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Investing Strategies

Creative Dealmaking: The Paper Broker

paperboyToday we’re going to start a revealing, multipart conversation on real estate notes, including some creative ways you can profit handsomely from them.

When we’re done, you’ll have learned no fewer than eight distinct, creative-yet-uncomplicated ways you can make a great income in the real estate notes arena.

The key to unleashing your real estate investing creativity on the world lies not in finding ways to eek out a living in today’s market. Anyone can figure out how to scrape by with a minimal amount of training. If you want some easy ways to boost your bottom line in today’s market, you should seriously consider adding a few of these crafty ideas to your bag of tricks.

This all came about when I recently cornered Jack Sternberg, the nation’s most “noteworthy” expert in the notes niche, for an extended sit-down session.

You Don’t Know Jack?

In case you don’t already know Jack, he’s the owner of the Noteworthy Newsletter (the note industry’s oldest and most respected newsletter). And also, the guy’s been doing REI since before I was born.

sternbergJack has done many millions of dollars in real estate deals – including every deal type you can imagine – and he has one of the most creative, brilliant real estate minds I’ve ever met. Seriously he’s forgotten more than most folks ever learn, and he always delivers an exceptionally worthwhile experience.

He’s also quite the expert on New Orleans cuisine, but that’s another lesson entirely.  :-)

That said, I’m thrilled to bring you the first of an eight-part mini-series on notes – walking gingerly through a whole pile of creative ways to further monetize real estate that you probably haven’t tried (or maybe haven’t even heard of) yet.

These are the very same techniques Jack has used for more than 40 years in successfully buying, selling and dealing in notes.

You’ll learn about:

  1. The Paper Broker
  2. The Paper Wrapper
  3. Double Your Pleasure
  4. Sell the Head, Keep the Tail
  5. The About Face
  6. The FSBO Paper Shuffle
  7. Sexy, Sloppy Seconds
  8. (A surprise!)

Before We Begin

Just to make sure you’re not lost, we should cover a couple of quick fundamentals on notes.

First off, to be clear, a note and a mortgage are two entirely different (although related) things.

A note (or “promissory note”) is essentially nothing more than a written promise to pay – an I.O.U.  If you borrow $100,000 for your house, then you sign a note stating that you owe the lender $100,000, and it’s publicly recorded in your county.

IOUA mortgage is an additional document that gives the lender certain rights against your property (like taking it from you via foreclosure if you don’t pay your note). Some states use a deed of trust instead of a mortgage, but it’s essentially the same thing.

So although note investing is generally not as well-known as the standard buy-and-hold-a-house investing strategy, investing in real estate notes represents a whole new (and very profitable) world available to you on the other side of the coin.

One of the best features of note investing is that you competition is generally less intense than in residential property investing. It can also be a truly passive investment on your part. (No experienced landlord would ever call rentals “passive” income).

Also, it’s much easier to run the entire operation from home, without ever even having to set foot outside your door to look at a property. About all you need to get started in the note business is a home office, a computer, an Internet connection, a way to bring people to you, and a few creative ideas off which to springboard.

Sounds simple enough, right? And it is – if you do it correctly.

In this eight-part series, we will pull back the veil shrouding notes and show you a number of different ways you can tap into your fair share of this multi-billion industry – starting today if you like.

In today’s lesson, we’ll begin with Jack by delving into what we call “The Paper Broker”.

The Paper Broker

JP: In your vast experience, what’s the best part about investing in notes?

Jack: The nice thing about the note business is you're not dealing with real estate; you're dealing with paper. It's clean. You don't sweat. You don't have to deal with sellers. You don't have to hear their sob stories about why they want what they want. That's a really great reason to be a Paper Broker. I've done that, and your readers can, too.

relax guyJP: Is The Paper Broker substantially similar to the way someone could wholesale a house, or is it a completely different animal?

Jack: The Paper Broker is wholesaling a note instead of the house. It's brokering the paper. You find the note and you hook the seller up with someone who's looking for notes. You locate a note and a buyer, and then you put them together. When you do this, you're basically in the middle.

You make a fee for flipping the note, wholesaling the note from a seller to an ultimate buyer. You can do this with basically any type of paper – good paper or bad. With good paper you'll be talking to Realtors and to FSBO sellers, or scanning courthouse records to discover who has taken back a note.

Either way, you discover who's got what, and you broker that paper to an ultimate buyer for a fee. In short, you buy it at one price, then sell it at another and keep the difference.

JP: Give me an example of one of your Paper Broker deals so we can illustrate just how ridiculously easy this is.

Jack: I had someone call me yesterday who saw one of my ads. He has two single-family home deals that he faxed in right away. This man took back two notes on two different properties awhile back. Now he wants to buy an apartment complex, which I learned by asking why he needs to sell the notes. He has to sell these notes so he has cash for the down payment.

The key to making a Paper Broker deal work isn’t in asking how much somebody wants for the note. It’s in asking the questions that will give you the information you need to put together a deal which will help them accomplish their goals. In addition to knowing why they’re selling, it’s important to know what they want to do with the proceeds because people won't sell a note unless they need the money. So you've got to find out why they're selling. In this man’s case, he needed the money for his apartment deal.

These two notes had quite a bit of built-in value – $15k in one; $10k in the other. Assuming his paperwork is in order and the deal closes properly – and everything is as he’s represented it to be – a deal like that can close in ten days.

JP: If you buy these notes from him, are you going to keep them, or are you going to flip them?

Jack: I have no interest in these two notes at all. They're in Michigan, and even though this guy doesn’t think anyone in Michigan would be interested in these notes, I know better. By knowing this market, and by having financial institutions that can buy good notes, I can quickly flip this note to that institution, assuming all of the documentation is in order.

Since these notes don’t trade at face value, I was able to give the guy a quote over the phone, at a discount, based on how much I know an institutional buyer will pay for the note.

JP: What other questions do you have to ask the holder of a note so you can decide whether the note would make a good purchase for the end buyer? And is due diligence required?

Jack: There's a BPO (Broker’s Price Opinion) done to verify the values, and a bunch of other due diligence steps that need to be taken, but the institution I’m flipping them to will do that.

Some of the other questions I always ask include:

  • How long ago was the property sold?
  • How much did you sell it for?
  • How much of a down payment did the buyers give you?
  • Was it closed in good order with a Title company?
  • How did you base your sale price when you sold the property?
  • Did you get an appraisal?
  • Do you still have the appraisal?

JP: How do you analyze the answers to these questions when deciding whether a Paper Broker deal is worth pursuing?

Jack: It depends on the question. For instance, from the example above, the guy gave me a figure for the notes that was less than the appraised figure for the properties, which is a good thing. Since that appraisal, things have gone down in value. It's kind of a guesstimate at this point, but it’s enough to get us to the next step.

I’m still working this deal, but it’s possible the guy may have never even faxed in anything. He may have just been spinning my wheels. But this is a very typical, simple “Paper Broker” type deal that I do on a regular basis.

JP: What’s the best way to separate the tire kickers from the real deals?

Jack: Cut to the chase. Give them a quote over the phone, then make sure you write it down. For instance, I never get up from the kitchen table or wherever I’m at. When I do this, I never get up from the kitchen table. I do the whole thing without a piece of paper, then I have to go get something to write it down so I can remember what I quoted.

JP: When you do a Paper Broker deal, do you have to lay out a lot of upfront cash? How do you typically structure a transaction when you’re a note broker?

Jack: With the Paper Broker, you're not going to put out any real money at all. You’ll send the contract to him for signature. Then you’ll give him some deposit money, $1.00, or $10.00, or something like that. This is basically a purchase agreement that says that I (or someone else) will buy from the note for the amount of money in the agreement.

The most important part of the purchase agreement is that it has to provide for assignment so someone else can come in and assume my position. What happens is I'll sell that document and the file to this institution. The institution I have in mind for this deal is a federally charted bank.

JP: Do you only sell Paper Broker notes to financial institutions?

Jack: No, there are lots of people that buy notes. Individuals are generally not as regulated as banks. So you can flip them a different kind of deal. For instance, if everything isn’t exactly as it’s been represented, then a lot of banks won’t buy these kinds of deals. But there are a lot of other people that buy notes, and a lot of them aren’t as picky as banks when it comes to making sure everything is 100% in order. I’m not talking about intentionally hiding something from anyone. But if a “t” isn’t crossed or an “i” isn’t properly dotted, then the federal institutions will walk away. Private buyers will often make it work if the deal’s interesting enough to them.

JP: When will the end buyer pay you for the note? How long do you have to wait for your money?

Jack: They're not going to pay me until they close. And typically if all the paperwork is in order they can close within ten days. With an existing note that’s bringing in monthly payments, there’s really no work involved. It's not like a newly created note that doesn’t have a payment history. If all the paperwork is in order or can be put in order with minimal trouble, these Paper Broker deals are quick and easy.

It’s that easy!

What Jack just covered is only the beginning – merely a starting point for us. We have seven more creative note strategies we’ll be unshrouding with him.

So keep your eyes open for that, as Jack continues sharing some of the insights he’s learned through more than 40 years of buying, holding, brokering, and flipping notes.

Do It To It! Immediate Action Steps

If you want to follow Jack down the road to Paper Brokering success, here’s what you need to keep in mind:

  • You can wholesale notes instead of houses.
  • And just like wholesaling houses, the key is obviously to (i) have an idea of who you can sell notes to and (ii) pay less for the note than you can sell it for.
  • Financial institutions and private individuals will buy these notes – many of them are regular advertisers in Jack’s Noteworthy Newsletter.
  • When brokering the note, you don’t really have to do any of the due diligence; the end buyers will end up doing it for you.
  • All you need to assign a note is a signed purchase agreement with the seller that lays out the terms of the purchase, including the right to assign the deal, and a simple assignment agreement to use with your buyer.
  • You only need to lay out as little as $1-$10 as a deposit when you put the deal under contract.
  • These deals can close within 10 days, which is when you can expect to be paid from a Paper Broker transaction.
Go to it!

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