What You Will Need
• A minimum budget of $1,000. This
is not a business you can start with no money.
• A computer, e-mail, fax machine
and a good quality answering machine or voice mail.
You don't need a Ph.D. to understand the
material. It's actually pretty simple, although it may be confusing when
you're just starting out. You'll be learning some new terms, but don't
let that get in your way. Remember, this is new to everyone at first.
The key is to stick with it, especially through the hard parts at the
beginning. Everyone I know who is successful in
cash flow brokerage has one thing in common: they persevered at the beginning.
Since I have no idea how much you already
know about cash flows I've put together a little quiz. If you pass, you
can jump right into the system. If you don't, you need to prepare yourself
a bit more before you take the plunge. It's sort of a test to see if you
need anything else.
HOW MUCH DO YOU KNOW ABOUT THE NOTE/CASH
FLOW BUSINESS?
As security instruments for real estate,
does your state use: a) mortgages, b) trust deeds, or c) some form of
contracts for deed?
What is the usury ceiling on a real estate-secured
transaction in your state?
Define "the right of redemption." What
is the period in your state?
What are the steps in the foreclosure process
in your state? How long does it usually take? About how much would it
cost to foreclose on a $30,000 note?
I. What's the loan-to-value ratio (LTV)
on a $125,000 property with a first lien of $75,000?
II. What's the LTV on a $240,000 property
with a $130,000 first and a $72,000 second?
III. What's the investment-to-value ratio
on the above if you were to buy the second for $51,500?
What are generally accepted safe ranges
for ITVs?
Everything else being equal, which is more
valuable:
I. A $10,000 note at 11% fully amortized
over 5 years;
II. A $10,000 note at 14% paid interest-only
with a balloon in 6 years?
Everything else being equal, which is the
better note:
I. A first lien on a plush apartment building
with lots of equity;
II. A first lien on an average owner-occupied
house with adequate equity?
Everything else being equal, which is the
better note:
I. A second lien of $10,000 on a $50,000
house (the first lien is $30,000), giving you $10,000 equity or 80% LTV;
II. A second lien of $10,000 on a $500,000
house (the first lien is $300,000), giving you $190,000 equity or 62%
LTV.
(Answers in the Appendix)
On Courses
There are very few people who teach courses
worth taking. General rule of thumb: the higher the price, the less the
value.
The lack of a decent live course is no
great loss. A good course of study you can do at home at your own pace
has many advantages, especially in that you can go over the material again
and again until you master it.
The ABC System To Cash Flow / Note Brokerage
If you simply follow my ABC System, you
can make money from paper (notess, cash flows) with very little risk:
ADVERTISE for paper anywhere
and everywhere you can. While newspaper classified and mailings can be
productive, the most effective advertisement of your business is through
networking with real estate agents, lawyers, bank trust officers, accountants
and anyone who can refer clients to you on a continuing basis.
BE organized when people
respond. Have a cash flow Worksheet by your phone, and ask for the information
you need to complete the Worksheet. Thank the caller and tell them you'll
analyze the information and call them back shortly.
CONTACT a professional
cash flow investment firm (or "investor). Fax them your worksheet
and any other paperwork on the loan request note you have. If the request
meets their criteria (which you should know before you fax them) they
will quote it. You make your money by charging points (a point is one
percent of ther loan amount). Each state sets the ceiling on the number
of points a cash flow broker can charge. You will also be expected to
gather all the documents,INCLUDING THE LEGAL DISCLOSURES REQUIRED BY REG
Z, and send them to the investor investor before the closing of the transaction.
Do NOT try to broker cash flows to private
investors (individuals investing their own money, small pension funds,
etc.). This is a specialty in itself. The liability is too great for any
but highly-experienced cash flow brokers, and even they have to learn
a whole new set of rules to do it safely.
This is the simplest way to start. As soon
as you can, I want you to do it differently, because you'll close far
more deals, but this will get you started. Using the ABC System, you avoid
liability, use none of your own money, make profits and learn from institutional
investors. Only when you've done this over and over and over again and
know exactly how the professionals work are you ready to explore other
venues (private investors, pension funds, etc.).
Using the ABC System, you never use any
of your own money and you never actually own a note, so if something goes
wrong, you haven't lost any money. The professional reviews the note with
you, tells you its strengths and weaknesses, orders and pays for the title
search, appraisal and credit check and handles all the details. You work
with the professional, ask questions, review the paperwork with him and
learn: And make money in the process! Every time you do this, you'll learn
more and more about the business. Even if the pro rejects the application,
you'll still learn, because they'll tell you why they're not interested.
A couple of caveats: Don't waste the investor's
time with obviously unmarketable applications. The home
study course I recommend and your own experience will train you to
spot such applications in 30 seconds or less. Make sure you are working
with a "real deal."
Don't try to work with many investors at
first. Make it your business to know what kinds of cash flows different
investors want and only give them those. You'll soon know who gives the
best quotes. The PAPER
SOURCE REGISTRY OF NOTE INVESTORS will be invaluable to you for this.
You'll notice that the worksheet asks for
a lot of information. All of it is needed by the investor to be able to
give you an accurate, dependable quote. After all, you don't want the
quote to change later because you didn't get the necessary information.
Institutional investors: How To Work With
Them
When the cash flow loan application passes
your initial inspection, your next step is to fax your worksheet to the
investor. Now, I'm not talking about your Uncle Fred, I mean one of the
major national firms, the largest of which are known in the business as
"institutional investors." The firm will usually respond within a few
hours, sometimes less, and the response will be either a quote, a request
for additional information, or an indication of no interest. If you have
pre-qualified the investor -- call your contact there and say something
like, "I know you're busy, and that's why I don't want to waste your time
in the future bringing you notes you don't want. Can you tell me why you
turned this down?" In this way, you'll learn even from the notes you can't
sell.
When you do get a quote, be sure to ask
if it is "net" or "retail" -- in other words, do they pay all
closing costs. Many offer you an option: a higher quote if you will agree
to pay for the closing costs and be reimbursed by the investor when the
transaction is finished. That's a "wholesale" quote. The risk is yours
if the transaction falls apart and you will end up paying for the title
search, appraisal, credit check and any additional costs. You'll make
more money with a wholesale quote because you are taking the risk.
As a new broker, take the retail quote.
When you have more experience you'll be ready to take wholesale quotes.
Ask the investor if he wants to use his
own paperwork or if yours is acceptable. If he insists on his own, have
him fax it or overnight it to you - time is of the essence. Now is also
the time to find out if he has any other forms for the applicant to sign
or if he wants any documentation other than what is on your checklist.
Cutting Costs Too Much Will Kill Your
Note Brokerage Business
In today’s competitive
market you’ll be tempted to cut your profit margin drastically just
to get the deal. Don’t do that. I have seen people
who have gone out of business because of it. You cannot remain in business
by making only $500 on deals. You have overhead that will eat up
that profit and leave you with nothing except losses. You cannot stay
in business being the cheapest broker in town. You will not succeed in
the business by trying to beat your competition every time and "making
it up in volume." Maybe that works in selling groceries, but not in this
business, and the reason is that your transaction costs, especially the
cost of your time, are high for every deal. You might want to pin these
cash flow brokerage business axioms up on your wall:
* No matter how low you quote the deal there is always
a newbie out there willing to do it for less.
* The more you cut your price to get business, the more likely
you are to go out of business.
* The more you try to compete on a price basis the lower your
prices will go. Corollary: Your income will follow.
* The bigger your yellow pages ad, the more low-priced calls from
non-repeat customers you will get.
* Increasing your ad size increases the percentage of low profit
calls you get.
* The prize for beating out all of your competitors for the biggest,
most expensive ad in all of the different yellow pages books is bankruptcy.
* The more you advertise that you have 24 hour service, the more
security guards and insomniacs will call you in the middle of the night
with requests for price quotations.
* Advertise as a 24-hour service and you will get angry calls
from people who stopped by your office at four in the morning and you
weren't there.
* Your best apprentice will quit and open an office across the
street and cut your prices.
* The one who is untrainable will stay with you forever.
If you find yourself having to lower your
offers frequently because the note holder says he has a better offer,
then you need to change your marketing plan.
Marketing Plan? I Don't Know Nothin' About
No Stinkin' Marketing Plan!
What marketing plan, you say? There’s
the first problem! You should have a written marketing plan. Your goal
should be to market to people who think you are the only cash flow broker
in the world, not to those who are working with every other broker in
the world. I call this YATM -- "You Are The Market."
The Cash Flow Broker's Most Useful Tool
Believe it or not, you can make money from
your rejections. This is where most brokers fail. I've always said that
I the most useful note-finding tool I have is my filing cabinet, where
I have all the offers that were rejected by note sellers.
When everything you've tried fails, simply
thank the note holder, make sure he/she has your phone number, and file
his name and number, along with the intake sheet and a summary of the
rejected deal in a tickler file. Contact him again in a month and try
again. If not, put him back in the tickler file and try again 4-6 weeks
later (not so soon that you bother him, but not so late that he's forgotten
you). If you're not familiar with tickler files, you're missing out on
a terrific organizing tool. It's simply an accordion file with 31 tabs,
one for each day of the month. Have 12 for each month of the year. Every
morning, look in your tickler file to see who you have to contact that
day.
What if the client asks you questions you
can't answer? Well, so what? You're not pretending to be the world's foremost
expert, so relax. Tell him that you don't know the answer, but you'll
get back to him. If he had doubts that makes you less threatening to him
and helps to make him more comfortable. As you talk with more and more
note holders, you'll begin to anticipate their questions. To help you
know what they may ask you, I've put together a list of the most common
questions with my suggested responses. They follow below.
Meet with the note holder right away!!
This is CRITICAL. . Don't let time pass while he assembles the documents
you need; he can do that after he's signed the contract. Your face-to-face
meeting to sign the contract is a good time to give him a list of the
documents you'll need to close the transaction (see the Transaction Checklist
that walks you through the documents). Don't let the him become intimidated,
however. If you see that happening, just put the Checklist away and tell
him you'll just need copies of everything he has relating to the property
transaction. Reassure him that if he doesn't have the documents you need
it will be no problem, since you can get them from public record or from
the attorney or title company that handled the original settlement. Don't
scare your note seller away!
Once you have a signed application, fax
it to your investor immediately. When you get the documents, organize
them as you've been trained to do in a professional package and fax it
or overnight it to the investor. Always make a copy of everything for
your files.
Keep in touch with the investor; this is
vital to your education. But don't bug him. Ask him to keep you posted
on the hows and whens of the appraisal, title search, credit check and
any other processes. Feel free to ask questions -- remember, he's making
money because of you.
That's it: the ABC System of cash flow
brokerage.
This can truly be one of the most important
steps you will ever take. It has been for hundreds of people. Just
like starting any small business, it takes common sense and, most of all,
iron-willed determination. Above all, always remember to "Trust in
the Lord with all your heart, and lean not unto your own understanding.
In all thy ways acknowledge Him, and He will direct your steps."
(Proverbs 3:5,6)
APPENDIX
ANSWERS TO THE TEST
I have no idea - ask someone familiar with
your state's law.
Same answer.
The right of redemption is the right of
the foreclosed-upon property owner to cure the deficiency and regain his
property. Each state establishes the time in hich this may be done, from
a few weeks to a year. Some states have no right of redemption. In general,
you should avoid notes secured by property located in states with long
redemption periods. In case of default, you can't be certain you have
the property until the period expires.
Again, this is something you'll have to
find out from a local attorney familiar with real estate law.
I. 60%. Divide the balance of the first
lien ($75,000) by the property value ($125,000).
II. 85%. When there is more than one lien,
add up the totals ($130,000 + $72,000) and divide by the property value
($240,000).
III. 76%. To find the investment-to-value
ratio, use the purchase amount of the note, not the note balance. In this
example, add $130,000 and $51,500 (not $72,000) and divide by the property
value.
Conservative ITV guidelines are: no more
than 75% on a single family house or an apartment building with four or
fewer units; 65% on larger apartment buildings, commercial or industrial
property; 50% on raw land or a single family house outside your local
area (unless you are selling the note to a professional); 40% on mature,
developed lots in recreational areas. Venture beyond at your own risk.
The note with 11% interest is worth more
than the note with 14% interest! All other things equal, a fully-amortized
note, since it is paying back some of the principal each month, is more
valuable than an interest-only note. If you use a note calculator and
discount each of these to yield 18%, you'll find the 14% note is worth
$8,538.51, while the 11% note is worth $8,562.22. An amortized note is
worth more for another reason. The interest-only note payor may not be
able to make the balloon payment when due, especially if it is a short-term
note. Most note payors plan to refinance their property to pay their balloon,
and are counting on appreciation in the property to provide them with
enough equity to make that refinance possible. The sooner that balloon
is due, the less likely that is to happen. That's why, for example, most
note investors stay away from notes with small payments and a huge balloon.
The note on the house is better, for two
reasons:
1. The person who is paying on a note secured
by his own home is less likely to default than is someone paying on an
investment property such as an apartment building. It's a lot easier to
lose an investment than it is to lose your family's home.
2. There is much more demand for single
family homes than there is for apartment buildings. If you had to foreclose
on either one of these, you'd be much better off owning the home since
it would be easier to sell or rent. Remember, to get 100% occupancy in
a single family home, all you need is one tenant.
The first note is better for most people.
If you had to foreclose, you'd have to make payments on the first lien
of $30,000 until you sold the house. If you owned the second note and
had to foreclose, you'd have to make payments on the $300,000 first lien
until you sold. That's great if you can afford it; most people can't.
W. J. Mencarow is the editor of THE
PAPER SOURCE JOURNAL and president of The Paper Source, Inc., which
he co-founded with his wife and business partner, Alison, in 1987. In
addition to numerous articles in his newsletter and other publications,
he is the author of the guidebooks "How To Get Started In Notes Without
Using Your Own Funds," "Almost Everything That Could Go Wrong
With A Note and How to Prevent It" and several seminars. He received
the Founder's Award for starting the first nationwide paper
publication and first national convention, and was inducted into both
the Mortgage Report Hall of Fame and Metropolitan Mortgage's Note Industry
Hall of Fame.
His opinions on financial and other matters have been quoted in The
Wall Street Journal, Newsweek, Time, Life, The Washington Post, New York
Times and many other media outlets, both print and broadcast. The
nation's best-selling personal finance author, Newsweek columnist Jane
Bryant Quinn, wrote, "William Mencarow is an expert on real estate
notes."
(Newsweek 8/22/00)
He served as Minority Counsel and Staff Director of the Subcommittee on
Government Operations of the U.S House of Representatives during his career
with the Congress in
Washington, D.C. He was the principal Republican staff member during a
wide-ranging investigation of President Reagan which ended in an exoneration
of the President.
During his public service he also was the press secretary and legislative
director for members of Congress, having responsibility for the drafting
and shepherding of many bills that became law. Healso worked exposing
graft and corruption while an investigativeresearcher in the Executive
Branch of the federal government. He and his wife-to-be Alison met on
Capitol Hill when they were both Congressional press secretaries.
"People often ask me what I learned working in Congress,"
he says. "I answer with a question: If the opposite of "pro"
is "con," then the opposite of "progress" is..."
Before his congressional service he managed over a dozen political campaigns,
was a Field Director for Ronald Reagan's presidential campaign, served
as the coordinator for all Reagan volunteers at the Republican National
Convention, and served as Senior Advisor to the Presidential Transition
Committee. In addition, he was a television and radio talk show host for
eight years in the Chicago area and a producer for NBC.
During his political career he appeared on many radio and TV programs
including "Good Morning America" and most networks and major
U.S. newspapers. He has engaged in numerous formal debates before audiences.
His opponents have included Jane Fonda, Gore Vidal, Dr. Paul Ehrlich and
many others.
He believes his highest political honor came when a speech he wrote
for a member of Congress was attacked by Pravda, the official newspaper
of the Communist Party of the former Soviet Union.
He is now an ordained minister and pastors Reformation Church, a conservative,
Bible-believing congregation (/www.WorldUnderChrist.com).
His sermons are posted at http://reformation.sermonaudio.com
He and Alison give glory to the Lord for all He has done in their lives,
whether from a human perspective they are "good" or not (see
www.papersourceonline.com/fire.htm):
"And we know that all things work together for good to them that
love God, to them who are the called according to His purpose. For whom
He did foreknow, He also did predestinate to be conformed to the image
of His Son, that He might be the firstborn among many brethren."
(Romans 8:28-29)
"Trust in the Lord with all thine heart; and lean not unto thine
own understanding. In all thy ways acknowledge Him, and He shall direct
thy paths." (Proverbs 3:5,6)
|
by
W. J. Mencarow, editor of