When we ended Part One of this formula, we had figured out how to find paper to buy so that we can “Flip” it and get some of that Cash Flow. Just as we discovered how to find and buy Real Estate paper, which we will refer to as “Notes”, we will more or less use the same tactics to find someone that we can flip these notes to, for a profit. Good sources are Realtors, Real Estate Attorneys, CPAs, Financial Planners, Stock Brokers, Loan Officers, etc. However, the best probable way is the old “Ad in the Newspaper” formula. You could advertise with words like “Real Estate Note For Sale” or “Investor Needed To Purchase Real Estate Notes”. Check the newspapers and Yellow Pages for ads like “We Buy Notes” and/or “Top Dollar For Your Notes”. In other words, look for the same ads we saw and used to find Notes to buy & flip.
When you find an Investor or Note Buyer, you need to determine the requirements and perimeters of the Note Buyer, such as:
What kinds of properties will they accept as security for the note? For example, Single Family houses, Land or Lots, Apartments, Commercial Property, or Mobile Homes with or without Land.
What kinds of minimum yields do they want from the notes they buy? This will vary based on many factors, such as security for the note.
Investors will want greater yields on higher risk notes. For example, a note secured by a Single Family, Owner-Occupied (with excellent pay history) would probably require the lowest yield, let’s say 12% return on the investment. On the other end of the scale might be Raw Land, wherein an investor may require 18% or 20%. In this article I’m not going to get into how to calculate yield. I will, however, recommend that anyone interested in these types of deals purchase a good financial calculator or software.
Examples of other things an investor may require are Title Insurance, Appraisals, Credit Reports, Casualty Insurance, etc. These things discussed above need to fit the investor which you may be dealing with.
OK, so now we have found a note to buy on a Single Family house. The face amount of the note is $80,000 with 10% interest payable monthly over 20 years. You know that the “Going” investor yield requirement for this type of note is 12%, which you could sell this note for $70,115. So for you to make a profit of , say $4,000, you offer and get accepted a bid of $66,115. You should actually get a written contract to buy the note from the owner, preferably an “Option To Purchase”. You have to keep in mind who is going to pay things like Title Insurance, Closing Costs, etc. If you are going to pay for these costs, you better subtract the amount of these costs from your offer to the owner of the note. Investors do not normally pay these costs.
What you are going to do is have a “Double” or almost simultaneous closing wherein you will close with the owner of the note first. Then a few minutes later you close with your investor who is buying the note. The closer(s) will then disburse the funds; $4,000 to you, and $66,115 (less Title Insurance fees & Closing costs) to the note seller. Actually, I found it works better if I paid these costs and bought the note at a lesser price, say $64,500. Sometimes when people go to a closing they become unhappy when they realize they’re receiving less money that they thought they were going to.
I know I’ve covered a lot here that seems complicated, and it is – a little; however, once you’ve done a few deals it becomes routine. I remember when I first started trying this. I became discouraged and it took me a few months to close my first deal; however, since that time I would estimate that I’ve bought and sold over 6,000 notes – And most of those, one at a time. Of course once my volume increased I hired people to help me.
The note business is a great and very interesting career; Something new or different all the time. One thing I want to stress is that it is very important to have that double closing so that you actually own the note, even if only for a few minutes, before you sell it to your investor.
I will be publishing a book in the future, showing in detail how to thrive in this great business. I will be selling the book for a nominal price, which at this time I haven’t determined. It will depend on how much time I put into it; however, I want it to be as complete as I can make it. I’ll tell you this, if a person enthusiastically gets into this business, the business will always be there with excellent financial returns.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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