Make millions buying bank notes

Make Millions Buying Bank Notes How to buy, sell and profit from bank mortgages and other notes

By Sebastian Acosta

Contents Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 CHAPTER 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 What is a Note?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Types of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Real Estate Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Are Notes a Good Investment?. . . . . . . . . . . . . . . . . . . . . . . . . . 16 The ROI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 A List of the Major Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 CHAPTER 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Finding Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Locating the Strongest Leads . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 The Secondary Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Competition Explained. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Getting to Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 How a Mortgage Works. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 The Mortgage Document. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Private Mortgages versus Bank Loans. . . . . . . . . . . . . . . . . . . . . 28 Note Selling is Not Uncommon. . . . . . . . . . . . . . . . . . . . . . . . . . 29 Where to Find the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Tracking the Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Problems with the Easy Approach. . . . . . . . . . . . . . . . . . . . . . . . 34 Gaining an Advantage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 What is a Non-Performing Note?. . . . . . . . . . . . . . . . . . . . . . . . 35 Using the Details. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 The Cookie Tale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Networks and Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

The Formula. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Developing Your Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Formal Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Speaking to the Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Developing Contacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Banks as Note Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 The Current Status of the Financial World. . . . . . . . . . . . . . . . . . 49 The Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Private Individuals as Note Owners . . . . . . . . . . . . . . . . . . . . . . 52 The Current Status of the World and Finances. . . . . . . . . . . . . . . 53 Overcoming Obstacles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 The Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Word of Mouth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 A Mention of Networking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Closing a Private Note Transaction. . . . . . . . . . . . . . . . . . . . . . . 58 CHAPTER 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Buying, Selling and Flipping Notes for Profit. . . . . . . . . . . . 60 The Business Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 The Power of your Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 The Importance of the Mission . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Educating Yourself. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 The Office Setup. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Getting Down to Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Understanding Market Research. . . . . . . . . . . . . . . . . . . . . . . . . 71 Actual Market Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 The Basic Protocols. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Building your Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Finding Partners and Building Networks. . . . . . . . . . . . . . . . . . . 77

A Brief Exploration of the ABC Way. . . . . . . . . . . . . . . . . . . . 77 Partnerships and Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Overcoming Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 The Partners in Detail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Website and Blog Creation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Creating a Site . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Establishing your Brand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 A Quick Look at SEO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Other Tactics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Use Seminars to Build your Business . . . . . . . . . . . . . . . . . . . . . 90 Partnering for a Seminar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 The Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Next Steps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 CHAPTER 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 All of the Little Details. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Attorneys. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Conflict of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Establishing a Relationship with a Note Servicing Company. . . . . 98 How it Works. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 DIY Servicing?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Paperwork. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Essential Checklist for Research and Action. . . . . . . . . . . . . . . . 100 CHAPTER 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 A Collection of Case Studies: Suggestions to Inspire You. 104 #1 Work it Out. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 #2 The Flip. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

#3 Nick of Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 #4 In the Foreclosure Process. . . . . . . . . . . . . . . . . . . . . . . . . . 109 #5 & #6 Deed in Lieu of Foreclosure Options. . . . . . . . . . . . . 110 #7 Non-Performing for Cash. . . . . . . . . . . . . . . . . . . . . . . . . . 112 #8 More than One. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 From Here.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Note Buying and Selling Worksheet. . . . . . . . . . . . . . . . . . . . . . 115 CHAPTER 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Note Buying and Selling Worksheet. . . . . . . . . . . . . . . . . . . . . . 115 Assessing the Information and Determining Investment

Value Worksheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Formal Offer Worksheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 The Introductory Sheet: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 The Formula Worksheet:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Contracts and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Agreement of Simultaneous Close . . . . . . . . . . . . . . . . . . . . . . . 120 Assignment of Contract Rights. . . . . . . . . . . . . . . . . . . . . . . . . 121 Basic Affidavit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Mortgage Purchase Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Financial Information Release Authorization . . . . . . . . . . . . . . 128 Non-Disclosure and Non-Circumvention Agreement. . . . . . . . . . 129 Note Partnership Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Seller’s Representations and Warranties. . . . . . . . . . . . . . . . . . . 133 A Note Closing Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Terminolog y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

Make Millions Buying Notes

Introduction Many of us are totally saturated by the many “get rich quick” opportunities that we see everywhere, and this flood of “offers” has led to an unfortunate situation. This unfortunate situation is that many people are actually missing out on some truly valid financial opportunities.

For instance, the note buying industry has started to earn a reputation for using lots of marketing hype and creating only limited or zero profits, but that is far from the truth. In fact, the note buying, selling or flipping business can generate some pretty impressive returns to those who are willing to do the legwork.

This book is going to take a very in-depth look at the business of buying real estate-based notes directly from the banks. This is NOT a book about mortgage short sales, but is something that will address the issue of mortgage or real estate-based notes, and how to go about building a very solid business around them.

We are going to begin with an examination of the different kinds of notes in order to help you see how real estate notes may be a very lucrative option. We will then focus in a bit on the different ways that real estate notes can be found, and close the first chapter with a look at the viability of any real estate note as a good investment.

Subsequent subject matter will include mortgages, non-performing notes, methods for finding “hot” notes (which are the most valuable and profitable), ways of speaking to note sellers, and then how to go about building a business geared towards buying and selling notes for profit. We will also address the development of partnerships, which is often a key to 8

Introduction

obtaining some of the most valuable notes available.

You will quickly discover that the negative commentary around the note buying and selling business is totally inaccurate, and that it is possible to earn a good income stream through this fascinating industry.

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Make Millions Buying Notes

Chapter

1

What is a Note?

The technical definition of a note is fairly simple – it is a debt

instrument. This means that it is the “paper” that backs a mortgage or loan of some kind and which serves as a guarantee to the lender that the borrower will repay the funds. It is a legally binding contract between the two parties and is meant to protect both equally. Most notes will itemize the terms of the arrangement, such as the amount borrowed, the interest rates, and the anticipated re-payment schedule.

The document will also mention how the note is secured. For instance, a house or business might serve as the security on a note.

Unfortunately, there are times when the person owing the debt itemized in the note just cannot repay the loan – even if they are pursued by formal collection activities. It is at such times that the lenders will be able to legally “liquidate” the paper by selling the debt instrument at a discounted price. We won’t go into the implications for this situation for the borrower, but we will note that millions of large investment funds and financial institutions make a point of buying up such debts “in bulk” in order to make profits. This is NOT the kind of note buying we are going to explore here because some of these debts are of the “unsecured” types, such as credit card accounts or small consumer loans. What we are going to focus on are mortgage-based debts.

10

What is a Note?

This leads us to the other reasons that people might be able to purchase notes. For example, not all people interested in selling a note that they hold are going to do so because it is a “non-performing note”.

Instead, there are many people who hold notes and who are looking to “cash in” on them quickly. This is an opportunity for someone to acquire the debt instrument at a lower price than the actual market rate.

For example, the holder of a note for a business loan might want to get some of the total value in a lump sum payment, and would then sell the note to the interested buyer.

In both examples of note buying, this is where the business of buying and/or flipping enters the equation. As stated, a note owner may be an investor who has already acquired a valuable or relatively valuable note, or they might be the note holder looking to get rid of a seemingly toxic asset. Either way, a person who is interested in acquiring notes as a form of investment or to just quickly sell them will be able to actually develop a very realistic business around this sort of activity.

It helps if you have a clear understanding of the different types of notes since this really clarifies how the buying and selling of them can generate serious income.

Types of Notes As you might assume, there are a large number of different kinds of notes. The most widely available are: • Lottery notes – this is a note that the winner of a lottery holds and it guarantees them their annual payment. The terms of such notes will vary widely and will have to factor in the amount won, the anticipated payment schedule, and any special terms. The holder of such a note might sell it in order to get a large amount of cash “up front,” but this is usually going to be a serious disadvantage for them. This is because they are opting to take less money from the transaction than they would have acquired by holding the asset for the full term.

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Make Millions Buying Notes

For instance, someone who has won one million dollars in a lottery might enjoy a $30k payment per year for a term of 20 to 25 years.

They would be given a note from the lottery agency indicating that they are owed this sum, and this note would list how the winner will receive the funds. If the holder of the note wanted to transfer all of the rights in the note to someone else, they could sell the note to them. The thing about this sort of deal is that the note buyer is not going to give the note holder the equal amount of money, and will usually purchase the note for far less than it is actually worth.

For our example, they might give the seller the equivalent of 40% to 60% of the note’s real worth. The buyer of this note can then enjoy a large return on their investment, and will be able to easily anticipate the exact amount that it will yield because they know what the annual payments are to be; • Injury settlement notes – people who have won lawsuits or claims based on personal injuries are often the holders of injury settlement notes. These are promissory notes that outline the manner in which the settlement is to be paid to the injured party. Again, this is a note that the holder sells in order to get the money all at one time. This too is something that will always deliver a serious financial loss to the seller because they tend to offer it at a discount on the actual value.

For instance, a seller may have a promissory note for a settlement that will yield around $250k in payment, but which they might sell for 40%-70% of that value to a note buyer; (It is interesting to point out that the two types of notes already listed are of substantial interest to corporate buyers. If you watch any late night television, you will notice that there are many law firms offering to buy these settlements from the note holders. Clearly, this proves the value of note buying – especially if large firms are seeking to acquire them as assets!)

• Business sale notes – it is not often that someone has all of the cash necessary to purchase a successful business “out of pocket.”

This is the reason that a business sale note will be created, and the holder of such a note (usually the former business owner) may feel

12

What is a Note?

comfortable selling the asset at a discount in order to get a good sum from an interested buyer.

The individual or group who purchased the business would still make their payments to the note holder, and the amount due would not change. This is the way that the buyer of the note gets to enjoy a nice, long-term investment that is secured by the holdings and assets of the business; • Real estate notes – this is when things get a bit more complex, but this doesn’t impact the profitability of such ventures. As already mentioned, there are a few ways that real estate notes “pan out,” and instead of summarizing them here, we’ll give them an entire section to themselves! (See the next section below) Now that you have seen some of the most common types of notes, it might be much easier for you to begin to see how you can go about using them to create income for yourself.

With this basic comprehension of how notes operate, we’ll move on to the real estate segment and really get started with learning all about the ways to buy or flip notes for profit.

Real Estate Notes A mortgage is a real estate note. The private real estate transaction in which one party is slowly paying the other for the property will involve a real estate note too. The loan going into default and being made available for sale is a form of a real estate note as well.

For this book, we are going to look strictly at the first two kinds of real estate notes mentioned, because the third could easily include the “short sale” options. This is an entirely different sort of transaction and is not going to be addressed in this book at all.

So, true real estate notes will include: 1. The promissory notes held by banks or other lenders and which are secured by the property in question. For example, if you have

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Make Millions Buying Notes

a house and have borrowed the money for the purchase from the original owner, they are likely to be “holding the note.”

2. The deed or title to a property that is free of encumbrances or liens, but which is being held until a borrower has repaid any sort of loan on this note. The holder of the note on a property may want to cash out on their holding. Instead of doing a real estate sale, however, they may take a much lower sum of money for the promissory note on that house or property.

When you begin your search for real estate notes for investment, you will begin to discover that uncovering the name of the note holders can often be a bit difficult and will usually be extremely competitive.

For instance, you might find that your local county clerk’s office is the frequent gathering place of others like yourself who are looking to get information about recent transactions, or information about notes that might be coming up for sale. This often leads to a single note holder getting a handful of calls or letters from interested buyers. While some will become annoyed at the contact, others use this pool of interested buyers to negotiate the best possible prices. It is important for a buyer or seller of notes to understand that this is a “fact of life” for their industry, and to develop methods of contact that rival their competitors.

Clearly, this means that there will ALWAYS tend to be serious rivalry for good notes, and this is the reason that someone interested in building a career or steady stream of income from flipping notes will have to develop a sort of network that can get them the information that they need quickly.

Usually, this means that a potential investor is going to want to develop a good relationship with: • Local real estate agents – they will know all about possible deals, recent sales, and all transactions of interest to a professional note buyer or seller. There are some issues associated with this approach to information, however, including the simple fact that the agents may want a percentage of a sale if they give out the information.

These include; 14

What is a Note?

• Related businesses – there are some financial groups, investment firms, and real estate businesses that are good sources of information.

Just like the real estate agents, however, most of these businesses will need to be considered as a sort of partner and receive a portion of the profit from a successful buy or sell; and • Attorneys – if you know attorneys who work with real estate issues or financial issues, you may be able to partner with them to offer clients an option for selling notes. There are some legal issues around this approach, but a well-trained and knowledgeable legal professional can be a very good partner in the note buying and selling industry.

You will come to find that you may need some sort of partner, such as the groups described above, in order to gain an advantage over the “competition.” We will cover this in great detail in subsequent chapters, but for now, it is important to note that this is a business that is “networking intensive.”

Naturally, your networks will also include potential investors who might be interested in actually paying you to find notes or who might be willing to contribute a portion of the purchase price for an equal percentage of the returns on the investment.

For instance, you may find that you interact with several other note buyers or flippers on a frequent basis, and that you all agree to begin working together on specific notes or projects. This will give you all a much larger “collective” pool of money to use in the buying transactions, and you may find yourself serving as a major player or operator in such an arrangement.

This can be extremely lucrative, and is a subject we will cover as well.

While all of this may make it initially seem like note flipping is a limited field or industry, it is actually an extremely good way to invest. If you understand that you will have to be organized and seriously motivated, flexible, and ready to partner up for some of your deals, then you have already won half of the proverbial battle.

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Make Millions Buying Notes

Are Notes a Good Investment?

By now, you are probably asking yourself if real estate notes are really a savvy business investment. The answer is a resounding yes! Not only can they serve to generate income over a very long term, or be “flipped” in a quick and highly profitable sale, but they also allow the note holder to know exactly the kind of returns they can anticipate on their investments.

Just consider that any note investor worth their proverbial salt will take the time to fully research each note they consider purchasing. In doing so, they are going to easily uncover the real market value of the asset, and also learn if the note is free of claims (also known as liens) that will instantly reduce the value.

Additionally, there are many notes that are too old and advanced in their repayment process to be lucrative enough to purchase.

A study done by the Pew Research Center indicates that most consumers and investors acknowledge that real estate ownership is among the smartest of all options: 50 40 30 20 10 0

Strongly Agree

Somewhat Agree

Somewhat Disagree

Strongly Disagree

The ROI Note flippers and buyers know that they can usually enjoy returns of at least 25%, but that a healthy 60% isn’t unrealistic either. This is a return on investment (ROI) substantially higher than most of the other readily available investment vehicles such as stocks or securities.

16

What is a Note?

One of the main issues that any potential investor has to consider, however, is that there is the need for a large amount of available cash in order to make the buying of profitable notes a possibility. Consider that a valuable real estate note may have an asking price of around 70% of the value.

Case Study #1 Stephen, Andy and Phil all purchased into the same investment five years earlier, and have not been getting good returns. The business investment was supposed to generate at least ten percent interest per year, but inflation has led to that investment yielding just under 6% instead.

The three men begin scouting around for a better option and find a real estate note valued at around $2 million. Stephen is asked to do all of the due diligence necessary, and the three men decide to add two more friends to this investment partnership.

The five partners all agree to offer the owner 40% of its total value, or $800k.

The owner agrees and each of the partners adds their $160k to the fund.

What will they make from this deal? If the annual yield is still going to be the payment on the $2 million note divided by five partners, and the note has ten years remaining, it translates to roughly $22k per month in income. This means that the ROI for the group would be: Roughly $2.6 million in payments; If the initial investment was $800k, we subtract that from the $2.6 million earned on the note (bringing us to $1.8 million); We then divide this figure by the $800k investment; and Multiply by one hundred to discover the percentage that was the ROI. In this case, it is a whopping 225%.

Clearly, this case study is an extreme example in which enormous profitability is obtained through group participation in an investment, but it is NOT an exaggeration of the simplicity of the note buying and selling industry.

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Make Millions Buying Notes

For example, let’s say that your research turns up a private real estate transaction that occurred around three years earlier and that the note holder has an asset worth around two million dollars. Your research has uncovered the fact that the note holder might be ready to cash out on the deal and sell the note at a deep discount. (It isn’t uncommon to find sellers looking only for 40% to 75% of the actual value.)

While this deep discount represents a substantial savings, and an even greater possibility for high profit, it doesn’t eliminate the need to have the cash “up front” to make the acquisition. This is where partnerships or multiple investors are going to enable people to enjoy even more success with note buying.

A List of the Major Benefits Let’s really streamline the reasons for investing in notes in order to be sure that you understand just how remarkable an opportunity this is in the current market: • Totally secure – in the world of market investments you cannot enjoy security in any way at all. The only comparable method for insuring against total loss is to purchase something like “bullion quality” coins that have intrinsic and extrinsic value.

For instance, if you buy gold coins you will retain the intrinsic value of the precious metal, and get the small security of the extrinsic value that is found in the face value of the coins. In notes, however, you are basically buying the document that ensures persistent payments of a very specific amount. You are getting the document and all of its privileges at a deep discount, but not losing out on the actual value assigned to it. You can retain this document to get the stream of income or you can sell it at a small profit; • Predictable ROIs – Returns on Investment are never easily predicted or anticipated because they are often connected directly to the behavior of the markets. When you are purchasing real estate notes, however, you examine the mortgage documents and know precisely what you can expect on a monthly and on an annual basis.

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What is a Note?

You will be able to calculate the best returns by doing a thorough assessment of each property and then offering the note holder the most favorable deals for your investment goals. Unless the borrower of the mortgage defaults on the loan attached to the note, you will be able to get the precise ROI that you planned on receiving; • Freedom and flexibility – as an investor in real estate notes, you get the advantages of property ownership without the serious hassles associated with it. Consider that you will be similar to the landlord of a rental property; receiving the monthly payment for the proverbial roof over the tenant’s head. The great thing about this exchange is that your “tenant” is the potential property owner who is solely responsible for all upkeep and maintenance, all taxes and insurance, and any other standard expenses that reduce the profitability of property ownership.

You also have the option for taking on investment partners. This means that you may not have to be the only party involved in dealing with the management of each of the notes in question. This is particularly beneficial to the investor who wants to use note buying and selling as a way of diversifying their holdings without also having to direct all of their capital into a single asset. For example, consider the illustration we already provided – the individual investor had to come up with less than $200k to get an ROI of 225%. They did this by taking on only 1/5th of the risk of the total investment; • Diversity – in the modern era, financial advisors are recommending diversity to levels never seen. For instance, some are guiding their clients towards 30% ownership in hard or tangible assets such as precious metals and/or real estate. This is because the classic investment vehicles like securities and stocks are no long reliable… not by any stretch of the imagination.

Thus, the investor looking to follow their advisor’s recommendations could realistically consider converting up to 30% (or more) of their portfolio into real estate notes. Not only would such a choice help them to spread out their assets to prevent a catastrophic failure of some kind, but it would allow the investor to know PRECISELY 19

Make Millions Buying Notes

the return on this portion of their portfolio will be (unless they focus entirely on “flipping” the notes acquired); • Bargain prices – we all know about the global financial meltdown that began back in 2008 and has continued ever since, and the subsequent mortgage industry disaster that it included. This has left a lot of note holders in an uncomfortable position. Many people are eager to unload the hundreds of mortgage notes in their portfolios, and a savvy investor can often do the research and choose from the very best in someone else’s collection.

As already stated, however, it does take some research and effort to find these notes. This is the subject we tackle in the next chapter.

Now that you see that note flipping and buying can be done in a few ways, we’ll begin to explore the steps that you must follow in order to accomplish your first transaction, and it all begins with finding the notes!

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Finding Notes

Chapter

2

Finding Notes So, you are sold on the idea of investing in real estate notes, or at least you are considering the development of a business that is built around acquiring and perhaps re-selling notes attached to real estate. The next step is to develop a system for finding the most lucrative notes.

It is after that when you will have to develop a good method for negotiating with the owners, buying at a discount, and deciding what to do with those notes (this is limited to holding them as a reliable investment or flipping them for a profit).

For now, let’s focus on the best ways to find the notes for possible investment, and then how to do a quick assessment to see if they should be pursued as possible opportunities.

Locating the Strongest Leads Where are these real estate notes? We already briefly mentioned that most county clerk’s offices tend to be the place where you will go to find the available notes, but we haven’t yet explained what to look for when you head to these offices.

We have also already mentioned the alternatives to the county registries, and these include real estate agents, lawyers, and even professional 21

Make Millions Buying Notes

business networks for note buyers. There are also the plain, old-fashioned newspaper listings as well. We’ll spend some time with each of these options in order to be sure you know precisely how to fit them into your system and/or investment plans and goals.

The Secondary Market The term attached to the entire group of possible buyers and sellers of mortgage notes is the “secondary market.” It is deemed as a secondary market because it follows the initiation of the loan, or is a secondary step in the progress of the loan as it passes to a new owner.

For example, the primary market is the borrower and the original lender, but when the lender sells the debt it is to a secondary entity, which is why the entire market that has grown around buying real estate notes is known as the secondary market. There is no “tertiary” market for the subsequent sale of a property, it will always remain in the secondary marketplace no matter how many times it is sold or re-sold.

It is very important for anyone interested in building a business around buying and selling real estate notes to understand that the secondary market is a diverse and often competitive place. Not only are individual buyers and sellers racing to get their hands on the most lucrative, or “hot”, notes around, but so too are massive corporate entities as well.

Attitudes Towards Foreclosure 100 80 60 40 20 0

Willing to Walk Away

Prefer to sell

Willing to Invest in Renovations

For example, there are many investment banks, hedge funds and equity groups constantly shopping around for notes of all kinds, and it is this sort of group that might buy up hundreds of mortgage notes from a single financial agency at one time.

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Finding Notes

There are also pools of investors who are not concerned about the vehicles used to generate the financial returns, but who are simply willing to “pool” their money towards the most lucrative options around. Frequently, they too will buy a collection of real estate based notes from a major lender or mortgage firm.

There is also the other end of the “spectrum,” which is what this book is about, and is the market for individual notes that might be available for sale if the potential buyer can propose the most favorable terms.

Clearly, this means that someone looking to purchase even a single profitable note is often going to find that they are coming up against major competition. This is one of the primary reasons to develop a good system for researching and then approaching your possible sellers.

Competition Explained Why is this such a remarkably competitive business? After all, aren’t there other equally profitable investment tools available? In order to answer these questions, you have to stop to think what the buyers are obtaining.

First of all, most buyers are purchasing notes or loans that are completely “current” and up to date. This means that they are buying a loan that is being paid properly, thus yielding the guaranteed returns. There are few business investments that come with such a clear-cut demonstration of their performance.

For instance, investment specialists could tell someone that the “anticipated” ROI (return on investment) would be a certain percentage, but they could not guarantee that amount because there are NO guarantees in the financial markets.

The real estate note, on the other hand, is not a vehicle in the financial markets at all. It is something that is totally separate from the fluctuating world of stocks, securities, and some futures contracts. It is an IOU that has all of the legal protections and guarantees necessary to ensure that an investor can always get what they pay for.

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Make Millions Buying Notes

Need an illustration? If we look at the current era’s most recommended investments, we would see that they are somewhat different from those recommended only ten years earlier. Today, we aren’t as likely to see stocks and securities as recommended investment vehicles and will, instead, see things like precious metal assets and real estate notes.

Consider the following: Returns on Investments 2000-2011 50 40 30 20 10 0 -10 -20 -30

Dow

S&P

NASDAQ

Real Estate

Case Study #2 Let’s just do a quick comparison between something like the purchase of gold bullion and a single real estate note: Let’s say that gold bullion is selling for $1350 per ounce, and that Sally Lucas is an investor who decided to purchase 24 ounces (1.5 pounds). She was told by her investment advisor that she could anticipate roughly 30% profit over the course of a single year, but that a more realistic goal was around 20% instead (this wide variation between the terms of return were due to the simple fact that no one can know how any market asset will perform on a daily basis).

This means that Sally might realize between $6k and $9k over the course of the calendar year.

In a different example, Lucille Martin purchases a real estate note for a private loan of $350k for a discounted price of $220k. The monthly payment on the 5-year loan is over $6k per month. This means that Lucille is looking at an

24

Finding Notes

annual return of more than $80k. She will have earned this investment back in full by the 25th month of payment, and would then take in the remainder of the fees as pure profit. In other words, Lucy would have taken in around $60k in the five years, or $12k per year.

This shows that a single good real estate note investment could return almost twice the amount of a standard investment in gold. The important factor to remember with such an illustration is that the gold market is currently operating at an explosive pace, and that the rate of return illustrated above may not be as reliable in the years to come, whereas the guaranteed return on the mortgage cannot be changed in any way.

The second reason that the note buying market is so competitive is that the buyers also get the rights to the collateral if the borrower fails to pay. This is the ultimate in security because it means that the individual or group that purchases a note will also have legal ownership of a home or valuable property (in addition to real estate, the note holder might have legal claim to all assets in the property as well – such as the holder of a business note) if the borrower defaults at any time.

So, the buyer of a note will be able to always do the legwork to see if the property is truly worth the price of the investment and if the investment is going to have a guaranteed return.

We will look at these things in greater depth, but it is very useful to know that, with a bit of preliminary research, a note buyer is going to be able to understand how much they can earn from the investment while also having the peace of mind that there is really no loss if the borrower defaults on their obligation.

Naturally, if the owner of a note is worried about the borrower falling into a default status, they can always use an existing network of buyers to sell the note at a discount too.

For example, if you do the research and find a very valuable note, you might negotiate a good price for it and make the purchase. After a few years, you may notice that this particular note slips in and out of current status because of late or missed payments. You might decide to sell this note while it is still able to be labeled as performing or re-performing. You might take a slightly discounted price for the note in order to still profit from the original purchase but to also eliminate a potentially toxic asset from your portfolio of holdings.

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Make Millions Buying Notes

Getting to Work By now, you are probably ready to move into a more detailed discussion about the best ways to find the notes. This is a relatively easy part of the process, but it will be beneficial for you to get a bit of background knowledge in the world of mortgages.

This means that before we itemize how to find the notes, we need to look at the way mortgages work in order to help you distinguish between the notes that will be available for sale and those that will tend to remain in the hands of banks and lenders. You will also need to be able to understand when the mortgage status is indicative of some trouble or hazard for an investor as well.

(It is important to remember that a mortgage registered to a bank or formal lending agency will NEVER be one that is open to an offer for purchase or private sale to a note buyer unless that financial institution has policies associated with note buying and selling activities. This will vary from lender to lender, and should also form part of your initial research.)

How a Mortgage Works A traditional mortgage for a home will use the property as “collateral.”

This means that the bank agrees to lend you the money necessary to purchase the home from its current owner, and will “hold the note” on the home until you have repaid the loan in full. Should the borrower fail to pay back the borrowed funds the lender gets to keep the collateral in order to compensate them for the financial loss.

Is this always a good thing? No, and it is up to the possible buyer to do the research in order to see if a property is worth the purchase price, and if the associated maintenance costs and taxes will be too large a burden to make the property a good exchange if the borrower defaults.

The Mortgage Document The mortgage itself is a very formal document that itemizes all of the specifics around the transaction as well as the repayment process. The document also indicates what will happen should the borrower fail to 26

Finding Notes

repay the loan according to the agreed upon terms.

As standard mortgage contract will include: • The Borrower (Mortgagor); • The Lender (Mortgagee); • Description of the Property and how it will be used; • Explanation of the function of the mortgage and the terms by which it will be terminated; • Explanation of the interest rates; • Listing of the closing costs and fees: • How the loan is to be repaid – including monthly loan payment terms, how the payments will be applied, prepayment terms, and early payment terms; • An explanation of the title to the property including if the borrower is going to be the owner or simply a tenant; • Description of the taxes; • Description of the ways that liens or other payments for the property may be handled prior to the mortgage being completed; • Transfer of the rents or lease payments; • Insurance details and requirements; • The lenders expectations about maintenance on the property; • Environmental Provisions; • Information about accelerating the repayment of the loan (this is if the borrower does not meet the original terms of the contract); • Details about the Receiver should the borrower default; • How the lender will enforce their rights and how any sort of foreclosure would function; • How the property will be released from the mortgage; • How the mortgage can be amended; 27

Make Millions Buying Notes

• Signatures of all parties; and • Witness signatures.

All of these details make it very clear what the lender might expect from the borrower, and vice versa. This document will itemize if the mortgage is a fixed rate or an adjustable rate, it will explain what is due at the time that the contract is closed, and every other detail related to the purchasing process.

Private Mortgages versus Bank Loans The outline above is an illustration of something that is not a “private mortgage”, but is instead something that is done between a corporate or large-scale lender and an individual buyer.

Banks tend to be the standard source of mortgage loans, but there are also credit unions, pension funds, government agencies and other groups making mortgages readily available.

Many people turn to a mortgage broker who scouts around for the best rates and deals, and then negotiates on the part of the buyer to get the best terms as well.

When a loan is considered a “private mortgage,” it is not funded by a bank but is instead funded through an individual or a business. All of the same line items may appear on a private mortgage document, and the major difference between a bank loan and a private mortgage is the way it is distinguished when filed at a county clerk’s office.

You might wonder why any buyer would seek a private loan instead of one done through a bank or traditional lender. Generally, it will be due to several logical and valid reasons.

For instance, a private loan could be: • Something between members of a family – often this is done between family members who are hoping to help one another to acquire a home because of financial limitations; • The fastest way to get the money - a private loan can often be funded immediately, unlike a banking institution’s prolonged 28

Finding Notes

funding process which is usually known for taking upwards of 120 days to complete; • A way of getting a loan without the proverbial “red tape” - the lending policies for private loans tend to be “looser” - meaning that a lower down payment is required or perhaps none at all.

Additionally, someone with bad credit may be able to find a private lender more than willing to front the money in exchange for a higher interest rate, etc; or • A way to get a home that is not usually qualified under FHA terms - a property might not meet the terms that banks require (such as a mobile home dating before 1974) and the private mortgage is the only option.

Sales, seasonally adjusted annual rate 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

Jul Sept Nov Jan MarMay Jul Sept Nov JanMar May Jul Sept Nov Jan

2010

2011

2012

2013

Regardless of the reasoning behind the use of the private mortgage, however, the note holders (who are not always the lenders but someone who purchased the note right after the closing) may be willing to sell their assets for a discounted price.

Note Selling is Not Uncommon If you read any mortgage contract, you will see that banks and private lenders all reserve the right to sell the note at the time of the closing or at any other point in the repayment process.

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Make Millions Buying Notes

This is why someone who just purchased a home and who thought they would be working with a specific bank might be shocked to get their first mortgage statement from an entirely different agency. This is usually due to the fact that the lender turned and sold the mortgage within hours or days of the closing.

Often, the lender that sells the mortgage will not continue to service the account and this is the reason that the buyer will have to deal with a series of different banking agencies in order to pay their mortgage.

Does this mean that you, as a private investor, can contact a bank or lending agency and offer to buy one of their loans if they have plans to sell it? Often, this is totally impossible.

Few banks will work with individual investors because they are not as lucrative as the hedge or equity funds that buy their loans “en masse.”

There are also mortgage companies that work with banks to acquire their loans at a slightly discounted price too.

Instead of these bank loans, the note buyer is going to have to initially limit their pursuits to the private transactions between buyers and individual lenders. These are easier to find than one might think, and it all begins in the county clerk’s office.

Where to Find the Notes Any and all real estate sales are “trackable” at a local county clerk’s office, and this is what makes it easy for note buyers to begin scouting around for possible acquisitions.

For example, if you head to the offices of the clerk you will be able to look through every single real estate business transaction ever recorded in the region. All mortgages and liens must be documented in these records if they are to be considered valid and accurate. A simple failure to file the appropriate deed or lien can invalidate the lender’s or borrower’s claims, so a note buyer will always find all of the data they need to begin their research.

Depending upon your location, you may have to look through large binders and books of records, or you might find that your area keeps 30

Finding Notes

the records available on computer systems. You may also find that some searches will come with a financial fee attached to any copying requests, though most public records are free to access and search.

Tracking the Details You will want to begin by making some sort of easy system for documenting potential acquisitions. Most professional note buyers indicate that they look at the recorded mortgage data that dates to three years prior to the current period. You will want to follow their lead and look back for at least the previous 36 months, or even farther if desired.

We recommend that you create a binder of worksheets designed to help you track your research and help move the process forward. These worksheets should have some sort of organization that lets you know if they are active, worth pursuing any farther, or something to be put on hold pending further research.

You might color code them, tag them with special labels, or itemize them by sections in your notebooks. A main factor is that these sheets really must be full of the information necessary for following up on any possible investments, and for also doing a valid assessment of the “worthiness” of the property.

For example, a very useful and efficient system would include: • Name and full contact information of the Mortgagor and the Mortgagee – this is something that is crucial to your success because it gives you the actual contact information of the holder of the note. This is the name of the Mortgagee, but may be someone else if the note has already been sold.

(This can require you to do the initial recording of the information and then additional research on the address of the property to see if the note has been sold and someone else is now the official owner of the real estate. If this is the case, make sure that you make a note of this on the same worksheet to prevent yourself from contacting the wrong person.)

Remember that the names of the borrowers will usually show as the owner, and that the holder of the note is always the person with the primary lien on the property.

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Make Millions Buying Notes

Most county records use the term lien instead of mortgage or loan, and if the borrower has taken a second mortgage (or additional loans) on the property, the documentation will show the amounts due and the holders of these notes as well.

It is important to note here that when there is more than a single loan on the property, it tends to make the purchase of the note a “moot” point (where investment potential is concerned) because it will have a seriously decreased value due to the debt load against the asset.

Shortly, we will consider how to valuate any property in order to determine its viability as an investment, but for now you should know that it is problematic to purchase notes on real estate that has several liens against it; • Address of the property that secures the note – get the house number and the street number correct, and always do crossreference checks in county records to ensure that no errors have been made in filing or recording nearby properties; • Notice of any additional liens against the property – we have already looked at this, but you will want to jot down all of the information that you can find about the liens in order to do some further research and determine just how severely these loans are impacting the value of the potential investment. Most of the time a potential note buyer is going to see that the liens override the anticipated value of the investment; • Current assessed value – as you determine if a note is a worthy investment, you will have to take a lot of different factors into consideration. The value of the asset that secures the note will always be a primary factor in this calculation. You will also want to be sure that the amount of the loan is not dramatically higher than the value of the asset as this could be a sign that a sub-prime mortgage or loan is at work, and these are to be avoided at all costs; • Terms of the note – who owns the note, how is it to be paid, how is the note to be terminated or cleared from the property, what are the penalties if the current note holder decides to sell it? All of these terms are significant to the potential investor; 32

Finding Notes

• What are the taxes on the property? – many potential investors are surprised to see that they should be asking about this, but it is just another factor in the investment assessment process.

Consider that the person who is paying the mortgage is going to be responsible for the loan, the maintenance on the property, and any taxes too. If they should default on the loan, it is the holder of the note who will have to come up with the tax fees, and this is something that could be an enormous annual outlay.

Simply checking the annual or quarterly tax bill for the property will let the investor know what kinds of figures to “plug” into their evaluation of the note as a possible investment; and • The official property number on the town or city records – you should always double check the numbers assigned to the various properties to be sure that no errors have been made where liens and additional liens are concerned.

While you are in the Clerk’s offices, and with all of the loan documentation in front of you, you should also write down the following items as well: • Terms of the loan that you may have failed to previously note, including the interest rate, length of term, etc; • Amount of the down payment made on the property; • Loan to value ratio, which is the amount of money remaining to be paid on the loan against the value of the property which serves as collateral for the mortgage note; and the • Value of the property which serves as collateral for the loan.

You are going to need these figures in order to perform your financial calculations or “risk assessment” a bit later on. At that time, you are also going to have to have access to such information as: • The current status of the loan, such as if it is current, in default, has too many late payments, etc; and • Whether the mortgagee is credit worthy.

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Make Millions Buying Notes

Be sure to leave some space on your worksheet for this information because it is going to let you know if the note is low or high risk, and if the property is worthy of any assumption of that risk.

NOTE: We have included a formatted worksheet in the Resources at the end of this book. It is something that you may want to use when you first begin tracking and researching properties that you feel may be good choices for your initial note buying activities.

Problems with the Easy Approach We already mentioned that there are other ways of getting information about notes available for purchase. For instance, we said that real estate agents, lawyers, business networks, and investment groups will usually have access to details about notes for sale, and may be willing to work with you to acquire a lucrative deal.

The reality, however, is that you will be in constant competition with these groups to get in on the deal before anyone else. This is the reason that your research needs to be comprehensive, organized and super-fast.

Consider too that a visit to the county clerk’s office is what ALL of the other buyers are doing as well. Whether they are interested in long-term purchases, or if they are “flippers” looking to buy low and sell a bit higher, chances are they will have the same information as you.

This, however, is where your system for communication and moving forward on a property can come to the rescue.

Gaining an Advantage For example, we recommend finding out when a note has been categorized downward into the “non-performing” note category. This is something that will have two very motivated groups connected to it, and it may be a way to begin developing your earliest pool of acquisitions.

What does this mean? When a note is non-performing, it is likely that the loan is in default (or has been at risk for default at least once or twice in the 34

Finding Notes

past calendar year) and that the holder of the note will want to get out of the deal as quickly as possible. This is because a lot of note buyers want to be involved in real estate, but they don’t really want to be property owners.

When a property is in the non-performing note category, there is the chance that the note holder may end up as the owner of the property and have all of the responsibilities for maintaining it and paying the taxes.

Your research is always going to show you what the property is really worth and how much the minimal upkeep will cost. You can simply balance these issues against one another to see if stepping in to purchase such a note is a good investment.

Let’s take a closer look at the non-performing note to get a better understanding of the feasibility of such a decision.

What is a Non-Performing Note?

Mortgage notes are often classified by their payment histories, and these classifications can often help you to determine whether or not a note is going to be likely to be sold or held on to as a valuable asset.

For example, the four most common classifications are: • Performing: this is a loan that is “current,” meaning that the borrower Trends in Non-Performing Mortgages

19

88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

5 4 3 2 1 0

has made all of the scheduled monthly mortgage payments on time.

Few private lenders will consider selling a performing asset unless they absolutely have to; • Re-performing: this is a classification that indicates that the borrower 35

Make Millions Buying Notes

had repayment issues in the past, but has now gotten “back on track” and made the monthly payments as agreed.

• In order to get this classification the loan tends to require being up to date for at least six months prior. If the note holder has concerns about the borrower, they may make such a loan available for sale, but this too tends to be a classification that is not often readily available.

• Sub-performing: this classification means that the borrower is delinquent by at least 60 days, or has been delinquent three or more times in the last calendar year. Often, it is at this time that the note holder will begin making such a note available for sale, or seriously considering it; and • Non-performing: These are loans that are more than 90 days behind, meaning that the borrower has probably completely defaulted on the terms of the loan. A non-performing note may already be in the midst of the foreclosure process too.

Generally, the potential buyer may be able to get the information about the performance of the note from their research at the clerk’s office, particularly if the notes are of the sub and non-performing categories.

Using the Details Details such as the status of the note let the potential buyer understand what kind of discount on the purchase price is realistic.

For instance, if the property is in the non-performing status, the buyer can take their knowledge about the true value of the real estate in order to determine if the note is a savvy or disastrous investment. They can also decide how much to offer to the holder of the note in order to get a good deal.

It is probably a good idea to take a few moments to consider the sellers in order to understand exactly why most will be selling their notes. As you begin to get involved in the buying and selling of notes you will be surprised at how many of the notes available are in the performing and re-performing categories. Often this leads the potential buyer to feel a bit 36

Finding Notes

skeptical about the deal, but this is not a realistic view of the issue.

Why not? The reasons that sellers will want to cash in on their holdings can include: • The holder may need a “cash injection” and will be happy to take a bit of a loss on the note in order to get the “lump sum” payment; • The note holder may want to upgrade their holdings and is simply converting a property of lesser value into a note attached to one of substantially higher market value; or • The holder may be losing faith in the mortgagor’s ability to repay the loan and is looking at a way to eliminate the risks by selling at a bit of a loss.

There is also the famous “now or later” scenario that so many note flippers use to their advantage.

The Cookie Tale Many novice note buyers or flippers are given the following illustration to show them the fundamental psychology behind their intended line of business or trade. This story relates to the “instant gratification” principle that seems to guide human behavior, and is put to use in a lot of businesses in addition to that of note buying and flipping. The story goes like this: A group of schoolchildren was offered a plate of hot chocolate chip cookies fresh out of the oven. The delicious smell wafting up from the steaming plate of cookies was seriously tempting and all of the kids were leaning in with greedy expressions or smacking lips.

They were then told that they could each have one cookie right now, but if they waited for just one hour, they would each get two of the enormous and gooey cookies.

What did they all decide to do?

They all decided to take their one hot and delicious cookie right away. They sacrificed a double-sized portion because they didn’t want to wait even a short time for the satisfaction of getting the payoff.

This is the psychology behind the note buying industry because it is one in which the potential buyer is trying to tempt the note holder into making 37

Make Millions Buying Notes

the fastest deal possible, and which is usually to the immediate benefit of the buyer alone.

Another analogy used, and one that is a bit more accurate a reflection of the pressures on the note holders is this: A person is offered up the choice between a $10 bill and a $20 bill. They are told that they can have the $10 bill immediately, but that they would have to wait five years in order to get the $20 bill.

Naturally, the person opted to get those ten dollars right away realized that the ten dollars is more valuable to them in the present than the possibility of twenty dollars in the distant future.

This is EXACTLY how the note holding situation works because it really does ask the owner to accept the simple fact that the borrower may default and that the slow and steady income stream from the loan assigned to the note could potentially dry up.

Networks and Partnerships Until this point, we have looked strictly at notes found in the county registries, but what about the networks that include real estate professionals, lawyers, associated businesses and even newspaper listings?

As we progress through this book, we are going to cover the ways that partnerships and networking can help the note buyer to find some highly lucrative properties. For now, we are going to focus in on the independent efforts in order to ensure that you understand all of the points and tactics necessary for the work. Once you understand the basics, we can move on to how to go about joining forces with others interested in the same work as yourself.

By now, you will have developed your tactics for finding notes, recording the details about them, and beginning to assess them for their worth.

Before we move on to the right ways to approach the note holders – meaning the lending agencies or the property owners themselves – let’s take a good look at the best ways for assessing the notes in order to generate the right “asking price.”

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Case Study #3 To illustrate this point clearly, consider: Andrew Allen is a note holder, and one of his properties has been generating an income stream of roughly $40k per year. There were a few problems with the borrower in the past year, and so Andy has started looking for a buyer. He would do this because he had anticipated the full return on the investment – even though it was to take 15 years, but with the problems in payments, he has lost confidence in this business deal. To alleviate the financial strain, Andy decides to sell the $115k investment as soon as possible.

The buyers he meets with are told that there is 12 years left on the note, and the possibility of a full return of more than $200k on the loan. The first buyer offers him $120k right up front. The second buyer wants to do a “structured” deal on the loan, with a payment of $80k up front and the balance of a second payment of $60k after the third year.

Andy takes the $120k offer because he will have the “cash in hand” immediately.

Even though he has the chance for making twenty thousand dollars more after 36 months, he prefers the money straight away instead of the potential for the money after the three-year time span.

Alternately, it is this same mindset that can be used by a dedicated note buyer or flipper to convince someone to sell them a very lucrative note.

For example, a person interested in acquiring a specific note might put together a package of information designed to show the note owner that declining property values coupled with a high unemployment rate, and perhaps the occasional late payment from the borrower, indicate that the venture is riskier than they desire. Though this may be a “scare tactic” it is something frequently done by flippers and buyers in order to encourage a note holder to part with their asset for a very reasonable price.

Assessing the Information and Determining Investment Value A bit earlier in this chapter you developed the list of information that you had to always gather from the local clerk’s office, or from any other sources, in order to properly track your potential note investments.

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We can now develop a sort of formula into which those details can be “plugged”, and this will allow us to understand if a note is worthy of pursuit, or if it should be abandoned as a bit of a risky entity.

The Formula Use the following set of values to begin determining just how much risk is involved in a given property: • The Current Value of the Property – this can be the assessed value from the local tax office or an actual market value done through a real estate appraisal • The Down Payment Made on the Property – this might be added or subtracted based on the actual owner of the real estate. For example, if the note holder is also the property owner, you may have to hold the cash value of the down payment in the total amount offered because they will want to recoup that amount. If, on the other hand, the note holder is a lender, you can subtract that amount from your offer.

• The Loan to Value Ratio – How much is left on the loan for the note? Take this amount and divide it by the actual value of the property to see if the outstanding loan is a “losing” venture. If it is, it means that you can feasibly offer the note holder a much lower dollar amount for the purchase of the note. If the value of the property is far more than the amount left on the loan, however, you will have to make a higher offer on the note.

Need an illustration of what this might look like?

Developing Your Plan So, you’ve assessed the property and taken all of the different factors into consideration. You can now begin to draft the proposal for the acquisition, but you will have to understand who you will be addressing.

For example, are you contacting a financial institution or organization, or are you going to get into touch with the owner?

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It is at this time that you are going to have to really stop and consider the level of your personal determination and commitment to the process.

Why? This is because a bank or financial group is far different from an individual person or family.

When you are about to begin negotiating with someone over the price of a note, you will find that you are dealing with two very different attitudes.

For instance, there will be: • The Purely Business Client – this is the easiest way to tackle the process because there is no “human” side to the issue. The pure business transaction is going to involve a bit of haggling over prices, a bit of debate about the feasibility of the offer, and usually a bit of persistence on the part of the buyer if they really want a specific price. This is going to be the deal that feels the most straightforward and comfortable because there is very little emotion involved in the entire process.

Case Study #4 Sara and Caleb find a property with an outstanding mortgage of $350k. They do the research and discover that the original loan amount was $485k, of which the borrower put down 20%. This means that they put down $97k, and had an outstanding balance of roughly $388k at the closing.

The value of the house was around $500k at the time of purchase, and it has held its value since that time. This means that the equation looks thus: •

Current Value - $500k

•

Down Payment - $97k (this figure is subtracted because the originating lender received it as a cash payment against the original note)

•

Loan to Value Ratio - $350k / $500k = 70%

•

What does this mean? It means that Sara and Caleb can take the outstanding loan, subtract the down payment, and then offer the lender around 70% of the value, or around $180k for the note. This is the lowest possible figure possible, but it isn’t unrealistic in the current markets.

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In addition to the figures above, they would also consider: The terms of the loan – the figures above are the base line to use in order to determine the right price. The couple would also look at the amount of interest that will come with the assumption of the note, and also the amount of time left for the borrower to pay back the initial sum.

The credit history of the mortgagor – this will let them see if there is additional risk added to the investment if they are trusted to pay the loan.

The status of the loan – it is acceptable to bump the figures of an offer up or down depending upon the status of the loan. This is not an unrealistic choice because a loan that looks as if it is likely to enter into a default status, or even one that has been in such a status from time to time, is worth less than a current loan.

(NOTE: We have included a formatted worksheet in the Resources at the end of this book. It is something that you may want to use when you first begin assessing items that you feel may be good choices for your initial note buying activities.)

How would these factors affect the formula for Sara and Caleb?

•

Well, let’s say that the initial loan was for 15 years at a 6% interest rate.

This would mean that the lender had intended to earn around $200k in interest alone, and that nearly $600k would be necessary to pay the loan in full.

•

Because the originator of the loan would have already received nearly $100k in cash as the down payment and another roughly $50k towards the loan, they would be quite satisfied to make a reasonable sale. Taking the $180k offered by the couple would be quite realistic because it would have netted them over more than half of what they had hoped to make in the first place!

•

They would have to give Sara and Caleb full disclosure about any hassles with receiving payments or any period in time that the loan entered into a non-performing or other undesirable status, but that would still be something to be considered against the potential for profit.

Clearly, there are some “variables” to be taken into serious consideration, but a

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savvy note buyer is going to learn to recognize the good deals from the riskier ones with great ease. This is due to the fact that the largest part of the equation is mathematical rather than theoretical. This demonstrates yet another way that note buying is superior to other forms of investment because it involves little to no guesswork!

• The Personal Ownership Client – this is the most complicated way to enter into the process of buying notes for profit. This is because you will often come across sellers who are in dire financial difficulties or who are facing unpleasant or uncomfortable choices about selling the note.

For instance, someone may be forced to sell the note on their family home because of exorbitant medical expenses, an enormous load of debt, or just too little income to make ends meet.

How would you feel making the lowest possible offer to them when you knew that they needed a lot more money? This is a situation that any professional note buyer is going to have to prepare themselves for, and it is never easy.

Most of the experienced buyers or flippers give the following recommendations: o Accept and understand that the person selling the note ALREADY KNOWS that they will have to take a loss or make a bargain that is not favorable to their needs. They may look surprised or disappointed when you make the initial offer, but it is quite likely that they were well aware of the range of figures they could expect to hear from a note buyer; o Understand that you are not obliged to give them the highest price possible simply because this is a BUSINESS TRANSACTION. It might feel like a very personal interaction, but never forget that it is all about the business deal. Even if the client is making small talk and being very impersonal, you should always remind yourself that this is no different than if the transaction was occurring in a formal 43

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banker’s office; o Try not to let any owner tell you why they have decided to sell, and NEVER ask them that question yourself. Opening up the door to your personal opinion or feelings is going to lower your chances for a successful note buying experience.

The note is for sale, you have made a fair offer, and that is the end of the issue; o Do enough research before making the deal to understand the situation. This will prepare you for any uncomfortable moments and allow you to prepare some good answers to such statements as “but we really need more money for our children’s school/medical/dental bills.”

The business of note buying and selling doesn’t allow you to pick and choose the situations into which you will enter, but if you know in advance that you may be pulled into a scenario in which an individual’s or a family’s problems are discussed, you can prepare yourself to address the situation like a professional.

You should remain entirely without feelings of guilt over the financial deals that you are trying to offer to them in exchange for their asset because you will usually be helping them to overcome the worst of their problems.

They are in need of cash, and you are doing all that you can to make the deal as realistic as possible. You are not a corporate giant stepping in and offering them the proverbial “pennies to the dollar,” though it may be taken that way by the owners of the note. This is the reason that your research needs to always be written down and carried with you to each and every meeting with the note holders – whether they are businesses and private owners.

Formal Offer When it comes time to make a formal offer, you will want to have a very structured document to present to the owner/seller. Remember that a lot of owners have already been approached by several buyers before your arrival, and may have been turning them down for a diversity of reasons.

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Case Study #5 Cyndy is conducting research into her first “personal ownership” note transaction. She knows that a large farm property has a note on it and that it is held by the oldest woman the the farming family. This woman is of an advanced age and Cyndy believes that she would probably be glad to have the responsibility off of her hands.

She also know, however, that the woman’s family may not be happy to hear that the “mortgage” they have been paying to the woman to live in the various homes on their enormous family property will be in someone else’s hands.

The one factor that makes Cyndy move forward is that the deal is going to generate around 12 years of income, if it stays current. During the research period she discovered that the note had not been paid one month in the previous six months, and so it is likely that the woman might sell.

Cyndy drafts the packet and shows the woman the following: •

Current Value - $800k

•

Remaining Due - $318

•

Down Payment - $25k (this figure is added because the elderly woman served as the lender)

•

Loan to Value Ratio - $343k / $800k = 45%

•

What does this mean? It means that Cyndy can take the outstanding loan, add the down payment, and then offer the lender around 40% of the value, or around $320k for the note. This is the lowest possible figure possible, but it isn’t unrealistic in the current markets.

Remember too that you have done all of the research and will usually be offering a reasonable and fair price for any and all of the notes you are buying.

If you have doubts about this, or if the seller is questioning you about your offer, you will always have a formal proposal (in addition to all of your research notes) to give them in order to prove that you are being realistic.

What is this formal proposal? In the next section, we will look at the bullet point list of things you will put into this document. It will be a road map that shows how you reached the “bottom line” price you intend to pay for any note, and it will be formulated only from the most current, accurate and reasonable figures.

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You can overcome obstacles to making the acquisition by being courteous and respectful, but also by showing that you are sincere and thorough.

You do this by presenting them with a small packet of information about your offer. The MOST IMPORTANT PART OF THIS PROCESS IS TO CONDUCT THE MEETING FACE TO FACE. It is only by live meetings in which you can make the best impression that you will be able to gain a serious advantage over the competition.

This packet will contain: 1. An introductory page describing your business and giving a brief paragraph about your “discovery” of their note. This could be something as simple as mentioning that you found it during your regular research, or that you learned of it when the lender put some sort of non-performing notice in the town records. If you saw the information in a classified ad, feel free to include this detail as well.

The point is to open a written dialogue with the seller/owner and to convey your seriousness and level of research; 2. The “formula” described a bit earlier in this chapter, along with all of the copies of documents that prove your figures to be accurate.

This might mean that you include copies of documents from the clerk’s offices, and the tax assessor, but it could also include any sort of real estate appraisals or pricing comparisons that you have had done on the property as well. This is the section that includes your bottom line offer for the property, and it should be positioned in a location that allows the reader to see it plainly and immediately, but it should also be set into the formula in order to encourage them to see exactly how you reached this figure; 3 An explanatory page or statement about the status of the loan, the reasons for any deep discounts on the offering price, and a summary of your willingness to negotiate.

It is best to purchase some sort of standard binder or folder for this proposal and to forward it to the owner of the note only after you have spoken with them about your intention to make an offer. At the time that you speak with them, be sure to arrange for your face-to-face meeting in order to follow up on the documents you sent. You will not be sending your complete research packed, only forward a summary document that contains the offering price, 46

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the “discovery” story about the note, and a brief itemization of the formula that brought you to the bottom line price.

In addition to being a polite and positive approach to the business of acquiring the note, it is also going to save you a lot of time and money on wasted materials if the owner has no intentions of selling.

NOTE: We have included formatted worksheets in the Resources at the end of this book.

Speaking to the Owners With all of the basic groundwork completed, you should feel fairly confident in approaching any individual or business entity in possession of the note or notes you hope to acquire. There are some differences in how to go about your communications, and we’ll begin with a look at the “standard” techniques and then move on into the specific ones.

Before you contact a homeowner it helps to look at the facts about the housing market. For example, consider the chart below. It can help you to see that a lot of homeowners (even with current mortgages) will be interested in selling if they are under pressure.

Developing Contacts If you haven’t already made some contacts with local businesses related to the note buying industry, this is going to be one of those rare first chances to begin networking.

30% 25% 20% 15% 10% 5% 0% 2015 or later

Table of Anticipate Recovery in Housing Market

2014

2013

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For example, when you first begin working as a note buyer, you will be heading to the town or city hall in order to peruse the clerk’s records. We have already explained that this is a primary way to find notes, but that you also have a few other alternatives.

It is important that you always use your worksheets to jot down the contact information available, but you can also begin developing some sort of written or electronic file of handy contacts as well. For example, if you email someone a question about a note or about some related issue, why not also create a special email “list” or “group” or even a separate heading under which all of these people belong.

As you begin to create actual networks, it will be extremely valuable to be able to contact an entire group of possible partners or investors with a single click of the mouse. Remember, however, that some people DO NOT want their email addresses put in public places, so create the lists as BCC categories that keep the information entirely private.

Who is going to go into these lists of contacts? The private individuals who own notes will always be added to your list of professional contacts, but also the real estate agents, lawyers, and businesses connected to note buying such as the investment groups and financial institutions that might make notes for sale or with whom you will be in regular competition.

The financial institutions tend to mean the “bank” or banks that you will most frequently visit, and it is unlikely that you will ever be able to get a meeting with a much larger national or international bank as they tend to avoid small transactions with private buyers.

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Trends in Foreclosures During 90s and 2000s 2500 2000 1500 1000 500 0

1st Qtr

2nd Qtr

3rd Qtr

4th Qtr

Banks as Note Owners When first visiting a bank or lending agency to discuss the possible acquisition of one of their notes, you will have to do all of the proper preliminary research in order to know exactly who among their staff to speak with and where to go.

For instance, if you have found that a local mortgage company is willing to discuss selling some non-performing notes to you, it will be important to understand if the staff member capable of negotiating the deals is going to meet with you in the local offices or if you will have to travel to another location to meet with the person who can legally discuss the terms by which a sale might occur.

Often, the receptionist or other preliminary contact person has no idea about note buying and who to contact in the bank. This means you should do a bit of research to get the names of the mortgage managers and request to speak directly with one of them first. They can then point you towards the most appropriate bank employee with whom to work.

The Current Status of the Financial World We should mention right here that a lot of novice note buyers feel a serious amount of discouragement at this point in their new career. This is usually due to the level of what they perceive as rudeness from the bank employees.

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For the most part, it is not rudeness but saturation and exhaustion that these employees are showing.

Remember that, since the 2008 mortgage crisis started, and all of the subsequent “fallout” has occurred, the banking and financial agency employees in charge of mortgages and notes have been pushed to amazing levels of constant work.

Unfortunately, the tasks to which these folks are assigned are infrequently happy ones, and they will usually approach additional work as a sort of frustration.

Just consider that it is they who are in charge of the millions of foreclosures, restructuring of loans, negotiations of new terms, and so much more.

Even as their workloads have increased, they have seen their companies decline and even fail. It is little wonder that they might come across as rude or even as unable to deal with a new customer, but persistence and patience with these busy people will pay off. Do not let their fatigue sap your energy!

Instead, be sure to get their contact information immediately and put it into your worksheet about the specific property. Be sure also to give them your business card or other contact information and try to make things as easy and straightforward as possible for them.

Remember too that they have schedules now crammed with all kinds of daily work, so they may not be able to deal with your offer for some time.

Just make a point of checking in every few days or weeks to follow up on any formally submitted proposals.

If you really do come to believe that someone at a bank or financial institution is just plain ignoring your offers, go ahead and find out who is their direct manager or department head. You can feel free to reference your interaction with this member of the staff, but try to keep any negative comments to an absolute minimum.

For example, you can simply say “On February X and on April X, I contacted Mr. Z at the mortgage department. I sent him a printed and electronic copy of an offer to purchase a non-performing note in the bank’s hands, but have not yet received a reply. Perhaps you can help me obtain further information/action…”

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In this way, you can see if you can get the proverbial ball rolling on the transaction without also getting the bank employee into any sort of trouble. It is important to remember that you want to do more than just this one deal and making an enemy out of a would-be ally is not savvy business dealing!

In a subsequent chapter we are going to cover all of the details of the different protocols that you should apply to your work, but for now you should just be sure that anyone at a banking institution repeatedly receives your name, number and email address, and that you have their information accurately as well.

The Meeting When you do get a meeting with someone at the bank or financial institution, don’t assume that they have the documents you presented.

Always bring extra copies of the proposal and treat the matter as if it were one of the major business transactions of the decade - even if the purchase price is incredibly small.

It is unlikely that a novice note buyer is going to have a nice portfolio full of properties under their proverbial belt, and the work you do at the beginning is going to lay the foundation of all future transactions. This means that if you can work hard to leave a favorable impression with the bank agents during this first deal you are likely to get a lot of opportunities with them in the future as well.

Because each agency operates along different guidelines and because each offer you make will be different, we cannot walk you through the process of discussing the deal with them here.

What we can say is that you should: • Really know the property and note in question; • Show a willingness to listen and negotiate; • Be willing to walk away from the deal if it is unfavorable; • Have a list of questions to ask if there are any missing pieces in your research; 51

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• Be willing to ask for a second meeting if some undisclosed information changes the feasibility of the note as an investment; • Have all of your financial documentation in order to prove that you can make the purchase on the spot; • Show information about any partners if that is how the transaction is to be funded; and • Retain a calm and cool demeanor throughout the entire meeting.

The meetings with the business clients will tend to be much less complicated than those with the actual note owners (especially if they are also the property owners).

This is something that we have already discussed, but will re-establish here. This is because you will find it easier to start your career as a note buyer if you can begin with financial institutions and businesses instead of the “personal” transactions. The banks or lenders cannot put a painfully personal edge to a demand for higher prices. This means that you will be able to really hone your negotiation skills if you keep your first transactions on the business side of things.

When it is time to speak with owners who also own the property as well, you will want to have developed a bit of “thicker skin” in order to negotiate effectively.

Private Individuals as Note Owners Only after a few successful purchases through a financial institution of some kind should you consider your first “private” purchase. This is for more than just a few simpler reasons, however. For example: • We have pointed out that you can really “hone” negotiation skills by working with businesses and financial institutions first and this is going to be more valuable than you can realize. If you have stared across a desk at a financial expert and negotiated a deal, it will be entirely different from the older man sitting across from you at a coffee shop or in your office where you have met to negotiate the purchase price of the note for his home or some other relevant real estate. If you can develop the ability to calmly discuss the primary 52

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or focal points of the sale, you will be able to master any purchasing scenario, but this takes time and experience, and it is experience in the colder and less personal business world where you will be the most powerful benefits; • You can also develop a very clear and accurate understanding of the most realistic prices that note holders should be offered when working in the larger sphere of “big business.” In other words, if you go to a bank for your first experiences, you can then say to a private owner with authority and accuracy that you know exactly what the local bank might give them for their note simply because you have been working with the banks and other institutions for X number of months or years. It is even better if you can reference a similar transaction in order to demonstrate your knowledge and reassure the seller that they are getting a fair deal; and • After working with a bank or other business to buy a note or two, you will then understand all of the legal documentation that is required for the transaction. If you were simply working directly with an individual for your first sale, you may fail to get the appropriate paperwork together. Having at least one “professional” transaction “under your belt” is going to provide you with a major learning curve! It must not be overlooked that a lot of note buying professionals and note flippers will come from a background of partnerships or as someone working with and for a group of investors. You will find that this is something that saturates the individual with business experience, and this can always help them to translate their knowledge and skill to a more personal level or private transaction.

You might wonder if some of the same advice or guidance about working with banks (as itemized in the previous section) also happens to apply to working private individuals, and the answer is yes!

The Current Status of the World and Finances We explained how and why so many novice or first time note buyers feel a lot of discouragement when they begin to build or develop their first

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purchases. It was here that we mentioned the “burn out” that so many employees of financial institutions are dealing with, but don’t forget the same level of anxiety and burn out being felt by investors and consumers alike as well.

The 2008 mortgage crisis was only the first in a series of global financial disasters that have impacted almost everyone in the world. From wealthy to poverty stricken alike, billions of people are feeling the impact of the different market crises. Just consider that the mortgage problems have been followed by the collapse of major markets and by the ongoing struggles of the banking, housing, and international industries to survive.

This means that, though a private note holder may actually need and want to sell the asset, they may project a bit of anger or hostility at those who approach them with offers. This is particularly true if they have been contacted by more than a single group or agency. This has got to be considered a “fact of life” for the note buyer or flipper, but it doesn’t mean that every single interaction and transaction is to be ugly and unpleasant.

It just means that it is “normal” to deal with people who are unhappy about their personal financial situations, but there is the “silver lining,” and that is that you are coming with a good solution to at least some of their troubles. It is just that you have to get through their barriers in order to have the opportunity to present them with this solution.

Overcoming Obstacles How do you overcome such a serious obstacle to success? You use tact and cordiality rather than a very personal and congenial nature. Have all of the appropriate documents at hand (those discussed during the Formal Offer section) and let them know that you are happy to provide them with the paperwork and give them the choice of whether to pursue the matter through your company or not.

It is VERY IMPORTANT that you use those terms – “choice” and “your company.” If you present yourself as an independent buyer of notes and phone or email them with a very casual attitude, it is not likely that they will respond simply because you may seem a bit dubious. If you come at 54

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a potential note seller as a large and formal financial organization, on the other hand, you may force them to balk at the idea of selling to an already financially stable entity.

If, however, you present yourself as a professional and organized buyer of notes, with a business card, cordial language, and prepared documentation about the proposed transaction you will tend to leave them with a favorable impression.

Also, by making any offer a “no pressure” arrangement, you are also allowing them to control the situation and decide for themselves if they are going to schedule some sort of meeting with you about the matter.

Lastly, don’t forget the value of following up. For example, you can email or phone a note owner to let them know you’re interested in discussing the purchase of the note in question, and leave it at that. You can then wait ten to fourteen days and then contact them for a second (and final) time to “follow up” on your initial inquiry.

In this communication, you need to establish that you “will not disturb them again” and that if they should change their mind you will be “more than happy to arrange an informal meeting with them on the matter.”

Again, we need to remind the potential note buyer that they should not let rejection sap their energy! Just as bank and financial institution employees can be overwhelmed and a bit on the grumpy side, so too can individuals in ownership of lucrative notes.

If they do return your calls or emails, be sure to get their contact information immediately and put it into your worksheet about the note.

Be sure to also forward them your credentials or a business card, and try to make things as simple as possible for them.

As already stated, we are going to cover all of the details of the different protocols that will be applied to the work. For now, however, you should just be sure that any private owners of notes are well aware of your name, email address, phone number and other relevant details.

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The Meeting When you do get a meeting with a private individual, you should also never assume that they have kept your initial packet of information or any other materials. Always bring an extra copy of the proposal and treat this matter too as if it is one of the most substantial business transactions of your career - even if the transaction is very minimal or small.

Remember, if you do not yet have a hefty collection of notes these first few acquisitions will truly lay the foundation for all future dealing.

This means that if you can work hard to leave a favorable impression with each of the individuals from whom you purchase notes, you can create a lot of positive “word of mouth” for yourself. This is going to become an enormously valuable part of your networking efforts, but it is also going to serve as a form of marketing too. This is immeasurably valuable to any note buyer, but particularly so if you want to focus in on the private transactions.

Let’s take a look at word of mouth and modern marketing briefly in order to understand how they can work to help someone increase their private note purchasing opportunities.

Word of Mouth The famous American illustrator Norman Rockwell did a very amusing painting known simply as “The Gossip.” It shows a chain of conversations about a single person and the way that the “subject” of the gossip learns of the public dialogue about himself. The final image in the painting is the confrontation between the gossip and her victim. What this painting also illustrates, however, is the power of the spoken word.

When a business professional acquires a reputation of any kind (good or bad), it is usually from something called “word of mouth” (rather than being called gossip). When you are interacting with private note owners, you will want to always keep the concept of word in mouth in mind. This is because consumers are great at “recommending” preferred brands and service providers to their friends, co-workers, and family or neighbors, but they can also destroy a professional’s reputation with a few well-chosen words too.

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This means that each and every note you buy from a private owner could lead to additional information and business or to professional disaster.

Need an example? Let’s say that you do some research and see that an older person has held the note on a home that they own and used it to create a mortgage for the property. This person may be of an advanced age and looking for a way to shorten the amount of time that they have to deal with this issue. You could approach them with the offer to purchase the note, and make the deal as seamless and comfortable as possible.

Whether you hold the note as a long-term investment or simply “flip it” to another buyer is irrelevant (at this point in the issue) because what you are going to want to focus on is the experience that your seller has enjoyed throughout the process.

If the seller finds you to be cordial, agreeable, positive and fair, it is likely that they would mention your name if the matter should ever arise in conversation with anyone else looking to sell a note of their own.

On the other hand, if you were rude and pushy and generally left the potential note seller with the proverbial “bad taste” in their mouth, you might find that a few people hear about it and spread the word that you are not to be trusted. This is catastrophic, particularly if you were hoping to do a lot of private transactions in a somewhat small or rural area.

This puts an emphasis on the need to do the research, develop a reasonable offer, and approach the private note owner in a way that is much friendlier and appealing than the bank, or your competition, might.

A Mention of Networking Additionally, word of mouth is a good way to consider developing professional networks. For instance, you might also offer some sort of financial incentive to anyone of your clients who sends additional clients to you in the future.

This might be done through a simple certificate or “coupon” issued at the closing on the note (such as a voucher for X number of dollars if they send another customer your way) or it could be simply a written guarantee of a financial reward if they ever get you a new client or two…or ten!

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We’ll get much more involved in marketing details, but for now, you need to remember that the “deal” is not the actual end of the interaction between yourself and your clients. People own numerous properties or notes, have family and friends in the same situations as themselves, and interact with lots of other people in their communities. If you give them a positive experience, it is going to eventually pay off in the form of other opportunities and an enhanced professional reputation.

Closing a Private Note Transaction Shortly, we are going to begin itemizing all of the legal documents required for the buying and selling of notes. Just as in the meetings with banks, however, you should know more about the real estate or the note in question than just the legal paperwork required to buy or sell it.

For example, just as with the banks, you MUST: • Be willing to walk away from the deal if it is unfavorable (but put extra effort into politeness and courtesy with a private individual); • Show a willingness to listen and negotiate; • Really know the property and note in question; • Have a list of questions to ask if there are any missing pieces in your research; • Be willing to ask the owner for a second meeting if some undisclosed information changes the terms or reliability of the note as a form of investment; • Have all of your financial documentation in order to prove that you can make the purchase on the spot; • Show information about any partners if that is how the transaction is to be funded; and • Retain a calm and cool demeanor throughout the entire meeting.

The meetings with the private note owners can be very complicated; particularly if more than a single person is involved in trying to negotiate the deal or to work out the terms. This is where that “thicker skin” mentioned in the section on bank note buying will come into the equation.

Consider that you might head into a meeting with a woman who owns the note on a mortgaged property only to find yourself sitting down at 58

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a table with her father, husband, brothers, uncles, etc. This same woman might have also brought an attorney or legal professional with her or even someone from her bank. If you are ill prepared for the meeting with the individual note owner, you will be entirely unready to meet such a group of “negotiators.”

Clearly, the personal nature of the private transactions can make things a bit uncomfortable, but if you have done all of your “homework”, learned as much as possible about the situation and the reasoning behind the sale of the note, and avoid asking the seller any personal questions, it is likely that you can dodge the worst of the issues so often associated with the negotiation of a private sale.

Additionally, if you have come to master the legal paperwork necessary for such a transaction, you can often focus or re-direct attention to this issue instead.

With each experience in private buying and selling, you will become a better business professional and negotiator.

Over time you are also going to begin to really master the ability to price things accordingly, and usually based on current market conditions or on your business plans. Because we haven’t yet developed the business plan, however, we need to turn our attention to this very necessary issue. This is because it is the business plan that is the ultimate road map or guide for every transaction.

The business plan will also let you understand if you need to work with partners, find investors, and just how “big” your first few deals can be according to your budget.

Before we begin to assess how to develop a business plan, however, we do need to emphasize that this is always a document that needs to be reviewed periodically, updated as necessary, and viewed as flexible rather than as being written in stone. This is because it will be drafted long before you have any serious experience with note buying and selling, and this means that you may not take into consideration such factors as investors, partnerships, legal fees, and more.

So, without further ado we will move on to the next chapter and a much closer look at the foundation necessary to buy, sell or flip notes for profit.

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Chapter

3

Buying, Selling and Flipping Notes for Profit Now we are going to get down to business! As a buyer, seller, or flip-

per of notes, you are going to need a solid foundation beneath you. This is because you have to be able to present yourself as a valid and professional businessperson.

This requires a lot of different things. In this section we’ll look at the business plan, the office setup, market research, developing professional protocols, and the best ways to really build your business. This is going to include taking on partners, developing a website, and using tactics such as seminars and press releases to attract a steady stream of interest and customers. Naturally, it all begins with the framework known as the business plan.

The Business Plan At the end of the last chapter we took a serious look at what was necessary to begin working as a successful note buyer and/or flipper. Now we need to look at the most essential of the “building blocks” to a successful business of any kind at all…the business plan.

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Take a look at the “basic points” of a workable plan in order to understand the complexities involved: 1. Mission Statement – this is more of a personal item, but is a vital part of the plan. It should cover the reason for starting the business as well as the desired goals and objectives.

2. The Business – this is the area where the “formal” issues covered in the Mission Statement should be addressed in greater detail. It is also an area where any hurtles are easily discovered and assessed. i)

Legal Structure (i.e. Sole Proprietorship, Corporation, etc.)

ii) Description of the Business (i.e. consultancy, installer, etc.) iii) Services/Activities (a) Buying; (b) Research and Proposal Drafting; (c) Negotiation; and (d) Selling or Flipping iv) Location – this should discuss where the day-to-day operations are located as well as the area of coverage. v) Personnel – this is not always going to be necessary, but it is a good idea to discuss the desired level of staff, any benefits to be offered, and any plans for future expansion of personnel. vi) Methods of Record Keeping – this is something that should be discussed with a financial professional once the funding of the business is determined. This will be a one-time decision because a business cannot shift its record-keeping tactics once the first annual tax return has been filed. vii) Insurance – depending upon the type of work offered, the business owner should consider any sort of disclaimers and also the type of professional and business insurances required.

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3. Marketing – this is a section that often surprises a potential business owner because of the large amount of research it requires.

Identifying potential markets, assessing growth potential, and understanding the competition can take a few weeks of work and exploration. It is incredibly important that this is done in what is sure to be a highly competitive industry. i)

Target Market – this must include every possible area into which the business aims to participate or compete, including any online offerings.

ii) Growth Potential – this looks at the possibility for the target market’s expansion. iii) Current Local or Regional Businesses of the same kind – include pre-existing businesses, but also look at companies, contractors and any other providers who can retain a portion of the market. iv) Competition – include only direct competition for your particular field of specialization, and even add details you have discovered in your research. Such as a competitor’s plans to partner for higher priced note buying. v) Advertising – incorporate all of your efforts at advertising in this section. For example, any websites, newspaper ads, seminars or free workshops at local organizations, etc. vi) Pricing – assess how your quotes or offers compare to those of your competition. Remember that you should not adjust downward to become competitive. It is important, however, to see where you stand against your competitors where prices are concerned.

4) Training – while you may not need a college degree to begin your business in note buying, it is important to understand the value of education and appropriate training. It is also vitally important to understand the legalities of your work, and to be sure that you have taken advantage of any opportunities to develop interpersonal, negotiation, real estate, and other related educational areas. Itemize

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your existing training and your plans for educational pursuits in this section.

5) Financing Methods – this is going to be another area that involves a great deal of research and time. This section also includes any “seed money” and your personal contributions to the starting of the business. i)

Start-Up Costs

ii) Funding 6) Financial Documents – these tend to be hypothetical scenarios, and it is advisable to work with several versions. For instance, you may want to create balance sheets indicating 40, 50, 60 and 70% profits on acquisitions to allow your plan the ultimate flexibility. This is also an area that can benefit from professional accounting or financial services at the outset. Paying a professional to get you off to a good start, and then checking in with them on a quarterly basis, is often a great way to stay on track and in line with all legal and taxation obligations. i)

Sales

ii) Cost of Goods Sold iii) Operating Expenses iv) Interest Expenses v) Taxes vi) Balance Sheet (a) Assets (b) Liabilities This is just a very basic outline of what your business plan can and should include, and while many business experts say that a business plan is unnecessary, the vast majority of highly successful entrepreneurs begin their work by pulling together a comprehensive plan.

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The Power of your Plan If you don’t believe that a business plan is necessary, simply do a quick Internet search on such billionaire success stories as Donald Trump, Martha Stewart, Richard Branson and George Soros.

Each of these people built tremendous financial empires and always relied upon formal exploration of the competition, the market, the “costs” of each venture or even of each client, and more.

Because of this preliminary planning and work they were able to move forward in their ventures or plans with the absolute assurance that they were making precisely the appropriate steps to ensure they remained on target.

You will come to look at the business plan in the same way, and it will soon serve as an essential document or “road map” because it contains every single answer that you could possibly require.

As already stated (and as noted in the business plan outline itself) it is a very good idea to review the details on a somewhat frequent and/or regular basis. In fact, a quarterly review of the business plans and goals is a great way to keep on track.

Additionally, many business partners, financial resources, and investors won’t even consider meeting with you if you don’t have a formal business plan to show them. This indicates the important of not only drafting the document, but also formatting it for presentation to investors, lenders, and financial experts.

The Importance of the Mission You will also find that a lot of successful note buyers have some sort of business mission imprinted on their stationery, emails, ads, and more.

Need an example? If you look around at other businesses offering to buy or sell notes you will see that they have a sort of “motto” emblazoned in obvious places.

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For example: • Every note seller is unique…let us meet your needs.

• You should get the most for your note, and we want to give you the best price!

• Get top dollar with a nationwide buyer • No notes are too small!

• We buy and sell, and teach all you need to know to succeed!

Clearly, these missions are not formal in the strictest sense of the word, but they make it clear what the fundamental goals and offerings of the buyer/seller will be. Be sure that your mission is just as easy to summarize, and that it is accurately reflecting your actual goals.

Once you have done the research and groundwork necessary for this plan, you will be ready to begin designing your particular approach to note buying and selling. This means looking at the competition, developing your marketing plans, and setting out to make your first purchases…or to put it plainly…educating yourself.

Educating Yourself Before we move into more details about expanding your knowledge and comprehension of real estate note buying, we have to take a moment to consider another pattern that sets those who succeed apart from the rest of the crowd, and that is that they take any of their own efforts very seriously.

They don’t view their note buying activities as a part-time endeavor that gets only a small percentage of their effort, and they also separate it from their hobbies or “everyday” spaces. This means that you too must follow their example.

How? The easiest way to ensure that you remain organized and dedicated to the work is to “set up shop” or create an actual, physical space for your note buying work. This is important because it is going to provide you with the ability to SOUND AND LOOK JUST LIKE A FULL BLOWN BUSINESS even if you are operating from your laptop and a corner of your bedroom.

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You don’t have to head out and rent an office space or empty out one of the bedrooms in your home to do this, but you do have to, at the very least, set aside a corner of a room and dedicate it entirely to your note buying work. In this way you are mentally and physically separating your note buying work from your home life, but you are also ensuring that you present the most professional image possible – and this is one of the KEYS TO SUCCESS. 1300 1200 1100 1000 900 800 700 600 500 400 1/8/2011

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The Office Setup To begin working in an official capacity you will have to create a legal business entity. If you know that you are not going to be finding a business partner and will always operate on your own, you could simply file to become a “sole proprietor.” There are also options for LLC and even corporate filings. To get the best answers for your needs, it is a good idea to visit the SBA. The U.S. Small Business Administration has all kinds of resources and details about the different ways to set up a legal business entity.

It is best to read the formal descriptions and requirements for each of the different businesses, choosing the most appropriate one for your needs, completing and submitting all of the appropriate paperwork, and then taking the time to develop your home office space.

Why that order of events? If you spend money on machinery and supplies before you are a formal business, you cannot use any of the out of pocket costs as legal and valid business expenses. Simply waiting a few days or weeks for the paperwork to be completed is a much more practical approach to the creation of the home office.

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What you will need for a home office includes: • A simple desk and enough room for some supplies, a phone/fax machine, your computer (or a working space for your laptop and any writing note taking), and an “in/out” box; • Office supplies – this is going to be up to you because you can run the entire operation in a nearly “paperless” manner. We don’t recommend doing everything without documentation, however, but you can opt to keep your paper consumption to a minimum. This means that you will need printer paper, note pads, pens/pencils, highlighters, a folder sorting tray or in/out boxes, stapler and staple remover, business stationery, folders, printer/fax/scanner, and necessary inks or toners; • Desk journal – whether you use a large notepad, desk calendar, or some sort of call-sheet or log, it is essential that you have a visible way of keeping track of each of your note buying ventures.

For example, you may use a vertical desktop file to organize manila folders that track each account and/or note. In this way you would create the file for the note in question, and then use the folder to contain the various worksheets, contact details, call logs, etc.; • Fax/phone/printer/scanner – we did already mention this above, but it cannot be emphasized enough that you will need a DEDICATED office line, and that it may be a good idea to route this to a multi-purpose machine. This saves time and money by consolidating the number of cartridges and machines you will buy.

Where the actual phone services are concerned, it is best to try not to use call waiting if possible, and do take advantage of any answering services available through your phone provider. If you purchase a multi-tasking machine, try to get one with the highest printing quality possible.

Don’t forget to also get your phone number listed in the regular phone directory, and SKIP THE YELLOW PAGES. We will get into this a bit when we look at some marketing tactics, but you should know that most consumers turn to the Internet and not their telephone books, and the money you would pay for the yellow 67

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pages listing could be directed towards much more productive tactics; • Business stationery – again, we did already mention this, but you may need to purchase few professionally printed items too. For instance, feel free to design a logo for your note buying activities, and add this to the letterhead you use in your correspondence. This logo, however, can also get used for your business cards (which you must have professionally created – we will go over the design details for these in a moment), any mailings or promotional materials, and in the bodies of all of your emails; • Answering service – this has been mentioned too, but we need to get a bit more specific about this before moving on. The reason that you must avoid call waiting is that it is simply disrespectful to the client who happens to be on the line with you, and is also discouraging to the person seeking to contact you. Most people know when they are listening to a telephone line beeping the mandatory number of times before getting sent over to voicemail, and most people resent it. Instead, simply use an answering option on your telephone network that picks up on the first ring if the line is otherwise busy. This lets the person know that they are not being ignored and are headed immediately into the voicemail option; • A good message – this is part of the answering service, but we need to separate it from the rest of the office essentials because you need to ensure that the message is in line with the rest of the “professional image” you present. This means making the recording in an environment without a bit of background noise, and at the best level of quality possible. Do not let your kids, dogs, or neighbors appear in this message in any way at all, and be sure that it is not “fuzzy” or “muffled” as these things all negatively impact your professional image.

What should the message say? Keep it as straightforward and professional as possible. A good script would read: “Hello, this is YOUR NAME at YOUR BUSINESS NAME. I am in a meeting or on another line. Your call is important to me, so please leave your name, telephone number (beginning with the area code), the time 68

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you would like a return call, and any message, after the tone. I will get back to you immediately. Thank you”; • Bank account – until you make your first sale we don’t recommend opening a business account. This is due to one thing – high fees.

When you open a dedicated “business” account, most banks want a much higher minimum on deposit and will usually tack on some hefty fees if you dip below that amount. It is a good idea to simply use your personal checking account to pay for the startup fees, and then designate any of these expenses as a short-term loan from yourself to your business; and • Website/Blog creation – this is something that you really have to do regardless of the role you intend to assume in the real estate note industry. The flippers or buyers of the world absolutely must utilize the Internet as their primary means of finding viable investment opportunities. Even a local buyer of real estate notes will want to create a very high quality and high profile website too. This is a good way of building your network of sellers and/ or investors, doing all kinds of affordable marketing and research, and getting applications from people selling notes.

You need to simply choose a web hosting service that will provide you with easy to use templates. Your market research will have already shown you what your competitor’s are doing with their sites, but you don’t want to make exact copies of what they offer.

Instead, seek inspiration from their best ideas. We will discuss your website in the “Building your Business” section in much greater detail, but for now it is important to know that this is something you want to create and solidify before you begin your actual daily note buying/selling work.

Now that you have the foundation in place, it is time to consider how to actually “get down to business”!

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Getting Down to Business We have already mentioned that some of the world’s leading “moguls” have reached such lofty heights because they did one thing – they planned ahead. They took the time to assess their markets and familiarized themselves with the language, events, and best tactics possible. They incorporated everything that they learned into a reasonable business plan, and then began making deals according to the information that it contained.

You might read twenty books about or guides to note buying, but if you don’t really make a point of looking at your particular market/area, and mastering all of the details, you would be wasting your time.

This means that reading this book is a strong first step, but you also have to put all of the various materials to use by; • Drafting a business plan; • Setting up an office; • Conducting in-depth market research; • Learning the most appropriate tools for the industry (including the development of a website, blog or other electronic “entity”); • Designing your personal approach (the protocols mentioned in earlier chapters) to contacting note owners, preparing your offer, and establishing/maintaining strong communication; and • You will also have to create a good working relationship with a knowledgeable attorney, and even consider hiring a CPA or financial expert to assist you with bookkeeping and tax issues. We’ll look at this in greater detail when we examine “Partners in Detail”.

This much “information overload” can often stop someone in their tracks.

Before allowing yourself to get dizzy from all of the items accumulating on your “to do” list, however, just use a simple approach to organizing and then educating yourself where you discover “missing pieces.” This is simple because you have actually already done some of this work. Just consider that if you have been using this guide as a step-by-step program, you will have realized that we have already gone over a few of the things on the “must do” list.

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For example, we just covered the creation of the office, considered the preliminary steps in your standard protocols for approaching banks and individual note owners, and you have even started to understand the various items that must appear in your business plan (which was provided in a previous chapter). If you haven’t yet taken the time to use the outline provided to create a business plan, go back and do that now.

Of course, in the business plan itself we call for a lot of different things.

Right now, however, the most significant activity is to conduct your “indepth market research.” Because this is something that is a bit variable from business to business, and somewhat difficult to summarize, we’ll go over that in greater detail below.

Understanding Market Research The online encyclopedia known as Wikipedia provides the following definition for market research: “any organized (sic) effort to gather information about markets or customers. It is a very important component of business strategy…

Market Research is a key factor to get advantage over competitors. Market research provides important information to identify and analyze the market need, market size and competition.”

Okay, that seems fairly clear, right? The “market need” is basically going to be summarized as “the opportunity for someone to step in and purchase notes of different kinds”. The market size, as you already know is global, and this means that the competition is global too.

Since this is the case, we immediately recognize that the “face to face” meetings necessary for successful negotiation of a note deal are going to limit the actual size of “your” market.

For instance, if your budget allows for you only to drive from meeting to meeting, it will mean simply that your market is going to cover a set radius around your hometown or base of operations. This is not a problem because we have already looked at note buying in terms of heading to the local town halls or city clerk’s offices to get details on potential deals.

Thus, the beginning of our market research has indicated the need and size of the market, or has identified the target market available to you when factors such as budget and experience are considered.

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What about the growth potential for this market? We already know that you will do the research for any available notes in your region, but this means that you will often stumble across opportunities that may require a partner or even group investment. If these are not feasible to your budget at the time, or if you have not yet developed a network of investors and/ or partners, then simply make detailed notes about this option and keep it mind as the primary component of your growth potential.

What about the competition? That is a bit more difficult. You can always use the Internet and your telephone directory to discover the names and locations of the nearest buyers, but very few independent note buyers will have yellow page listings.

Instead, we suggest that you simply “Google” or input the following information into your preferred search engine: “note buyers NAME OF YOUR COUNTY AND STATE.” For example, “note buyer dutchess county ny” would yield the top buyers of notes and mortgages in that region of the state. Thus, it would be a good way to discover the “competition” if this was where you operated.

Actual Market Research Now that you have the basics, you may wonder exactly how do you conduct actual market research. We’ll start by giving you the “big picture” of the market for real estate note buyers. First of all, there are an estimated 50 million homeowners in the United States ALONE. The average mortgage is $100k, meaning around five trillion dollars in outstanding mortgages.

Around ten percent of them are expected to fall under the “nonperforming” heading. That means that the market should have around $500 billion in non-performing mortgages.

You also already know that non-performing mortgages are not the only real estate notes available, however, and this means that you have to accept that the general size of the note buying market is much larger.

For example, with housing prices continuing to drop and unemployment rates continuing to rise, there will be more non-performing notes, but there will also be people willing to sell at a loss or at a discounted price due to a need for money, to get out of a loan they cannot afford, etc.

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Your broad-spectrum market research has shown you the vast size of the opportunity in any note buying endeavors. The problem is, as you already know, that there is a huge amount of competition in this general marketplace too. This means that it would be most productive if you focused your energies on your “local” area, initially, in order to get the best opportunities.

We already covered how to begin finding notes, but let’s quickly review: • Using local public records to find potential properties; • Discussing the matter with brokers, realtors, attorneys, established note buyers, and other network connections; • Direct options such as directories and newspaper listings.

We have gone over the first method in great detail, but have only briefly touched upon the second and third. When viewing these three methods of finding notes in terms of market research, you have to have already created your mission statement and explored the limits in your budget and capabilities.

What does that mean? Consider that your mission may be to “consider notes of all sizes” or it may have expressed an interest in “unique notes.”

This means that your mission statement has already started to describe your market and guide your research. This is the reason we suggested that you keep it a bit general, but it will help to steer you through your earliest market research. Plus, the limits of the budget, and of your experience level, will also dictate the way you conduct the market research too.

As we already mentioned, your business plan is something that is going to be developed over an ongoing period, and this means that your market research is also constant as well. The point is to keep the materials you have in front of you as fresh and accurate as possible.

Basically, your market research will tell you about available notes, current prices, and what the competition is up to. This is going to let you know immediately when it is time to step outside of the standard protocol (such as research at the town hall, creation of proposal, contacting owner) in order to rework the process to meet the needs of an expanding market.

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This might mean that you do your “research” through a network connection, offer to partner with someone on a deal, work together to draft the appropriate documents, call a meeting, and complete the transaction.

Clearly, this means that it is time to take a look at the protocols you will use to keep every deal on track.

The Basic Protocols You have already learned about the steps required for researching a note, creating a strong packet of information for the note owners, and the need to call a face-to-face meeting.

What other protocols do we suggest? That depends upon the type of transaction, but you do need to incorporate STRONG AND CONSISTENT COMMUNICATION. This means using a very simple call log system, and whether this is a paper document kept in your office or a computerized schedule, it is essential that every contact and every need to follow up or return a call is recorded.

Remember that as someone working in the real estate note industry you might work as: • Buyer – in this role you would seek out the notes, negotiate with the owner, and make the purchase. This would be someone who used the following set of procedures or protocols: o Research potential notes;

o Establish communication with the owner to discover if they have an interest in selling; o Conduct due diligence to ensure that the note is a viable investment; o Develop an offer and arrange for a face to face meeting with the owner(s); o Submit an offer and review details with owner – having them sign a Contract of Non-Disclosure at the time of the meeting; 74

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o Negotiate the purchase price with the owner;

o Close the deal with the use of a formal package or mandatory documents (after having an attorney fully review them); and OR

o Arrange to have the note serviced by an authorized agent.

• Seller/Flipper – in this role you would seek to make a smaller (and usually quick) profit from the purchase and subsequent sale of a note. o Place ads and/or conduct advertising campaigns announcing interest in purchasing notes; o Review the applications received from an interested seller; o Research potential notes for sale;

o Contact your investment partners with offers for notes that seem the most suitable to their needs; o Establish communication with the owner;

o Conduct due diligence to ensure that the note is a viable investment; o Develop an offer and arrange for a face to face meeting with owner (if possible); o Submit and offer and review details with the owner– having them sign a Contract of Non-Disclosure at the time of the meeting; o Discuss the negotiated price with any investors;

o Contact the note owner and get them to sign the Sale Contract that indicates that the buyer (and/or their investors) get the next payment due on the note; o Close the deal with the use of a formal package or mandatory documents(after an attorney has reviewed them); and 75

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o Ensure that the investor (or the note buyer’s own company) has a note servicing (escrow) company lined up to handle the processing of the entire financial transaction.

You can see that both “roles” can benefit from the use of partners or cobuyers/owners, and that is what we consider as we begin the next section on building your business.

Building your Business How do you begin to build the business? You try to expand the market and become a serious competitor in your region! This is normally going to be done in only a few ways.

These include: • Finding investors interested in partnering with you; • Conducting sales or purchases that are of substantially higher value; • Getting public attention through seminars and press releases; and • Establishing a serious web presence.

Any of these options can help to dramatically expand the amount of income your business generates, but only a few of them might actually increase your ownership of a particular share or percentage of the note buying and/ or selling transactions within your local or regional market.

For example, if you establish a web presence or host seminars, you can increase the size of your audience, sell informational materials, and even develop a network of buyers and sellers of your own. None of these things, however, might increase the size of your share of the market.

This means that you absolutely MUST make smart and highly organized plans about the ways you intend to expand your business. Do you want to just focus on getting more notes? Do you want to add selling to your repertoire? Are you ready to do much more costly transactions and deals?

Would you like to write an eBook or online course about your methods, and then generate income selling the materials?

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Any of these choices can take your business into an entirely different direction. Because of this, it is essential to base your decision on the terms of your business plan and any goals that you have outlined for yourself.

We’ll look first at the two things you can do to expand your actual hold on the market, and then consider the things that would increase the size of your income stream along with expanding your note buying or selling options and activities.

Finding Partners and Building Networks If you recall from an earlier chapter we outlined how the need for cash “up front” can often act as a hurtle to your success. Well, there are a few ways of working around this issue. One way is to use the classic “ABC” method to fund good note transactions without putting up the capital on your own, and the other is to just locate a small group of special investors interested in becoming partners.

The ABC approach will ask you to use negotiation skills and do all of the legwork in exchange for a portion of the proceeds, and partnerships or networks will see you putting up some of the capital on your own, doing most of the work, and then closing deals with co-brokers or co-buyers.

We will look at both approaches in great detail.

A Brief Exploration of the ABC Way The ABC method is a way of reducing your risk and acquiring notes without any cash out of pocket. Basically, it asks you to function or operate in the capacity of a “scout” who finds the deals, assesses them for validity, and forwards them to an investor or group of investors ready to work the deal. Your profits come from negotiating a lower price than what the investors have accepted or quoted for the deal.

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Partnerships and Networks With the mention of the legal documents, it is a good time to consider how partnerships can introduce a bit of risk, but we must also emphasize that these risks are easily overcome and eliminated through the use of some simple legal documents.

The last chapter of this book contains all of the forms, worksheets, and document templates that you might need in order to use any of the deals outlined in the book, BUT we still highly recommend sitting down with a legal professional to ensure that everything is totally safe and secure.

Remember, there is no such thing as a “one size fits all” contract, and the various local and state real estate laws can mean that you may require a few additional items not included here.

Overcoming Risks Any of the partnerships can be riskier than working alone because a lot of people might take the information that you submit to them and just go ahead and do the deal without you. To avoid this horrible outcome, however, is quite easy.

All you have to do is create a legal form of “exclusivity” with the seller, and this establishes protected legal terms. This involves the use of the NonDisclosure Agreement already provided, and is also completed through the use of an Assignment Contract, available in the last chapter of this book as well. This second document is going to be used at the closing of the deal, and will be easily applied to almost any sort of partnership.

A basic list of the mandatory documents will include: • Agreement of Simultaneous Close (included in last chapter) • Assignment Contract (included in last chapter) • Assignment of Note and Security Instrument (from seller to purchaser) • Attorney’s Title Report

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Case Study #6 Tom is sent information about a very viable note for investment through his website’s “seller application” process (this is something which is basically a response from someone who had seen one of his advertisements, headed to his website, and submitted the information about the note that they wanted to sell). He looks it over and determines that it is a good match for one of the investment groups that he has recently networked with.

He contacts them in the way that they have pre-arranged (usually via a faxed worksheet with cover letter) in the event that an acceptable note becomes available.

(This is a system that he had worked out between himself and the investment group ahead of time, and we cannot overemphasize the need to do this. It is also important to send only the quotes that fit the group’s criteria, and to obtain a Non-Disclosure Agreement with the seller prior to releasing this information.

To protect yourself and eliminate the need for the Non-Disclosure document, you might also work out some sort of contractual arrangement with the investment group that secures your position and prevents them from working around you and speaking with the note owner themselves.)

Once the investment group received the information and reviewed it, they got back to Tom with their “offer” or “quote” for the asset. They offered $150k for the note, and Tom then contacted the owner of the note and arranged for a price that was lower than what his investors quoted. For this deal Tom got the owner to sell for $140k. This means that he earned the $10k in difference once he made all of the arrangements and closed the deal.

Why is this type of transaction called ABC? It is the acronym for “Advertise, Bargain, and Close.” You advertise for the notes, bargain with the two parties, and close the deal in your favor!

Obviously, however, you already see that the involvement of the two “parties” means that you have to have already created a network of contacts such as note investment firms, banks, etc. You also see that you would have had to create the website that brought the information to you in the first place.

Will this amount of effort and work yield a reasonable return? The answer is an absolute YES! This is because you will quickly develop an excellent protocol around each type of transaction, and you will have worked with your attorney in advance to draft “templates” of the various legal documents that are put to use the most.

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• Basic Affidavit (included in last chapter) • Mortgage Purchase Contract (included in last chapter) • Non-Disclosure Agreement (included in last chapter) • Notice of Change of Mortgagee (this changes the owner’s name to that of the purchaser’s name and address and is signed by seller to buyer) • Notice of Substitution of Insured and Loss Payee (this is going to alert the title insurance company of the change in ownership and is signed by seller for the title insurance company) • Seller’s Representations and Warranties (included in last chapter) There will be many other kinds of documents that are necessary for the closing of a deal, and we provide a detailed Checklist in the last chapter as well.

The Partners in Detail A full list of possible partners includes: • Investors – groups of investors exist all over the place. It is up to you to find them locally or on a much larger scale. There are “hard money” groups that seek fast returns and which have very exclusive criteria for their investments, and there are much “looser” organizations that are open to offers like the ABC example above.

The trick is to identify the groups that will work best with your particular plans.

For instance, if you are someone who is going to keep your work on a very local basis, you are going to have to seek out regional investors looking to “buy into” that very specific real estate market. Is this a viable approach? Absolutely! There are many real estate markets that are considered to be extremely lucrative and which have a lot of potential. Do the research about your area and determine if a nearby city, vacation area, or general real estate market has a lot of investment appeal.

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Also, be sure that you have a very strong grasp on the kinds of deals that a particular group of investors will want, and send them ONLY the information about notes that meet their general guidelines. There are many stories of note buyers and/or sellers who send every offer they receive to their potential investors, and then who lose the interest of those investors because of this pattern. Make a point of scrutinizing, comparing, and forwarding only the deals that will grab the interest and attention of the investors with whom you have partnered; • Mortgage brokers – companies that are responsible for scouting out every possible mortgage opportunity for a borrower will also be a good place to go when looking to buy mortgage notes as well.

They are going to have the option of selling any note at the time that the actual mortgage has closed, and this is a good way for them to get the down payment and various fees, and yet remain free from risk. You can establish a relationship with a broker to really expand your market.

For example, let’s say that you establish a working relationship with a brokerage firm that is willing to sell the notes valued at $185k or less. This is actually considered a “smaller” deal than most and is a good way to generate a steady stream of income.

How? Let’s look at a very simple example: You partner with an investment group interested in funding deals that cost them $175k or less. You also network with a mortgage broker willing to sell you the notes on loans in this price range as well. They contact you with an option for a note valued at $165k. You do the research and offer them $148k for the note. They accept this, and you forward the necessary documentation to your mortgage brokerage group, indicating that the note is available for more than your negotiated figure. This broker knows that you will have made a deal for yourself, but still sees the profitability in holding this note, and they accept the plan. Clearly, this approach involves a bit of “leg work,” but shows how partners and networking can provide you with somewhat simple deals.

Does it have to be that complicated? Unless you have the cash up front to purchase the notes, you will have to find partners. The volume and frequency with which the offers will appear through 81

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a mortgage broker tends to mean that investment groups and partnerships are the best way to keep a steady stream of such deals occurring; • Real Estate Agents – these are the people on the “front lines” in terms of foreclosures, recent sales, or traditional real estate transactions which might be of interest to note buyers. This makes them a remarkable resource for times when you are seeking a good real estate note opportunity. They can usually work with you, but will often ask for a percentage of any transaction. This is reasonable, but you will do the best if you use some sort of documentation about the relationship between you.

For example, you will want to create a Non-Disclosure Agreement for each opportunity that you discuss with them, and you will have to have your lawyer draft a contract that outlines the percentage that the realtor anticipates making from each of the “leads” that they provide to you; • Lawyers – you will have already established contact with a lawyer for your legal documents and to double check the safety of each transaction, but have you considered them as a partner?

You might ask if they would do the legal work around each of the “deals” for free in exchange for a percentage of the transaction.

You could also see if they want to help with the financial “outlay” that might be necessary for a lucrative deal instead. Lawyers cannot, however, point you towards possible “leads” because this is a breach of their confidentiality agreements. If, however, you work with a lawyer and affiliate that lawyer with your real estate note business, they can make offers to those who are working with them on real estate transactions, etc.

For instance, if they are handling a private mortgage deal, they can discuss the option of selling the note to the person who is serving as the owner while the other person makes the payments on the mortgage. In this way, they might help the owner to be free of the debt, and yet still give the person paying the mortgage the terms that they need, and all without breaking confidentiality and while offering your investment partners a great deal; 82

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• Professional Business Networks for Note Buyers – the viability of note buying as a good business has led to a huge number of networks or groups of note buyers being developed. These are not going to be as focused as the investors because note buyers in large networks will look only at notes, and they may not be interested in real estate notes as much as lottery or legal settlement notes.

Does it pay to connect with them? Absolutely! Even if it is to purchase ad space or direct a stream of traffic to your website, it is well worth the time and energy spent on establishing a relationship.

Just consider that an advertisement on their website could increase visitation to your own site or your blog, and this could introduce you to a handful of new and beneficial investors.

Also, be sure that you have a very strong grasp on the kinds of deals that a network of note investors will pursue, and send them ONLY the information about notes that meet their general guidelines; • Directories of Investors – though not technically partners, there are some note buying sites that make very valuable directories of investors available. Look at the sites that are focused on note buying to be sure that the listings contain a large percentage of note buyers or those interested in investments in real estate notes.

This can help you to begin to develop connections to networks of investors, private investors, and related groups that will strengthen and expand your opportunities and your business; • Newspaper Listings – again, this is not strictly a way of creating partnerships, but if you advertise an interest in buying notes, you are likely to be contacted by others interested in the same work.

Many people involved in the note buying industry firmly believe in the old adage of keeping their “friends close, but their enemies closer,” and will create working relationships to offset the amount of competition between your businesses. Does this mean that your ads will only attract the attention of the competition? Not in the least! What it means is that people interested in buying and selling notes will see your offer and contact you for things far outside the realm of selling a note to you, and this is usually going to be mutually beneficial; and

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• Website visitors – though someone who “Likes” your blog on their social networking page or who subscribes to your website newsletter is not technically a partner, they are providing you with a lot of benefits.

This is because those who visit your site and either subscribe to services or return often will also tend to discuss the site with others.

This is the traditional “word of mouth” mentioned in an earlier chapter, and it is one of the most potent forms of marketing imaginable. It is also a great way to test your offerings and generally measure the size of the market through feedback or response. We will take a longer and more in-depth look at websites, blogs, and social networking in a moment, but it helps to consider this as a way of finding partners, building networks, and expanding the scope of your business.

Now that you have learned about potential partners for your real estate note business, you can figure out how to incorporate them into your business plan. They are often the only way to increase the financial scale of your purchases or transactions because they can present you with a large pool of investment capital.

Many of the partnerships listed above require formal legal documentation that will serve to protect your interests, and a good attorney should be consulted for each transaction. As already mentioned, we recommend that you hire an attorney to create a basic portfolio of templates you might need for all of the different issues that arise.

As already indicated, we believe that the use of your website and/or blog is going to be extremely valuable. This is the most modern form of communication and any sort of customer will expect that you have a web presence of some kind, and so we will now look at this issue in greater depth.

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Number of Websites Since 1995 100000000 80000000 60000000 40000000 20000000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Website and Blog Creation Let’s just open this discussion with one simple fact – we cannot possibly cover the subject of websites and blogs in enough detail within only a single chapter or section. The creation of a website or blog is something that requires a lot of planning, some serious commitment, and a lot of FOLLOW UP. This is because a website or strong blog will be one way to get a lot of attention for your business, and will also help you to rapidly develop a pool of networking contacts, potential partners, and future clients. The trick is that you must keep the site or materials presented as fresh and up to date as possible. You must also be sure that your site is reaching your intended audience. We’ll begin with the creation of the site, and move forward from there.

Creating a Site A website begins when you acquire a domain name or web address. This is done by choosing a name for the business and trying to get a web address that is a close match or appropriate phrase. This is not as easy as it sounds, but deserves your thought and attention.

For example, if you call your business Nelson’s Notes, you are not likely to get the NelsonsNotes.com domain name easily. This is because there are only a limited number of domain names and variations of those names, and many of the most predictable have been taken for a long time.

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This means you may want to consider adding numbers or additional terms to the domain name or web address. For instance, adding the year you began business (NelsonsNotes2010.com) or the zip code for the office (NelsonsNotes12522.com) may get you what you want.

You can often find domain name registration through the same group that provides you with the actual website hosting. For example, there are some major web hosting services, and most of them can help you to register your domain in several ways (such as .com, .org., .bus, etc.) and also give you everything from website templates to guaranteed hosting of your site.

Shop around to find the sites with the best array of tools. For instance, you may want the option of putting up images, videos, presentations, numerous pages, a shopping cart, a blog or option for blog links, and more. The hosting service should also make it easy for you to register dedicated email addresses and to use different types of marketing options through your site as well.

One thing to double-check before formally registering for a site is the way that URLs are handled if you leave that particular hosting company. There are some sites that will include a “catch” that removes the ownership of the domain name from your hands at the time of registration, and if you leave the web hosting site it would mean that you would not be able to take your now well-known domain name or URLs with you.

Be sure that this is not the case for you because it would mean changing all of the materials you have created (including brochures, business cards, blog and social networking information, and anything else that had your web address appearing in it) to reflect a new URL or domain name, and subsequently this could confuse your audience and cost you in terms of momentum, brand recognition and more.

What “essentials” belong on the website? We recommend that you absolutely include: • Homepage • About Us • Feedback Forum 86

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• Testimonials • Videos (these can actually be tagged to improve the SEO of the site) • Privacy Info • Contact • Guarantees • Information – try to make updated articles and materials meant to educate and inform your visitors since this establishes trust.

Establishing your Brand Before “launching” a site, you really need to dedicate the time necessary to properly design every facet of it. This is going to fall under the heading of “establishing brand recognition” and can include: • Designing a logo; • Designing the site and coordinating it with printed materials and your blog; • Filling the site, blogs, videos, images, presentations, and marketing materials with relevant information that might include articles, newsletters, podcasts, RSS feeds, online courses, advertisements, and even eBooks and information that you make available “for sale” through the site; • Testing it on your potential market (use willing colleagues and acquaintances for feedback); • Developing your initial marketing scheme to determine how to “launch” the site in the most effective manner; • Creating your SEO campaign; and • Building your mailing and contact lists.

When you have mastered the site, designed it the way you want it to look, and test marketed it with some colleagues or friends, go ahead and do the formal launch. At this same time, you should also be launching your blog 87

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and any pod or webcasts too. This is something that can be announced via your existing social networking pages like Facebook, Twitter, LinkedIn, and more.

Let everyone know about the blog, the news feeds or RSS options, the newsletters, and any other details about the site. Begin drafting the twice-monthly blog that offers relevant content and which is designed to enhance the way your website shows up in search engine results.

SEO Popularity as Reflected in Job Trends 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Nov- Dec- Jan- Feb- Mar- Apr- M Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- M 09 09 10 10 10 10 ay- 10 10 10 10 10 10 10 11 11 11 11 ay10 11

A Quick Look at SEO Enhancing the ranking of your website in search engine results is known as SEO, and though it is a very common subject that is constantly being debated and discussed, it is something that you will want to get a basic understanding of in order to use it for your benefit.

To keep it simple – SEO is accomplished through the use of carefully selected “keywords” that search engine “crawlers” read and then use to establish “relevance.” When your site is one of the most relevant because it contains the most effective keywords, link backs, and materials, it receives a higher ranking in the result pages.

Because most modern web users do not go past the first two pages or results, it is going to be important to attempt to get your site in them. An SEO campaign is the best way of doing this.

So, how is it done? We suggest that you spend some time on the Internet investigating the services available for those interested in conducting an SEO campaign for their website. Currently the Google AdWords 88

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site is one of the strongest tools for understanding which phrases and “keywords” to incorporate into your site for the strongest results.

This, however, is not all that is necessary for success. You also need to know how to use them in the most efficient and viable ways possible.

After all, anyone can fill page after page of a website with keywords, but this may not generate good results. Also, you don’t want the website just to get a high rating in the search engines…you want the website to get business and traffic. This means that dedicating time to enhancing your search engine results through high-quality website and blog content is going to really payoff in the end.

There are professionals who will do SEO work for your site, but it is a good idea to save the funds during the startup phase in order to see if you can manage some good results on your own. If you direct time and effort towards learning about SEO and doing some of the work independently, and also spending some capital on very targeted advertisements, it is likely that you can do quite well on your own.

Of course, one of the fastest routes to optimal SEO an SERPs (search engine page results) is to turn to Google AdWords. This is the marketing tool of choice because it helps you learn the best keywords, and then allows you to put them to use in some of the most targeted and productive ads possible.

The issue here, however, is that Google may be practicing a policy referred to as “Sandbox”. This means that “links which may normally be weighted

by Google’s ranking algorithm, not least improving the position of a webpage in Google’s index, may be subjected to filtering to prevent their having a full impact.” There is no official acknowledgement of this policy or activity, but a lot of people who sign on for Google AdWords suddenly realize that their results are not all that great.

The best “work around” for this dilemma is to hire or work with a good Internet marketing group to FIRST advise you in the right marketing steps to take before you sign on for such services as AdWords, etc. This saves a lot of money and effort, but it also spares you a loss of efficacy in the site.

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Other Tactics We also mentioned that public interaction through seminars and press releases is a good way to help expand a note buying business as well.

Where the press releases are concerned, you should know that there are now several strong websites that are able to perform targeted press release campaigns. They send the document to relevant and/or targeted publications and organizations in order to help you get the level of attention desired.

For example, if you wanted local attention, this sort of site would be a good tool, but it would also be useful for national attention as well. The trick with using the press release engines is to make sure that you are writing only about the most relevant issues and not saturating the market with too much news about a startup note buying business. What you should be “releasing” through these sites is news about new partnerships, details about note buying “news”, and anything that might motivate a reader to head to your website or pick up the phone and give you a call.

Naturally, the costs will vary for such campaigns, and it is up to you to determine if your budget has the room for such an activity.

A more complex method of attracting attention to your note buying business is through the hosting of a “seminar,” which is the subject that we cover next.

Use Seminars to Build your Business Have you ever entered the lobby of a bank, public library, or physicians office and seen the signs explaining some upcoming seminar? If you read the fine print on these sorts of posters and signs, you would see that they may or may not be sponsored by the institution, and that other groups are actually funding the event.

What this tends to imply is that the seminar is being paid for, as well as the rental of the space, by a professional group or individual. Most often, the group is using the larger structure of the institution to give credibility to their seminar, and most often the seminar is actually what is known as the “soft sell.”

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When you are involved in the note industry, you can use one of these soft sell seminars to directly communicate with potential investors or those hoping to sell notes as well. Here’s how it would work: 1. You identify the most appropriate venue for a seminar. This is vitally important because it has to be “classy” and a good reflection of the sort of image you want to present.

For instance, if you want a very “clean and contemporary” image then select a venue that has a space that seems to reflect this concept. You should also spend money on catering or on some good food that will enhance the opinion that guests have of the initial, surface, experience.

2. Consider the time of day when making choices in venue and food, however, because you don’t want to catch people in a rush to get home, after a long day and heavy dinner, or when the idea of traveling to the seminar is a bit of a turn off. Because of this, most people select the traditional “post workday” hour of 7 PM, choose a mid-week day, and serve an array of drinks and some delicious “finger foods.”

If the budget doesn’t allow for “wait staff ” be sure that you create a visually appealing buffet and have at least one colleague or friend help you by keeping the tables full of food and ensuring everyone’s beverages are full.

3. Naturally, you are going to ask attendees to register in advance, and this will help you to anticipate the numbers due to arrive. You are going to be in charge of promoting the event, but if you are particularly savvy you can often find “partners” that help to fill the seats.

With this basic planning arranged, you can focus energy on finding partners that give the seminar a bit more leverage and credibility, and which might also substantially increase the budget and relevance of the event as well.

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Partnering for a Seminar What sorts of partners? Look at the list of partner types we provided earlier. You might ask your accountant, attorney, realtor, investment group, mortgage broker, or even your bank to serve as a sponsor or partner for the seminar. Another great benefit of doing this is that they can then use their own pre-existing mailing lists to alert people to the seminar.

Why would they want join in on this seminar? There are two strong reasons that they would support your efforts.

1. The first is that it gives them the opportunity to promote themselves via the literature and emails associated with the advertising campaign for the seminar.

2. Secondly, you can tell them that they will get a portion of that hour to “pitch” their related services.

For example, if you are talking only about buying non-performing notes, you could allow an attorney or the bank’s mortgage expert to discuss the foreclosure process and provide details about how they can use this to help their note buying or selling activities.

Promise the attendees in advance that you will not speak for more than one hour, and keep yourself on target. Doing so establishes trust and prevents the crowd from becoming tired and/or restless.

For example, it is likely that you will have selected a single “niche” in the broader note market. Be sure that this niche has a lot of appeal to a wide array of people, and be sure that your seminar really explores that subject alone.

Don’t be afraid to hand out brochures or educational materials, and be sure that you send every single attendee away from the seminar with something that they are likely to show to other people. For example, good gifts for those interested in the note industry would include: • Portfolios with your company logo – these are great for filling up with your brochure, business card, and a company pen but will be very useful for a recipient as well; 92

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• Jotter pads with your company logo – these are also great because they are extremely useful and can include your company pen and a business card; • Calculators in protective cases imprinted your company logo – extremely useful to those in the “numbers” businesses, and don’t forget to slide a business card inside; • Travel mugs with your company logo; and • Key chains that feature laser lights or other hallmarks of a higherquality product – and imprinted your company logo of course!

Remember that your partners or sponsors for the seminar may want to also contribute to the “goodie bags” as well, and this can really add a huge impact for those attending and receiving the merchandise.

Does this ensure success? No, but you must recognize that a seminar arranged in this manner is basically “setting the stage” for a party-like atmosphere. There is food and mingling of people in different, and yet very related fields, in advance of a short and intriguing presentation.

The guests all get a few gifts for attending (and they are items that will be able to be put to use often), and because most will have sincere interest in the subject they can then talk to the “stars of the show” (you and/or a partner) directly to find out more information, or begin the process of investing in or selling off notes.

The Results If you have one successful seminar, you will be able to begin establishing yourself as authority on the subject, which is going to help you obtain new clients, but will also make future seminars much easier to promote. This is because the guests will get almost as much out of the event as you do.

For instance, your company will have a stronger image and presence in the business community, but those attending will also get to mingle and network with one another too. This is usually going to have a lot of “payback” for the host because it assigns a positive memory to the experience. Once again, we look back at the way that “word of mouth” 93

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operates, and the attendees that gain a lot from your seminar are going to pass on your name and contact details whenever possible.

You will also be able to put any pre-existing sales skills to work. The seminar is usually a great place for making all kinds of new connections and expanding the network too. Be sure that you have an ample supply of business cards, but also be sure that everyone leaves with a physical reminder of the event (and be sure that full contact information appears on that item too).

Finally, a seminar is like a very long “call to action.” Instead of flooding someone’s email with offers of newsletters and free online seminars, you can give them everything in a single, comfortable, and enjoyable environment. Certainly you won’t reach the same numbers in a seminar as you would in a blog or email “blast,” but you are sure to walk away from each seminar with at least two or three dedicated new customers.

Next Steps You now have all of the knowledge that you need to begin operating in the world of real estate note buying and/or selling. The final chapter gives you all of the documents, details, and checklists that you need to begin locating real estate notes, assessing them according to your preestablished needs or criteria, and then buying or selling them.

We have provided you with some templates for the most frequently used legal documents as well, but we also recommend that you partner with a good real estate or financial attorney to ensure that they contain all of the terms and stipulations necessary for your specific region.

Be sure that you have followed all of the steps and processes outlined in this chapter before beginning to work in this lucrative and exciting industry. If you do, you will be sure to find success and develop a good career with real estate notes.

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Chapter

4

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You’ve followed all of the necessary steps for finding the notes, ap-

proaching the owners, and making the sale. This means that you can take your first steps in note buying or selling. We have already suggested that you have a relationship with an attorney established before you attempt your first transaction, but we have not yet gone over the way to choose the right attorney for your needs. In this section we will provide you with a guide to selecting your attorney.

We will also explain the need for a working relationship with a note servicing firm, and then give you the documents that your attorney and this serving form will need to review and accept prior to any real estate note deal being closed.

Lastly, we provide you with a handy list of the terms most frequently used throughout this guide, and which you can easily refer to if you become confused during a review of the materials.

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Attorneys You will need to work with an attorney whenever you are working with real estate notes – that is a simple fact. Why? The world of real estate note buying and selling is built upon legal transactions that involve mortgages and ownership of property. This means that a huge amount of legal language and knowledge is required to navigate them successfully and in a way that protects everyone involved.

Remember, that they can also leave someone open to difficulties, such as a seller of a note claiming that payment rendered was a “loan” against the note and not an outright sale of the asset. (Thus, we have included the Agreement of Simultaneous Close document at the end of this chapter!)

This means that there are a lot of legal complications that can arise from even the simplest real estate note transaction, and it is up to the buyer and/or seller to ensure that their interests are protected to the fullest extent possible. This is the reason that an attorney is always going to have to be part of the team.

Conflict of Interest The biggest dilemma is that a lot of attorneys are already doing work similar to that of the real estate note “flipper” or buyer. Generally, this can make it risky to align yourself to an attorney if you don’t know whether or not they will attempt to remove you from the proverbial picture and take the profits themselves. This represents a serious conflict of interests, but one that must be overcome if you are to succeed in your endeavors as a professional note buyer.

So, what’s the solution? The best approach to choosing an attorney is to simply find one the focuses on real estate, finance, or settlements. This is going to ensure that they have experience and a lot of working knowledge of the area in which you are working too.

You can find someone by simply using a search engine and typing in terms such as “note buying lawyer YOUR CITY AND STATE.” For example, let’s say that you live and work in a suburb of New York City, and you

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were about to begin working with real estate notes. You could just use your favorite search engine and seek out “note buying lawyers New York City.”

Any search of this kind is going to yield a lot of results, but you will want to narrow down the field to those with a proven track record and who are truly local. You will notice immediately that most search engines give you paid advertisements that look like listings, but which might apply to attorneys working nationally, and who will be rather inconvenient for you to sit down to meet with.

Once you have a good working list of at least three candidates, you should spend time making appointments and discussing the matter with them directly. It is going to be very simple for you to identify those who have a sincere interest in working with and/or for you on real estate note deals.

How? If an attorney is happy to create a working arrangement that is based on specific contractual terms, it is likely that they are a wise choice.

Only someone who doesn’t want to take all of the profits for themselves is going to be willing to draft the legal contracts designed to protect both of your interests in the partnership.

You must also hire an additional, neutral or outside, attorney to review the documents drafted for your working relationship with the real estate Inventory

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or note buying attorney in order to ensure that everything is acceptable.

Once you have structured the formal relationship with your attorney, ask them to help you in establishing a working relationship with a firm meant to service the notes that you have bought or sold – known as a note servicing company.

While some attorneys can help to process notes for faster payouts on them, you are going to be best served (financially) by an agency that will be able to manage every facet of the payment processes connected to a note.

Establishing a Relationship with a Note Servicing Company Let’s open this brief discussion by defining the work of the note servicing company. It will have a very focused mission “to collect, calculate and disburse payments for private notes, loans and other debt instruments that no bank, financial institution or escrow company has the time, capability…to provide.”

Basically, it will be a third party authority that helps to facilitate the payments of secured notes for anyone involved in real estate note buying or selling. This is not the company that creates any of the original documentation. Instead, they are brought “into the equation” once the note transaction is completed and in full force under the terms of the contracts or documents supplied.

Many note servicing companies are happy, however, to serve as a sort of custodian for the original documents that outline the terms of the real estate note transaction. Usually the firm will simply store the documents in a secure location until the note has been paid in full. At that time, the interested parties can usually reclaim the documents or simply pay for storage until the note is re-sold.

Should they be asked to do this? While you will be working with an attorney, it is going to be up to the owner of the note to decide where the documents are stored. For example, as the buyer of notes, you will tend

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to own them outright, but if you are also working with investment groups who are yielding income from notes being repaid, it is going to be a wise idea to leave these documents in the hands of your trusted note servicing company.

Remember that a note is a negotiable instrument, and if it is misplaced or lost there is substantial risk involved. For example, a lost note document means that a mortgage cannot be successfully recorded as being paid in full. This makes for a lot of legal headaches and additional paperwork.

Simply conveying the original documents to the note servicing company streamlines and secures the entire transaction.

How it Works What happens once a real estate note professional establishes an account with a note servicing company? Usually, the full details of the transaction are reviewed by the servicing company and they will immediately contact the borrowers that need to make payments against the note.

DIY Servicing?

Can you make some extra income doing note servicing too? There are a lot of “pros” and “cons” for the opening of a note servicing business.

While you would simply have to create a formal business entity, and explore the appropriate levels of insurance for such delicate issues as financial details and minor collections activities, you need to understand customer service.

You absolutely have to be totally committed to providing top notch and effective customer service. You have to actually do a better job than any of the competition – and there is a lot of it!

What are some of the tasks you would have to master? You would have to be able to resolve any problems with non-performing notes, which could include the initiation of foreclosure proceedings and/or finding an agreeable solution with the homeowner or note holder.

The essential consideration would be legalities and limitations. As a note servicing company you need to make a profit, keep fees low for the 99

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clients, and ensure that you are not operating outside of any federal or state policies and regulations. This means that you will want “in house” legal counsel.

This also means, however, that you could align yourself with the attorney as a business partner, and begin focusing all energy on a note servicing business instead of only on the buying and selling!

Paperwork In previous chapters we have gone over the entire process of researching notes, using various worksheets and formulas to determine the true value of the asset and how to calculate your offer, and the creation of the business plan.

We have not touched on subjects such as credit reports, appraisals, and title insurance. These are matters that will pop up on a frequent basis, but which are best reviewed with your attorney. For now, we will list the items that are most often associated with real estate note transactions “in general,” simply to make you aware of the documents you may require at some point in the future. (Some of them appear in the template section of Chapter Five) Your attorney is your most powerful ally in deciding which items to use when closing a deal.

Essential Checklist for Research and Action The mandatory paperwork for any note buying activities will always include the following: 1. Research: a. Note Buying and Selling Worksheet; b. Basic Affidavit; c. Assessing the Information and Determining Investment Value Worksheet; and

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d. Non-Disclosure Agreement 2. Packet Presented to Owner: e. Formal Offer Worksheets; and f. Non-Disclosure Agreement; 3. Documents Necessary for Sale and Assignment of Note: g. Assessment Sheet;

Case Study #7 A family arranges for a private mortgage for a married couple in their family.

They are then approached by a firm offering to purchase this note. They accept the offer and complete the transaction. Immediately after that, the buyer arranges for servicing of this note (repayment of the mortgage by the young couple) to be handled by their servicing company of choice.

This servicing company sends the couple a welcome letter and payment coupons that help them stay current on the note. The servicing company will then record all payments, keep track of the amortization of the loan, and also calculate the changes to the principal and interest, subtract the appropriate fees, and then transfer the payment to the owner or lender.

Basically, this means that they monitor the status of the loan and ensure that the profits are distributed accordingly. This frees you as the real estate note professional to tackle more deals and to be free from the management of the different deals already closed!

The best note servicing companies will work in much the same manner as a mortgage company and give paying clients options for paperless accounts, online access, direct deposits, late notices, phone payments, credit card payments, and more.

They will also handle things like “late notices� when a payment is overdue or skipped altogether. If you have arranged for late fees to be charged to the borrower, the servicing company handles the task of informing the customer of this as well.

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h. Credit report on the buyer; i. Copy of mortgage, deed of trust or land contract; j. Copy of promissory note; k. Copy of property settlement/closing statement from when the property was last sold; l. Copy of lender’s title policy if available; m. Copy of current homeowner/rental insurance policy; n. Appraisal report; o. Recent photographs of the subject property if available; Usually, the servicing company does not move forward on the foreclosure process but will instead follow your protocol.

For example, let’s say that the couple described earlier is late on a payment against the note. They would get up to four “late notices” from the servicing company, and would most likely then receive a letter indicating that your company would be receiving a notice from them that it was time to initiate foreclosure or collection. This is an approach that is known to usually generate an immediate payment or some sort of action on the part of the borrower.

If a borrower failed to make a payment on the note you were holding, the servicing company would only be involved up until a very specific point, but any and all collection or legal actions would be in your hands, and would have nothing to do with the servicing company itself. Such activities are going to be in the hands of your attorney and yourself.

You might wonder how note servicing companies earn profits, and though these agencies tend to get paid in any number of ways, most will simply keep fees collected at the time they process the monthly payment and/or according to terms in their servicing contract.

Now that you understand the need for an attorney and the wisdom in working with a note servicing firm, it is time to go ahead and begin taking a look at the many different kinds of paperwork and documents involved in the real estate note buying business.

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p. Payment history that includes copies of cancelled checks or deposit slips; q. Title commitment from title insurance company. (It is up to the title company to perform the tax search and issue a full report.); and r. Closing instructions for title company - place, time, date, wiring instructions.

As already mentioned, in this list you see many items that we have not yet addressed or mentioned, and that is simply due to the fact that they are issues to be handled by your attorney.

For example, we did not touch on credit reports about the buyers, but this is certainly something that would form part of “due diligence.�

The need for any of these documents will vary according to the real estate note transaction. Consider that you may not need many of the items listed, but we include them to make you aware of them.

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Chapter

5

A Collection of Case Studies: Suggestions to Inspire You

You’ve learned a great deal about note buying and seen some brief

case studies. Let’s take some time now to explore some further case studies that are meant to inspire you to act on all that you have seen in this book.

Each of them is completely feasible and possible based on what you have learned, and we provide them to show you how to get started and what to do in order to ensure you turn a profit. We are going to use fictional “Mr. Jones” (an avid buyer of real estate notes for profit) as our protagonist.

He will always be exploring the different options available to him and following through on those that meet his needs.

So, let’s begin each of the following case studies on the understanding that he will have: • Done all of the due diligence; 104

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• Negotiated a deal with the bank or financial institution holding the note; • Closed on the transaction, and • Is the formal “owner” of the note What next? It doesn’t end with Jones seeking to simply earning income from selling the home or flipping it to investors...unless that is what he had planned. No, there is a huge amount of “leeway” for professional creativity, and you should take some inspiration from the simple case studies provided.

These examples will show you what can happen after you have gotten your hands on the notes using the techniques already described throughout this book.

#1 Work it Out Working as an independent buyer, Mr. Jones has decided that he would rather cut down on the work load that something like flipping or foreclosure creates. He opts to simply turn around and work out a financial arrangement with the existing owner. Instead of operating as a flipper or looking for a group of investors to buy the new note, he is prefers to generate long term income for his own business.

For example, he finds a home with a delinquent second mortgage. By working directly with the bank that holds the note he is able to acquire the debt for pennies on the dollar. This means something tremendous to the current homeowners: the mortgage has now been deeply discounted, and payments on that amount are well within their budget.

Mr. Jones knows this too, and contacts them to extend his offer of serving as the note holder on the discounted debt. The owners are eager to stay in their home and agree to meet. Allowing him to pull their credit report and discuss their financial condition lets Mr. Jones draft a proposal that will allow them to enjoy some of the benefits of the discounted loan, but which also allows him to enjoy a substantial profit as well.

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Let’s not forget that the property now has equity where there had previously been a significant debt. This means that the owners can enjoy the benefits of equity in a few short years after the new note is created.

This is a deal in which Mr. Jones operates as a buyer. He is going to enlist the help of his attorney to ensure that the appropriate documentation has been created, and will most definitely want to have the note serviced by a trustworthy and reliable firm.

Why would any bank be willing to extend such an offer? Never forget that banks are currently flooded with toxic loans and debts. The dollars involved in that second mortgage today are not worth what they were five or ten years earlier, and will be worth even less in the next ten years.

The bank holding this second mortgage already sees that it is a losing venture because of the pending default, and because of the decreasing value of the money. Selling it to Jones and getting it off of their books is far cheaper than foreclosing or even modifying the loan.

Statistics show that lenders will opt to sell the loan around 25% of the time, rather than falling back on a foreclosure or extension without modification. This means that one of the best options is to consider using the purchase and “work it out” tactic for long term income.

Extend without mortgage modification

6.3%

Foreclose and dispose

14.8%

Extend with mortgage modification

Sell to third party

53.5%

25.4%

Source: Emerging Trends in Real Estate 2012 survey Note: Based on U.S. respondents only

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#2 The Flip Mr. Jones has become proficient at making deals with a group of specific lending institutions and banks. During the ongoing work he encounters people like himself, but who are interested in pushing paper quickly. They prefer to partner up with buyers and investors and to work deals that meet their criteria.

This is not something that Jones has shown much interest in doing, but there are times when he knows a property may be a good deal, but not something he sees as manageable or profitable over the long term. For example, the owners indicate that they want to protect their credit but will not remain in the home or property for many years after the sale of the note.

It is at a time like this that he prefers to work with a reliable buyer who is interested in obtaining the notes from him after he has negotiated and brokered the entire deal. In this situation Jones works as a buyer and as a flipper because he is taking ownership of the note, and then making a quick deal from someone interested in buying notes.

Now, for Jones there are some ethical issues involved because he enjoys doing deals that allow people to remain in their home and to be able to take charge of their financial obligation again. There are those instances, however, in which he learns from the owners that they would be comfortable with a sale of the note because they already intend to sell the property in the near future. In fact, there are many times when an owner will sell within five years or less of a transfer of note ownership because of near default.

In this case, however, Jones not only has to tackle the due diligence on the property itself, but he also has to create a working relationship with a buyer or group of buyers. This is when the establishment of partnerships (as covered in Chapter Three) can really pay off.

For example, he will have to know if the note is viable for his buyer’s needs. He will then have to communicate the details of the opportunity before acting on the deal in any way. When this is in place he works with the owners to establish the terms. This is then communicated to the buyers, with the re-negotiated price per Jones’ needs for profit, etc.

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This involves harder work than a straight purchase and servicing of the note, but it can yield immediate profit.

#3 Nick of Time Something that Mr. Jones encounters in his efforts is a note that is about to get a bump up in the interest rate because it has reached a specific point in its maturity. We all know that the subprime mortgage problem involved a lot of these notes that experienced a huge increase in interest (at a predetermined date) that the owners could never have managed.

There are also punitive increases in the interest rates on loans that are headed into default in order to allow the bank or financial institution some chance at getting a larger amount on any sale or modification. Keep in mind that all mortgages yield the highest dollar returns during the first half of their repayment plan and any increase in the interest rate only increases that initial return for the note holder.

If Jones can step in before this happens and buy the note at a discounted price it is a huge “win win” for everyone involved. Though we hear daily that interest rates on loans are declining further and further, this is only for new loans. The pre-existing loans have terms that are still echoing the catastrophic terms of the subprime meltdown, and this is where a buyer and seller of notes can find major opportunities.

So, Jones discovers a loan that is in the process of default. He assesses the property and discovers that the terms of the mortgage indicate that a bump in the interest rate is about to occur. He communicates with the owners to let them know he is interested in acquiring the note. He discusses the terms he would establish as the new note holder to see if they are interested in pursuing a deal with him as “the bank”.

They find that his offer will allow them to make their payments easily and remain in their home, which would not be possible if the original note holder bumped up the interest beyond the current rate. Jones discusses the matter with the lender and discovers that this institution would rather avoid the loan modification or foreclosure process. He makes an offer on the note and acquires it.

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30-Year Fixed Mortgage Rates National Yearly Averages for conventional mortgage balances below $417,000

197 1972 1973 1974 1975 1976 1977 1978 1989 1980 1981 1982 1983 1984 1985 1986 1987 1988 1999 1990 1991 1992 1993 1994 1995 1996 1997 1998 1979 1973 20 3 0 20 0 0 20 1 0 20 2 03 20 0 20 4 0 20 5 0 20 6 0 20 7 08 20 0 20 9 10

17 16.63 16.5 16.04 16 15.5 15 14.5 13.88 14 13.74 13.5 13 12.43 12.5 12 11.5 11.2 10.34 11 10.21 10.32 10.13 10.5 10 9.64 9.25 9.19 9.05 9.5 8.878.85 9 8.04 8.39 8.38 8.5 8.05 7.93 7.81 7.31 8 7.38 7.6 7.44 7.5 6.94 6.97 5.41 7 6.54 5.83 5.87 6.34 6.5 6.03 5.84 6 Line indicagtes rate 5.5 5.04 4.73 on 11/24/10 5 4.40% 4.5 4

Following his standard protocols he goes ahead and creates the new note.

This is formalized with the homeowners, and he then sets up the servicing of the note according to the terms agreed upon.

Though, this loan did not come in as “cheaply� as one already well into the default process, it is still a viable investment.

#4 In the Foreclosure Process Jones knows that foreclosure purchases can be cumbersome. He still makes a point in seeking out the details on any non-performing notes available.

He does the due diligence on a property that is shown in the county clerk’s office to be non-performing and in the midst of foreclosure.

Meeting with his contact at the bank he discovers that the bank is going to move forward on the foreclosure and the subsequent auction of the property. This bank, however, would like their involvement to end at that point. This means that they offer Jones a unique deal - buy the note as the foreclosure process occurs and let the auction happen. After that, he will take over the property.

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Here is how the deal “works”: the bank will use the funds obtained in the auction as part of its compensation, and then work with Jones to determine how the remaining funds are distributed. This is similar to a partnership with the bank, and puts the management of the sale in Jones’ hands after the auction.

This means that any outstanding profits go to Jones once the auction comes to a close. And though this is risky, if he has done his research and followed all of the assessment steps outlined in this book, he will know if it is going to be profitable or not. He may also receive administrative fees from the bank in this deal too.

Short Sales and Deed-in-Lieu-of-Forclosure Actions (% of newly initiated foreclosures) 6% 5% 4% 3% 2% 1% 0%

Q1 Q2 Q3

Prime

Alt-A

Subprime

Other

Overall

#5 & #6 Deed in Lieu of Foreclosure Options A deed in lieu of foreclosure is an interesting thing. It allows the owner to convey any interest they have in the property to the lender when the loan is in default. It is meant to forgo the foreclosure process by releasing the owner from their indebtedness, and getting the property into the lender’s hands without repossessing it or being open to risks of damage to the property.

Mr. Jones has found that there are two interesting ways to put properties currently in default into a deed in lieu of foreclosure deal. The first is to buy the note from the bank and approach the homeowner with a deal for a deed in lieu of foreclosure. With this in hand he can then turn around and sell it to another investor.

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In this approach it would be similar to a standard real estate transaction.

He effectively obtains ownership of the note (ownership of the home), gets the owners who have defaulted to release their interest (meaning they move out of the home and are free of the debt and negative impact on their credit because they have avoided a foreclosure or complete default), and then sells the note to someone interested in the property.

Clearly, Jones would have to have determined if the property was of interest to any of his network of buyers and partners. This is something that becomes second nature, but is also something that should be closely assessed before any action is taken. As usual, Jones would have to propose the deal to the flipper first and only then move on the purchase once the terms for the final sale have been established.

The other way of using the deed in lieu of foreclosure is very simple, and something already in line with the Jones’ preferred tactic: he buys the non-performing note from the bank and then contacts the owners to see if some sort of mutually beneficial arrangement is possible.

In this approach, he offers them the deed in lieu of foreclosure deal, and indicates that he is more than happy to collect a reasonable rental payment instead of a mortgage payment.

In other words, the owners are allowed to remain in their home, but they have the debt erased from their records. This is something that might be better implemented if Jones speaks with the owners ahead of the purchase of the note because it could run the risk of leaving him the owner of an empty home.

Is this the best approach, financially, for Jones? After all, he now has the need to keep the home in a certain condition if his investment is to be protected. This is a time when the details of property upkeep and management will have to be established in the rental contract.

After all, it is to the benefit of the former owners that the deal is made, and it may be entirely feasible to put some very firm terms into the rental contract - i.e. maintenance and other expenses are their obligation, etc.

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Nonperforming Total Loans, Banks with Total assets from $300M to $1B (NPTLTL2) Source: Federal Financial Institutions Examination Council

Banks’ Non-Performing Loans Skyrocketing

Far worse than in the S&L Crisis

1985

1990

1995 2000 Shaded areas indicate US recessions.

2009 research.stiouisfed.org

2005

2010

#7 Non-Performing for Cash Non-performing notes are those that are 90 days or more in default. They are often in the process of foreclosure (or about to enter into it) and are things that most banks are more than eager to get off of their books.

Mr. Jones finds a good non-performing asset and acquires it from the bank. He has already been in touch with the owners to determine if they want to use the deed in lieu of foreclosure option, and they don’t. This means that he can let the deal go or he can offer them to settle for a cash payment that conveys all of their interest in the property to him. If he offers the cash it prevents him from implementing a foreclosure process, seeing damage to the property, or losing out on potential profits.

Once the homeowners agree to sell their interest and have vacated, Mr. Jones can turn to his network of buyers to sell this note, or he can extend an offer of a rental contract to the former owners or other interested parties.

Purchasing the note outright from the bank means that he owns the debt, but not the property. He has to find a way to obtain full ownership, and the cash settlement may be the fastest way to get the asset entirely under his control. This is a good method if the property is something that he 112

A Collection of Case Studies: Suggestions to Inspire You

knows one of his buyers will really want or if the rental fees are substantial and consistent.

#8 More than One One interesting thing that Mr. Jones has discovered in the current markets is the wide array of housing developments that were started and left unfinished during the bust beginning in 2008. Entire subdivisions sit awaiting completion and yet no buyers are lining up to make the investments in them.

Mr. Jones discovered that this sort of non-performing asset could yield a good profit within his network of buyers. The glitch is that he would have to find properties in a workable condition. He struck gold when he found a small subdivision that had three out of fifteen homes completed, but entirely empty.

He met with his partners to discuss the opportunity. They all agreed to the price they would pay, and Jones began negotiating with the financing company. This was definitely one of the most complex arrangements Jones had handled because he was dealing with vacant lots, full houses, and a chain of owners who had sought to recover some income from the initial investment.

Working as a buyer and as a flipper, he was able to perform the due diligence required, negotiate the deal with his investors, work with the bank to purchase the non-performing note at a tremendous discount, and to then flip the property to his investors to do with as they saw fit.

Though Jones may have been able to invest in the property and begin selling or renting the completed homes, it was clear that his agenda was met by the sale of the note at the time he took full ownership.

From Here...

From small “one home� deals in which Mr. Jones was able to purchase and then workout a repayment plan with the owners to entire subdivisions in which the initial investors had failed, he found amazing opportunity.

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Some of the case studies show that Jones had to use tremendous efforts to get the project done and funded, and others show that he used only his basic resources and well established network for success.

The point we want to make is that you too can put a lot of these stories to use in your buying and selling efforts. Don’t lock yourself into a single path or approach because you may be overlooking a lot of different opportunities.

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Chapter

6

Resources Note Buying and Selling Worksheet

This document is for your own research. We also have the Note Partnership Assessment that you would use to communicate with an investment partner about a potential note as well.

Real Estate Research Property ID Number: Address of Property: Description: Name of Mortgagor: Contact Information: Name of Mortgagee: Contact Information:

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Subsequent Names attached to this property: Lien Holders: Are there secondary liens?

Terms of the Note: • • • •

Who owns the note?

How is it to be paid?

How is the note to be terminated or cleared from the property?

What are the penalties if the current note holder decides to sell it?

Assessed Value: Current taxes on Property: Amount of Down Payment?

Loan to Value Ratio?

Total Value of Property: Status of Loan(s): Mortgagee Credit Worthiness?

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Assessing the Information and Determining Investment Value Worksheet The Current Value of the Property The Down Payment Made on the Property See below for mathematical instructions for this figure: Include this in the formulation if the owner is also the individual who paid the original down payment

+

OR Subtract it from the amount if the lender/note holder received this for originating the loan The Loan to Value Ratio Figure to Multiply by Preferred Percentage: Terms of Loan

Length Remaining

Interest o Anticipated Earnings o Amount Remaining to be Earned Credit Worthiness of Mortgagor – remember that a very bad history for loan repayment should be considered a risk.

Status of the Loan – if the loan is in the non-performing or sub-performing categories it translates to a serious risk to an investor

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Formal Offer Worksheets The following sheets are those to be inserted into the official package presented to the note holder.

The Introductory Sheet: Paragraph #1: Insert a standard paragraph or mission statement for your business.

1.)

Paragraph #2: This is your explanation of how you found this note and why you feel it is a good opportunity for yourself and the note holder. This could mean you reference any advertisements that the note holder placed when listing it for sale, it could be a persuasive comment about the poor conditions in the local economy or housing industry, or it could be simply itemizing that the note in question is a good “position” for your financial goals.

2.)

Paragraph #3: This is an optional paragraph to be used if the status of the loan is a negative factor, and to indicate to the note holder that the offered price (on the next page) will be discounted. Be sure to also mention terms such as “negotiation” or “discussion.”

3.)

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The Formula Worksheet: Instructions for the Formula Worksheet: Insert your completed calculations, but also use adequate documentation to demonstrate the validity of your points. Reference all of the paperwork you have included, and remember that this is the section that includes your “bottom line offer� for the note The Current Value of the Loan The Down Payment Made on the Property The Loan to Value Ratio

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Contracts and Agreements These contracts are offered with no warranties either expressed or implied. Before you use any of them, you are advised to have them individually reviewed by your attorney who is already familiar with the applicable laws of your state.

Agreement of Simultaneous Close Date_____________________________________________________ [Insert name of your firm here] Re: Purchase of real estate note in the amount of $__________ executed by _____________ payable to the order of _______________(the “Note�)

The undersigned state and warrant that the purchase of the Note by does not constitute an extension of credit to any party in this transaction.

The undersigned Buyer acknowledges that Buyer is executing the Note payable to Seller with the understanding that Seller will be selling the Note to at a discount. The discount paid by the seller will increase the interest rate will receive. However, the increase in the interest rate will not make the interest usurious in the State of _____________.

Seller and Buyer both acknowledge and understand that the purchase of the Note by is strictly a business transaction and that the underlying transaction to sell the property was negotiated solely between the Seller and the Buyer. has not in the past purchased notes from the Seller and Seller does not anticipate the sale of any notes in the future to .

The undersigned further acknowledge that it is in reliance upon the truth of the statements herein above contained that the purchase of the Note is based.

SELLER: ___________________________ By_________________________ 120

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Assignment of Contract Rights THIS AGREEMENT, entered into this _______ day of ___________________, 20____, by and between ______________________________, hereinafter referred to as “Assignor”, and ______________________________, hereinafter referred to as “Assignee”.

WHEREAS, Assignor is a party to a Mortgage Purchase Contract dated the ________ day of _________________________, ____, by and between Assignor as Buyer and _________________________ as Seller, a copy of which Contract is attached hereto for identification and marked Exhibit “A”; and WHEREAS, Assignee desires to purchase Assignor’s interest in said Contract upon the terms and conditions set forth hereinafter; and WHEREAS, Assignor is desirous of selling and assigning the Assignee all of its rights, title and interest in said Contract upon the terms and conditions set forth hereinafter.

NOW, THEREFORE, THIS AGREEMENT: Witnesses that for and in consideration of the sum of: $________________ paid by Assignee to Assignor, the receipt of which is hereby acknowledged, Assignor does sell, assign, transfer and set over to Assignee all right, title and interest in money now due and payable under the subject Mortgage/Deed of Trust Purchase Contract dated the ________ day of ________________, ____, between Assignor as Buyer and as Seller, the subject of which is the Purchase by Assignor from the Seller of the right to receive all or a portion of the periodic payments (including a balloon, if applicable) to become due under the terms of a Note executed by ______________________________, as Maker.

The said Note is more specifically identified in the subject Mortgage Purchase Contract attached hereto as Exhibit “A”. The Parties to this Contract make the following Warranties: 1. Assignor warrants that there has been no breach of the above121

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mentioned Mortgage Purchase Contract by Assignor, and that there has been no known breach of the above-mentioned Contract by the Seller, or of the Note and Security Instrument by either the Seller or Maker thereto.

2. Assignor warrants that its rights, title and interest under said Mortgage Purchase Contract have not been assigned or encumbered.

3. Assignee is authorized to notify Maker of the subject Note to deliver subsequent required payments (including balloon payment, if applicable) to Assignee. Assignor (if not accomplished by Seller) shall also direct Maker to remit subsequent required payments to Assignee. Assignor shall execute documents as appropriate to effectuate this assignment, to include (but not limited to) an Assignment/Certificate of Transfer (or other appropriate document of similar purpose) in a form which may be recorded in the appropriate Public Records Office.

4. Assignor makes no warranties with regard to the Note and Security Instrument beyond those expressly contained in this Contract and does not adopt any of the Seller’s warranties set forth in Exhibit “A”.

5. Assignee acknowledges having read the Mortgage Purchase Contract (Exhibit “A”) and assumes all of the responsibilities, duties and liabilities of Assignor under the terms of that Contract. (Assignee’s initials: _____).

6. This is the entire Contract of the Parties relative to the Assignment

by Assignor to Assignee of all contract rights to the Mortgage Purchase Contract attached as Exhibit “A”. Waiver, modification or additions must be in writing to be effective.

This Contract is entered into the day and year first written above. ____________________________________ Assignor ________________________________ Assignee

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Basic Affidavit This instrument hereby acknowledges that the undersigned, ________________________________________________________ _ [name], (“affiant”), residing at

_______________________________________________________ __[address, city and state], is of legal age, and does hereby swear and affirm that the following is true and accurate, to the best of [his/her] knowledge, under penalty of perjury: [list facts to be attested to]

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Mortgage Purchase Contract This contract entered into this ____ day of ______________, ____, by and between ______________________________________________ ____, hereinafter referred to as Seller, and _______________________ ___________________________, hereinafter referred to as Purchaser.

Seller represents and warrants to Purchaser and Purchaser’s assigns that he is the legal owner (or current assignee) of the following described note and (mortgage) (deed of trust) (contract for deed), hereinafter referred to as Note and Security Instrument, executed by __________ _______________________, hereinafter referred to as Payor, in favor of _________________________________, original Principal Balance $_________________ (____________________________) bearing interest at the rate of ____ percent per annum and being amortized over ____ (interest-only) (equal monthly principal and interest) payments of $__________ (__________________________________), dated _____________, with a final payment in the amount of $____________ (________________________) due and payable _____________, ____ and recorded in Deed Book _____, Page _____, ___________________ County records, State/Commonwealth of ______________. Legal description of real property securing the Note and Security Instrument: In consideration of the agreements contained herein, Seller agrees to sell, transfer, convey and assign to Purchaser and Purchaser agrees to purchase upon the terms and conditions hereinafter set out, all of Seller’s rights, title, powers, interest in and to the above styled Note and Security Instrument, together with: • All of Seller’s rights, claims and causes of action which Seller has or may have against the Payor of the Note and Security Instrument, and • All of Seller’s rights, title, powers, interest in and to the real property which is described in the Note and Security Instrument, and • All of Seller’s rights, title, powers, interest in and to any insurance policies, both title and property damage.

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The purchase price shall be the sum of $___________________ (___________________________), payable at (issuance of title insurance policy) (after ____ payments have been received by Seller) (Other: Subject to proportionate adjustment if the balances, terms, payments or conditions stated in Paragraph 1 are incorrect or inaccurate.

Purchaser shall receive (______) ___________ Note and Security Instrument payments (hereinafter referred to as payments) beginning on ______________________, 20___, and a final balloon payment of $__________ (________________________) due and payable on _____________________________, 20___.

Seller represents and warrants to Purchaser that the Payor has been late ____ times and the payments are now _______________________.

Purchaser shall have thirty (30) days from the date of this Contract to examine all documents, property and information deemed necessary

by Purchaser to satisfy all contingencies and to close the transaction contemplated by this Contract, and to cancel this Contract without penalty or liability if any of the same is found unsatisfactory to Purchaser as determined by Purchaser in his sole opinion.

Seller shall cooperate with Purchaser or Purchaser’s attorney in obtaining any information necessary for such timely examinations and verifications.

Purchaser shall have the right to extend this date for a maximum of 15 days if it is necessary in order to complete due diligence.

The closing shall occur at a mutually agreed-upon time and place. In the event the Contract is not completed within the above period including extension, this Contract shall become null and void and there shall be no liability between the parties.

Closing costs, including attorney’s fees, mortgagee’s title insurance, appraisal and credit check shall be paid by (Seller) (Purchaser) (Other: __ ______________________________).

At time of closing the principal balance due under the Note and Security Instrument shall be no less than $____________ 125

Make Millions Buying Notes

(___________________) or there shall be no less than ___ payments of $________ (______________) each remaining due and owing on the Note and Security Instrument or an appropriate adjustment shall be made.

Any payments received by Seller during the term of this Contract or of any extension shall be credited to the cash required of Purchaser at closing and to the purchase price. There shall be no proration of interest.

Seller shall not sell, convey or assign any interest in said Note and Security Instrument or attempt to negotiate for the sale, conveyance or assignment of any interest of said Note and Security Instrument to any other party during the term of this Contract or any extension.

Seller authorizes Purchaser, its successors or assigns, to order, receive and review on Seller’s behalf one or more consumer reports in connection with this transaction from one or more consumer reporting agencies, all as permitted by the federal Fair Credit Reporting Act and applicable state law.

This Contract shall be construed in all respects with the laws of the State/ Commonwealth of ___________.

It is the intention of Purchaser and Seller that this Contract be interpreted in conformity with those laws. If, however, any portion of this Contract is deemed unenforceable, the remaining portions shall remain in full force and effect and be fully binding on the respective parties.

This Contract may not be assigned by Seller without the prior written permission of Purchaser. Handwritten or typewritten provisions initialed by all parties to this Contract shall control if inserted herein or attached as addenda hereto if in conflict with any provisions of this agreement.

In the event of any litigation concerning this Contract the prevailing party shall be entitled to reasonable attorney’s fees in addition to such other relief provided by the Court. Seller acknowledges that this Contract may be recorded in the appropriate county land records at Purchaser’s option and that such recordation will cloud the title of the instruments.

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This Contract shall inure to the benefit of, and be binding upon, the parties and their respective heirs, executors, administrators, legal representatives, successors and assigns.

Other terms and conditions: This Contract represents the entire agreement between the parties on this subject matter and supersedes all prior agreements, written or oral and may not be amended except in writing signed by the parties. Addenda attached: YES ____ NO ____ This Contract is entered into the day and year first written above.

_________________________________ Seller _________________________________ Seller _________________________________ Purchaser

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Financial Information Release Authorization Date: To whom it may concern: I hereby authorize the release of any personal or financial information requested by: Including but not limited to the below: • Checking, Savings, Money Market, or other Asset Deposits; • Employment and Income Verification; • Mortgage Balances and Payment History; • Rental Payment History; and • Secured or Unsecured Consumer Credit and Payment History.

A copy of this letter should be considered the same as the original, which is on file with the above named company.

I ask that you expedite this request. (signature)___________________________________________________________ Print Name: _________________________________________________________ Account Number______________________________________________________ Address: ____________________________________________________________ City, State, Zip:_______________________________________________________

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Non-Disclosure and Non-Circumvention Agreement This Agreement is entered into this _____ day of _______________, 20 ___, by and between the undersigned parties.

Be it resolved that in consideration of the details contained herein and other good and valuable consideration the undersigned parties hereby agree and certify that: • They intend to be legally bound hereby irrevocably and agree not to circumvent, avoid payment of fees or commissions, avoid, or bypass each other, directly or indirectly, in any transaction with any corporation, partnership, individual, trust, government, institution or entity revealed by either party to the other, in conjunction with any project and/or transaction involving any products, services or additions, or negotiations, or renewals, rollovers, mortgage sales, loans, extensions, amendments, new contracts/agreements, or third party assignments thereof.

• Nor shall either party disclose or otherwise reveal, to any third party, any confidential information revealed by the other, particularly that concerning note holders, lenders, borrowers, institutions, corporations, organizations or individuals’ names, addresses, Social Security numbers, telex, facsimile, telephone numbers, e-mail addresses, web sites or other means of access thereto, bank information, codes or references, without the specific formal written consent of the other. No telephone calls or inquiries are allowed to any bank, officers, investors or mortgage holders or purchasers without prior written approval from an authorized officer of _______________________ • It is further agreed that in the event either party shall at any time violate the terms of this Non-Disclosure and Non-Circumvention Agreement, such defaulting party shall be liable to pay to the other party any and all profits, and/or commissions which such nondefaulting party would have earned, or made from any transaction 129

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which may be consummated, as a result of, or through such circumvention, plus all court costs and legal fees expended in the enforcement of this agreement. • It is agreed that this document shall remain in effect for a period of five (5) years or the life of any agreement, contracts, or commercial agreements, whichever is longer, and will automatically renew itself thereafter from year to year unless mutually agreed to in writing to cancel same within thirty days of the anniversary date of this Agreement. • All the terms of this Agreement shall be binding and effective to the benefit of the parties hereto, their respective heirs, representatives, successors, assigns and designees.

This Agreement shall be interpreted under the laws of the State of ____________________.

In witness whereof the parties have executed and delivered this Agreement and is effective from the date of signing by both or all parties. ______ day of _________________ 20 ________________________ ________________________________________________________ ________________________________________________________

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Note Partnership Assessment Fax this page to the investor if it is a note that meets their criteria.

To:_________________________Attn:________________________ Fax(____)_______________ Broker’s Name: _________________________________ Company_________________________________________________ Broker’s Fax (____)_______________ Phone(____)________________ Broker’s e-mail ____________________________________________ What kind of property secures the mortgage (trust deed or contract) for sale?

Is this mortgage in (circle): first position / second position / third position Is the property occupied by the note payor? ________ (If not) Is it rented? _____ Rent? $__________ What was the sale price of the property? $_________________ Sale date? ____________ How much cash did the buyer put down? $_________________ What was the original balance of the mortgage for sale? $________________ Current balance? $_________________ What is the amount of each payment? $____________ per __________ If there is a balloon due: Amount of balloon: $____________________ Due date ___________ What was the date of the first payment? ________________________

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How many payments have been made? ______________ How many remain? ______________ What is the interest rate of the mortgage? ___________ Are the payments current? _________ If not, how many are overdue? ______________________ How much did the property appraise for? $________ When was the appraisal done?_______________ What is the address of the property securing the mortgage? __________ ________________________________________________________ City ____________________________ State ____________________ County ___________________________ ZIP ___________________ Describe the property & neighborhood in detail: Additional information investor should know about the mortgage, the payor and/or the property:

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Seller’s Representations and Warranties I/we, __________________________________________, hereinafter referred to as Seller, make the following representations and warranties to the best of my/our knowledge: 1. That Seller is the legal owner (or current assignee) of the following described note and (mortgage) (deed of trust) (contract for deed), hereinafter referred to as Note and Security Instrument: Executed by _____________________________, hereinafter referred to as Payor, in favor of ________________________, original Principal Balance $_________ (____________________) bearing interest at the rate of _____ percent and being amortized over ______ (interestonly) (equal monthly principal and interest payments) of $_________ (_________________________), dated ___________, ____, with a final payment in the amount of $_________ (____________________) due and payable ____________, ____ and recorded in Deed Book _____, Page _____, _______________ County records, State of ______________.

2. The Note and Security Instrument is a result of a genuine sale of the property described and was executed by the person or persons whose signature or signatures appear upon it.

3. The property which is the subject of the Note and Security Instrument is truly and accurately described therein.

4. The property is in the possession of the Payor of the Note and Security Instrument and/or their successors and assigns.

5. The amount due the undersigned on the Note and Security Instrument is not disputed or subject to any offset, deduction, credit or counterclaim.

6. The Payor has not indicated by act or statement any intention of ceasing to pay on the Note and Security Instrument.

7. The Payor has been late ____ times and the payments are now _______________________________________________________ 8. There have been no defaults by the Payor under the Note.

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9. There is no undisclosed delinquency or default existing on the Note and Security Instrument.

10. The undersigned received cash or its proper equivalent for the down payment.

11. There are no undisclosed agreements, modifications, concessions or litigation of any nature affecting the Note and Security Instrument.

12. The undersigned has full and perfect title and right to convey the Note and Security Instrument free of any encumbrance, lien or interest of any third party of any nature whatsoever.

13. Seller is named as additional insured and loss payee on a title insurance policy and a hazard insurance policy on the real property securing the above styled Note and Security Instrument in an amount sufficient to cover the combined outstanding principal balance of the first and, if applicable, second mortgages (or applicable security instrument).

14. Seller warrants that the Note and Security Agreement has not been obtained or created in any fashion which violates any state, federal or local laws, or administrative regulations and specifically not in violation of any usury laws.

15. Seller is not a creditor under the Truth in Lending Act and is not subject to the Truth in Lending Act. 16. Seller is not aware of any legal or equitable defenses to the payment of the said obligation or basis for offset, and in the event that there are any defenses to payment of the Note, Seller shall be solely liable for any defenses and shall be liable for all attorney’s fees incurred in defending such action.

17. To Seller’s knowledge there is no litigation threatened or pending regarding the instruments.

18. Seller has made no prior transfer, assignment or conveyance of Note and Security Agreement or any portion thereof.

19. This agreement and all transactions contemplated herewith have been duly authorized by all necessary corporate action should the undersigned be a corporation.

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The representations and warranties and undertaking set forth herein shall be continuing and any waiver of such shall not constitute a waiver of any subsequent breach.

No waiver thereof shall be implied from any forbearances, failure or delay and enforcement thereof. The liability of the undersigned in respect to any waiver or breach herein shall not be affected by the granting of extensions, adjustments or compromises of claims by ______________ __________________.

The undersigned hereby consents to and waives notice of any and all such extensions, adjustments, compromises or settlements in respect to the Note and Security Agreement.

The undersigned shall indemnify and hold harmless ________________ __________________ from any and all liability, loss or damage s/he/it or assigns may suffer as a result of any claims, demands, costs or judgments which may result from the representations and warranties herein made being untrue.

DATED this ______ day of ________________________, 20__. _________________________________ _________________________________ State of ________________ ) County of ______________ ) I, the undersigned, a Notary Public in and for the County and State aforesaid, do hereby certify that ______________________________ ______________________ whose name is signed to the foregoing as Seller, appeared before me this ________ day of _____________, ____, and acknowledged that the foregoing is their true act and deed. ________________________ Notary Public My Commission Expires: (Seal) Â State of ________________ )

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County of ______________ ) I, the undersigned, a Notary Public in and for the County and State aforesaid, do hereby certify that ______________________________ ______________________ whose name is signed to the foregoing as Seller, appeared before me this ________ day of _____________, ____, and acknowledged that the foregoing is their true act and deed. ________________________ Notary Public My Commission Expires: (Seal) SUBSCRIBED AND SWORN to before me ______ day of _______________, 20 ___. __________________________________ Notary Public in and for the State of __________________, residing at ___________________________ hereby assigns his interest in and to this agreement to _____________________

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A Note Closing Checklist Now that you have looked through all of the materials, learned the processes necessary for finding and assessing a real estate note, and the best way to structure and enhance a business, you can begin seeking notes in earnest.

The checklist below will help you to ensure that all of your proverbial “ducks are in a row”, and that you have all of the documents that you need to complete a transaction. We still cannot emphasize enough that you absolutely must seek the help of an attorney and use their services to review each of the documents prior to the formal closing.

Completed Formal Offer Worksheets

Signed Mortgage Contract

Signed Seller’s Representations and Warranties

Copy of Note

Copy of Mortgage, Deed of Trust or Contract/Agreement for Deed

Copy of Warranty or Grant Deed

Copy of Property Settlement Sheet (a.k.a. Closing Statement for original Mortgage, Deed of Trust or Contract/Agreement for Deed)

Settlement attorney’s or title company’s address and phone number

Copy of paid receipt or binder from casualty insurance company indicating mortgagee as additional insured (The reason you will want that is to be certain that the property is indeed fully insured, and that the amount of coverage is guaranteed to protect the buyer’s interests. It is also necessary to provide the details necessary for contacting the insurance company whenever necessary.)

Copy of Mortgagee’s Title Insurance Policy 137

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Payor’s name, current address, phone, Social Security No., prior address if recently moved

Credit Report on Payor

(There are many note buyers curious about the need for this, but it is actually a very powerful tool. It will usually give around ten years of information that includes address, work, salary, age, and credit rating. All of these factors can help the note buyer/seller to recognize risk in terms of repayment of a note. In fact, many professionals scour a credit report to find incidents of bankruptcy claims as this is one clear indicator of severe risk.)

Seller’s name, current address, phone

Verification of payment history. If the note is currently being serviced obtain the name, address, phone of agency, account number, and history

Tax and insurance escrows

Note amortization schedule

(This is essential because it is one sure way to see that the note being purchased is going to payout in the way desired. If there are liens or encumbrances they are going to appear here, and will demonstrate how they can impact the returns on the investment. For example, you might view the schedule as a sort of ledger that illustrates when your payments will be received, etc.)

Directions and map to the property

Comp photos of the property

(Because appraisals may be done using “comparables” – meaning other homes in the region that are valued at the same rate – it is a good idea to demand photographic comparables too. This would include around ten shots of the property and several shots of the comparables used in the appraisal.)

Property appraisal including area median value for type of

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property (It doesn’t matter if your appraisal is done using comparables, replacement cost, or income potential, it is essential that the full report be included in the closing documents and also thoroughly reviewed before the closing takes place.)

Attorney’s Title Report

Assignment of Note and Security Instrument from Seller to purchaser with original signatures

Original Note endorsed to purchaser with Seller’s original signatures

Original Mortgage, Deed of Trust or Agreement/Contract for Deed Notice of Substitution of Additional Insured and Loss Payee signed by seller to hazard insurance company

Notice of Substitution of Insured and Loss Payee signed by seller to title insurance company

Notice of Change of Mortgagee to purchaser’s name and address signed by seller to payor POST-CLOSING ITEMS:

Copy of recorded Assignment and Note showing clerk’s stamp, deed book and page number

Original Note and Deed of Trust (or Mortgage or Agreement / Contract for Deed)

Title Insurance

Notices sent via certified mail, return receipt, to hazard and title insurance co. and to Payor

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Terminology • Advertising – this is going to be done through newspapers, online listings, and PPC (pay per click) ads that utilize keywords selected for SEO purposes.

• Appraisal Value – this is the market value of the property to which a mortgage is attached and which indicates the feasibility of the property in terms of a real estate note investment.

• Asset – any investment vehicle can be viewed as an asset simply because it is a property to which a specific value is assigned.

• Assignment – any document which a property is assigned or transferred from one person to another. Mortgages, leases, and deeds of trust can be assigned.

• Bank – the institution through which loans and mortgages are provided.

• Bankruptcy - a proceeding under which the property of a debtor is seized by the court and divided among his creditors or his debts are restructured.

• Borrower – the term applied to anyone who accepts the assignment of a debt and will then make payments until the transaction is fully funded.

• Business Plan – the formal structure by which a business owner intends to operate, promote and fund a business.

• Collateral – a property that is used to secure a loan or note. A home is the collateral behind a mortgage, and is also used to support the note assigned to a real estate note transaction.

• Contract – any document that outlines a legal obligation between various parties. Once signed and properly notarized a contract is binding under the laws of the region or the state.

• County Clerk – the official in charge of documenting, tracking, and protecting all official county and/or state records having to do with properties, mortgages, deeds, liens, etc.

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• County Registries – these are the places where mortgages, notes, and liens are recorded against each and every property in a county.

• Credit History – the individual report on all financial, employment, and residential information having to do with a single consumer.

• Credit Report – see credit history.

• Credit Union – see bank.

• Current – when used to discuss real estate notes, the term current means that the loan secured by the note is not delinquent in any way.

• Current Value – the actual market value for a home or real estate property as determined by comparison to nearby properties, improvements, etc.

• Debt – a financial obligation that is deemed legal and binding per terms or contractual arrangements with a creditor or lender.

• Debt Instrument – any document that is used to create and secure a debt is known as the debt instrument. A mortgage, lien, or note can be seen as a debt instrument.

• Deed – this is a legal document identifying the owner of a real estate property of some kind, and is what is on file in a county clerk’s office.

• Discount – when used to describe a real estate note, the term explains the difference between the value or the note and the amount that a buyer or seller is requesting.

• Diversifying – this is a way of enhancing the stability of an investment portfolio by using various financial opportunities to increase wealth and protect purchasing power.

• Domain Name – the URL assigned to a website is also known as the domain name. For example, www.NelsonsNotes.com is an example of a domain name used in this book.

• Down Payment – this is a sum of money used to secure a loan or mortgage for a real estate property and which is subtracted from the total amount of the loan extended by the lender.

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• Due Diligence - the disclosure to potential buyers of all relevant information that applies to a security issue.

• Equity Group - this is a group normally interested in investment opportunities and which individuals support through annual or monthly investments/payments.

• Escrow - an amount of money or property granted to somebody but held by a third party and only released after a specific condition has been met.

• Exclusivity – an offer only available to or used by one person, group, or organization.

• Fees – any amount of money attached to a transaction.

• FHA – Federal Housing Administration.

• Follow Up – when used to describe real estate note buying it indicates the processes by which communication and deals are ensured. Generally, follow up is the only method of maintaining enough communication to complete a deal.

• Growth Potential – this is the term connected to any industry or investment that demonstrates the capacity for attracting new participants or customers and offering increasing income or profit.

• Hedge Fund - an investment company that is organized as a limited partnership and uses high-risk techniques in the hope of making large profits.

• Holdings - legally owned property, especially real estate, stocks or bonds.

• Injury Settlement Notes – notes that explain the method through which an injury settlement is to be paid. These are often sold at a bit of a loss to the owner, but also allow them to get a “lump sum” instead of a structured payment.

• Insurance - an arrangement by which a company gives customers financial protection against loss or harm in return for payment of a premium.

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• Interest Rate - a charge made for a loan or credit, and is the primary method that the lender creates a profit.

• Investment Bank – this is a financial institution that follows a policy of investment in order to generate higher returns for those with funds on deposit.

• Legal Structure – any business must have a legal structure. This can include sole proprietor, LLC, etc.

• Lender – a bank or mortgage company can be a lender, but so too can any financial institution or individual willing to put up the money in return for a guaranteed repayment (usually with interest fees).

• Lien - the legal right to keep or sell somebody else’s property as security for a debt.

• Loan - an amount of money given to someone on the condition that it will be paid back later according to specific terms.

• Loan To Value Ratio – the amount of an outstanding loan divided by the current value of the property.

• Lottery Notes - notes that explain the method through which lottery winnings are to be paid. These are often sold at a bit of a loss to the owner, but also allow them to get a “lump sum” instead of a longterm payment.

• Marketing - the presenting of products or services in such a way as to make them desirable. This can include advertising, but also includes things such as SEO and social networking too.

• Mission Statement - the formal document that states the objectives of a company or organization, and which is a major part of the business plan.

• Mortgage Broker – the agency in charge of finding a borrower a variety of loan options for the purchase of a home.

• Mortgage Short Sales – this is an agreement between a borrower and the lender to sell a home for less than the remaining amount of the mortgage. This will terminate the contract and allow the borrower to be free of the debt even though they failed to repay it in full.

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• Mortgagee - an organization that lends money to a borrower by a mortgage agreement.

• Mortgagor - the borrower of money under a mortgage agreement • Negotiation – when used in real estate note buying it tends to mean the meetings through which buyers and sellers attempt to agreement on terms and prices.

• Networks – when connected with real estate notes networks tend to mean groups of colleagues and clients which also include potential investors and partners as well.

• Non-Performing Notes – this term describes notes that are more than 90 overdue and which are viewed as being unable to be collected except through foreclosure.

• Note Buying – the business of acquiring various kinds of notes in order to receive the income associated with them.

• Note Servicing – the business of collecting, calculating and disbursing payments for private notes, loans and other debt instruments that no bank, financial institution or escrow company has the time, capability to provide.

• Originator of Loan – this describes the bank or lender through which a loan is funded.

• Partnerships – when connected to real estate notes, partnerships are usually groups of two or more that work to acquire and collect the funds from a note, or to simply invest in them and “flip” them quickly for a profit.

• Performing Notes – these are notes that are completely up to date and which are considered reliable generators of steady income.

• Private Mortgage – this term describes a mortgage company or provider that is not an official lender such as a family member or a hard money lender.

• Promissory Note – this is a debt instrument that describes the manner in which a debt is to repaid and also the collateral on the loan.

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• Protocols – this term describes the steps used in any process or professional exchange, and is generally another way of describing an official “system”.

• Real Estate Notes – these are the debt instruments attached to real estate properties and which can be purchased or sold for profit.

• Re-Payment Schedule – this is the formal calendar by which a loan and all associated fees will be repaid.

• Re-Performing Notes – any notes that have fallen into nonperforming status but which have been repaid and which are also now “current are viewed as re-performing notes.

• ROI – Return on Investment. This is a measure of the amount of income generated when all fees and out of pocket expenses are subtracted from the total.

• Sale Contract – this is the official document that outlines the terms of a sales transaction and which describe the obligations and responsibilities of everyone involved.

• Second Mortgage – this is an additional lien or mortgage taken against a real estate property, and usually at a lesser amount than a primary mortgage.

• Secondary Market – this term describes the market for the purchase of notes of all kinds. They are not the primary or original owners and thus have the name of secondary market.

• Status of Loan – a loan can be current, late, or in foreclosure. This is an important factor to consider when looking into any real estate note acquisition.

• Target Market – this describes the group or groups of consumers that will be most likely to have an interest in a specific product or service being sold.

• Taxes – fees assigned by federal, state, and county agencies. These can include property and sales taxes, among others.

• Title – this is the document that shows official ownership of an asset or property.

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• Toxic Asset – any item that is non-performing or which is forcing the owner to take a loss is considered a toxic asset. For example, the millions of sub-prime mortgages are deemed toxic assets.

• Unsecured Debt – credit that is issued without any collateral.

Student loans and credit cards are unsecured debts.

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