?

The note business is the buying, selling and brokering of privately held notes.

What is an example of a cash flow note?

Ever see someone selling a property that says, “Owner will Finance?” That means the seller of the property is looking to “be the bank” and payments will be made directly to them. Seller financing is one of most common ways a private mortgage note is created.

How come I never see a “note buyer” office?

Most note brokers work out of their home. Since they seldom ever see the note holders face-to-face, there is usually not a reason for increased overhead.

Do note brokers have staff?

Some do, most don’t. Just depends on how big they are. When people start adding staff they may decide to use office space.

How do note brokers find cash flow notes?

The most common methods used to find cash flow notes are direct mail, placing ads, Internet marketing, and referral networking.

How much money does a note broker make on a deal?

It varies by transaction but the average rule of thumb is between 3-6% of the amount invested (or paid) by the note buyer (For more details read Note Broker Fees in the Cash Flow Business)

How is the value of a cash flow note determined?

The fair market value of a note is determined by several factors. The amount of equity in the property, interest rate on the note, terms, seasoning (length of time the payer has made payments), and the payer’s credit will all impact the price paid by note buyers.

Are all promissory notes purchased at a “discount?”

Although possible in theory, it is very rare for notes to be sold at par or no discount. Typically there is a discount to cover the note buyer’s yield along with the hard expenses of closing and any note broker fees.

Can anyone start a note broker business?

Yes, note brokers come from all backgrounds. You do need to become knowledgeable in the industry. It is important to know all the players, the process, basic calculations, as well as the best and most cost efficient marketing methods. Most states don’t require a formal note broker license, although a few (like California) have specific procedures.

How much would it cost for me to learn the note business?

There are a several groups out there that offer training. Many of them don’t really know the industry and most of them overcharge.  In today’s competitive market quality training is available for under $500. With over 30 years combined experience, we feel our course at FindingCashFlowNotesTraining.com is the best in the industry  – and our members agree.

Any final thoughts on buying mortgage notes?

The note industry is like any other legitimate business venture. It takes work. Despite what you may have heard, there is no “get-rich-quick” business. However, if you are looking for a real business, with flexibility and earning potential, you might want to check out the note business.

Eddie Speed of Colonial Funding Group has been buying and selling notes for over 30 years and has transacted more than 30,000 deals.

To know Eddie is to know a few of his “Eddie-isms”.

I still remember hearing one of his trademark sayings when first introduced back in the late 1980′s.  You see I was helping place funds for a large institutional investor on the West Coast and we’d just expanded into buying Notes in Texas. Unfamiliar with regional differences, our underwriters and legal team were requiring something unreasonable to get a deal funded.

Eddie was understandably perplexed and contacted me to help find a solution.  As I explained the position of the company, Eddie put me at ease right away by saying…

“Now Tracy… it’s not my first rodeo.”

(Of course I later found out that before buying notes he was literally a rodeo champion so it wasn’t just some quaint saying.)

We went on to close that deal and many others with some creative thinking.  Later when starting my own company I also had the pleasure of working together on a variety of joint ventures over the years.  So to borrow an “Eddie-ism”  just let me say… “He’s the real deal!”

We recently asked Eddie to tell us about the non-performing note business including the much discussed7 Figure Note Investor training.

Note Investor: What is the current focus of your company Colonial Funding Group?

Eddie Speed: One half of our energy is directed or focused towards the purchase of owner financed notes and one half of our energy is directed toward the purchase of non-performing notes from institutions. Our deliverable is like no one else. I’ve bought notes and run a large operation buying work out assets.

How did you get your start in the note business? 

By Accident. While dating a young lady, now my wife of 29 years, her Dad offered me the right to work for free in exchange for sharing his knowledge of the business with me. That was 30 years ago and it was the best choice I ever made.

What unique benefits does your company provide?  

The most unique benefit is that our training is backed by time-tested techniques. It’s something we practice every day, and we constantly adjust what we teach based on the relevancy in the market in 2011 and beyond.

What type of notes will your company consider buying? (Location, size, property type, credit, LTV, seasoning, etc.)

We have no specific limitations in regard to what we can buy in regard to geographic locations and size on performing or non-performing notes.

What type of real estate notes would just waste your time?  

A waste of time is a deal with insufficient redeeming factors. For example, a note secured by a mobile home and land, the Buyer has severely injured credit with an insufficient down payment and poor payment history.

What do you consider the best methods for finding cash flow notes?

The best method to find quality notes to buy is direct mail.

How do you handle commissions to note brokers or consultants?

You determine the commission you want to make. We will quote you on what we can pay for the transaction and you adjust for your commission.

What advice would you give to new professionals just starting out in the note industry?

The best advice starting out in the industry is to work smart.

What is the most common business mistake you see people make?

The most common business mistake I see people make is not anticipating barriers.

Can you share one of the high points in your note buying career?

I was very privileged to have developed the “seller-financing system” for HomeVestors, the “Ugly house” guys.

What is one lesson you had to “learn the hard way”?

I learned the hard way that no one else cares about your business more than you.

Given the current economy, have you made any changes in the way you look at deals?

Absolutely, over 30 years you have to reinvent yourself in regard to how you do business and this economy is no different.

Where do you see the greatest opportunity right now in the note businesses?

I believe the greatest opportunity right now are notes on higher quality properties with more qualified buyers.

Can you give us a sneak peek preview of your new training course on buying non-performing notes?

In the new training course for buying non-performing notes, it not only teaches you about pricing notes but where to find likely candidates that sale non-performing notes. Not all lending institutions can sell notes at deep discounts.

Note Investor Update: Eddie has currently filled the openings in his upcoming training and removed the free videos but you are welcome to visit his site and request email updates at NoteSchool.com for the 7 Figure Note Investor.

Should you decide to buy the course please know that our company does receive a commission on purchases generated through our referral.  This does NOT result in any additional cost to you. Like all deals I’ve done with Eddie Speed, he makes sure everyone gets their fair share.  Even if you don’t decide to purchase the upcoming training, you will still want to take advantage of the free info on delinquent non-performing notes!

That’s the short summary of a cash flow business question we received last week from a Note Broker. It was an earnest inquiry and we wanted to share our answer in this edition of Real Deals!

I was just visiting your site and wanted to know what a fair % of cash flow a broker can expect from a performing package deal?

There are buyers wanting a performing MHP package I have available with only 2-3 yrs. to maturity and the smaller lender wants to cash out.

I understand from other brokers that 25% of net is reasonable as well as a smaller finder’s fee.

What are your thoughts? I appreciate your response.

Note Broker in Arizona

(Editor’s Comment: Name was omitted as this was an email relating to the sender’s ongoing transaction)

The average fee we see to a note broker on a single note ranges between 3-6% of the investor’s purchase price. For a performing portfolio the average fee we see is between 1-2%.

The percentage is often lower on a portfolio because it is:

1) dealing in larger dollars and

2) a more competitive market with sophisticated sellers.

People certainly make more on harder to place portfolios but there is also the danger of pricing yourself out of a deal if the fee is too aggressive. If you are splitting a fee with another broker it can be whatever split you agree upon with a 50/50 split being somewhat common or 25/75 if one party is doing the majority of work processing and placing with an investor.

I’m assuming the MHP stands for Mobile Home Performing. In this event the fees on a mobile home package will likely be higher as is it one of the “harder to place portfolios” referenced. Still, I believe 25% would be pretty aggressive even on a mobile home package.

There are some investors that will cap the referral or finder’s fee if they feel it is too far out of line with market conditions. You might want to check with your potential note buyer to see if they have any such limitations.

One way to make a greater amount on a deal is to earn a small finder’s fee upfront and participate in the future cash flow.  There are a couple of strategies for accomplishing this.

For additional details you might find these past articles helpful:

How I Turned $24.80 into $15,540 on One Mobile Home Note!

Note Broker Fees – Too Much or Not Enough?

Making Money with Cash Flow Notes Using the “Buy Full Sell Short” Strategy

Thanks for visiting and reading at NoteInvestor.com!

Want more great information?

Be sure to check out the Finding Cash Flow Notes Training!

Another method is to simply go for an Early Payment With Incentive.

To this day, the following situation is still my favorite example of this method.

It was late December and we were looking at a small note with a $10,000 balance. The payment was only $132.15 per month with a 10% interest rate and 120 payments left.

The note had been purchased at a discount for $6,000, which made for a 24% anticipated return.

Not bad…but we could do better! After talking to the payer we saw an opportunity to get an early payoff. They were very excited about their football team making it to the Super Bowl.

My comment was, “Tell you what. If you can pay off your note, in full, before the Super Bowl, we will give you a big screen TV to watch the game.”

They did payoff the note in full and received their TV!

So here is the math (and the chance for someone to win free access to Finding Cash Flow Notes)…

The payer made two payments on the $10,000 note bringing the balance to $9901.96.

We purchased a big screen television for $2,000.

That means we received a NET payoff  of $7,901.96.

The full payoff was made at the two-month mark so we also received two payments of $132.15  prior to the payoff.

What was the yield?

The first person to leave a comment telling me the note buyer “return” wins free access to Finding Cash Flow Notes.

The fine print for calculating this cash flow note:

1. First correct entry wins.

2. I will allow up to a 1% variance due to slight calculation differences.

3. Once we have a winner I will update this article with the answer including how to calculate on your best financial calculator!

Good luck!

Question: I’m a rehabber in Florida and would like to have a company to work with that helps me qualify buyers, structure notes and then buy the notes from me as an exit plan for my rehab properties, either at closing or shortly after. Are you doing or know of anybody doing simultaneous closings anymore? If not, after how many payments will you buy on a “green” note?

Response: You ask a great question pertaining to the simultaneous or simo closing. There has been a shift in the marketplace and most investors are avoiding the true simultaneous closing due to three primary reasons:

1) Dry-up of subprime securitization funds on the secondary market

2) Tightening underwriting standards due to increased foreclosures and decreased values

3) Regulatory concerns that a simultaneous purchase might be construed as a loan (especially in light of recent developments like the HUD Safe Act and HR 4173)

The closest thing is what some investors call a “near simo” where an investor buys after closing once the deal is recorded and the first payment has been remitted to the seller. Many investors are also limiting their exposure on new or green notes to a partial purchase at a 50-60% ITV until the payer has a proven payment history.

This reader already had a good foundation of knowledge with access to the structuring tips contained in Personal Profit Series Notes to help create mortgage notes that are marketable to an investor. If any of the terms are new, here’s a quick overview:

Green Note – a new note without a proven payment history.

Seasoning – the number of payments that have been made on a note.

Simultaneous Closing – The property is sold to the buyer, a seller financed note created, and the note assigned and sold to an investor, all through the same closing.

Near Simo – The property sale is closed and the documents recorded in the county records. The investor purchases the seller carry back after a certain amount of time has passed (generally ranges from 3 to 30 days and varies by investor). Note buyers may also require proof the first payment was made to the seller.

The Note Basics

• Property: Owner Occupied Bungalow
• Type: Note and Trust Deed
• Sale Price 45,000
• Cash Down 5,000
• Original Balance 40,000
• Rate 10.0%
• Term 180 payments of $429.84
• Payments Made 26
• Current Balance 37,128.94

The Offer

The seller accepted our offer of $31,250 to buy the trust deed. This started the standard review process, including documents, title commitment, and a verifiable payment history. The appraisal reflected good property condition with known value increases putting the fair market value at $60,000. While the buyer had poor credit, everything else looked good for purchase.

We prepared for closing and required standard proof of hazard insurance. The seller returned the document package along with the insurance information. We called to verify coverage, which was verbally confirmed by the agent, and authorized the wire transfer to the seller.

Under Pressure

On the day the wire transfer was authorized at the bank (a Friday) we received a return call from the insurance company stating they were in error. The hazard insurance policy was no longer in place due to nonpayment of the premium. We attempted to contact the buyer but no answer.

Under time restraints, we decided to move forward and did not pull the wire at the bank. We sent the standard notification letter to the buyer along with a request to clarify the insurance issue. We planned to force place insurance if sufficient proof was not provided.

Things seemed in order until the adjoining property owner called the office the following week. They wanted to make a $10,000 “as-is” offer to purchase the “lot” next to their $250,000 home.

Guess what?

The house covered by the note had burned down over the weekend. We were left with nothing more than a lot, a burned out shell, and some charred debris as security.

Could it be true? First a call to the fire department to verify the date of the fire and the condition of the property. Next we ordered a property inspection, contacted the appraiser to obtain a land only value ($24,000 – $29,000), and traced the buyer whose home phone was no longer in operation.

A Sad Situation

Once we made contact with the buyer we confirmed our fears finding he did not have insurance. He explained how the insurance premium money had been used to purchase prescriptions for his recently deceased wife who did not have health insurance coverage during her fight with cancer. He was a self-employed car mechanic and his income was currently down.

It was a sad situation without a good solution. Initially the buyer seemed cooperative and wanted to continue payments until he could sort out his financial affairs. He was interested in placing a mobile home on the lot and hoped we would help finance it. We were happy to explore the possibility and asked for a show of good faith in the form of current payments during the interim.

Unfortunately the buyer’s financial situation declined, payments were never received and we ended up holding a Deed in Lieu of Foreclosure. We attempted to sell the lot but realized most new building activity was being done on small tracts of land outside the city limits.

Just Being Neighborly

The neighbor was a local businessman who owned a nicer home in this small bedroom community of mixed homes. He was NOT happy with the condition of the neighboring lot and increased his initial $10,000 offer to $15,000. We explained the land only was appraised for $24,000 – $29,000 and we weren’t ready to take such a loss. We also offered a seller carry back if we came to an agreeable price.

He didn’t need owner financing. His concern was the view.

Understanding his motivation, we explained we were considering the placement of a used singlewide mobile home on the lot (1969 or newer according to zoning requirements), which we would offer to a new buyer with owner financing if we were unable to sell the property as a lot. We waited (or I should say sweated) the situation out and the neighbor offered a cash purchase price of $23,000 provided the lot was cleaned.

Now the Burn to Learn

Initial estimates for clearing the lot had come in between $5,000 to $7,000. We contacted the fire department regarding their “Burn to Learn” program. The fire department agreed to arrange a practice drill on the property resulting in a complete burn of the remaining structure and approximately 95% of the debris. The remaining debris could be hauled away at a nominal expense.

We accepted the neighbor’s offer resulting in a loss after expenses of approximately $10,000. The transaction closed and I was never so relieved to have lost “only” $10,000.

Lessons Learned

So, what did we learn moving from note brokering to note buying?

1. Don’t be rushed or pressured into making investment decisions

2. Perform a verbal debt verification or payer estoppel with the purchaser even if the account is serviced through a third party servicer.

3. Require current insurance at closing even if the seller has to pay and obtain insurance on the buyer’s behalf from the note proceeds.

4.  Creative thinking is required to buy and hold private mortgage notes.

Is this Déjà Vu?

A few months later we were ready to fund on a seller financed note in Alabama with a current insurance declaration page in the file. After calling the agent we found the buyers had not kept their premium current and coverage had lapsed.

Had we truly learned our lesson? That’s a resounding, “YES!” The closing was put on hold for proof of current insurance prior to funding.

We called to follow-up several days later only to be told the house had burned down the night before! It was another sad story but a good reminder of why mortgage note buyers confirm insurance coverage at closing and during the life of the account.

Wondering How to Buy Mortgage Notes? See what successful note buyers have said about The Complete Money Making System to Buying, Brokering, Creating and Holding Real Estate Notes.