What You Will Need
• A basic course. This can be live
or a "home study course" (a manual and tapes). I strongly
recommend both. Master the home study course first, then you'll get a
lot more out of the live course. If you have to choose one or the other,
get the home study course. Reason: the live course will get
you all pumped up and a month later you'll lose that enthusiasm.
A good set of tapes will be a resource you'll refer to over and over again.
However, the ideal is to first do the home study, then take the live course.
• A minimum budget of $5,000. 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 on your computer.
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
mortgage brokerage has one thing in common: they persevered at the beginning.
Since I have no idea how much you already
know about mortgages 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 MORTGAGE
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 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.
Contact MORTGAGE CONCEPTS for our current
recommendations for live courses in mortgage brokerage.
The ABC System To Mortgage Brokerage
If you simply follow my ABC System, you
can make money from paper 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 Mortgage 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
mortgage investment firm (or "lender). 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 mortgage 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 lender investor before the closing of the transaction.
Do NOT try to broker mortgages to private
lenders (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 mortgage 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
lenders. 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 lenders, non-conforming lenders, etc.).
Using the ABC System, you never use any
of your own money and you never actually own a mortgage 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 busioness. 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 lender'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 lenders at
first. Make it your business to know what kinds of mortgages different
lenders write and only give them those. You'll soon know who gives the
best quotes. k.
You'll notice that the worksheet asks for
a lot of information. All of it is needed by the lender 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 Lenders: How To Work With
Them
When the mortgage loan application passes
your initial inspection, your next step is to fax your worksheet to the
lender. 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 lender -- 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 applications 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 lender 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 lender 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
Mortgage 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 intangible 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 mortgage 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 client 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 MUST have a written marketing plan, and the basic
course you take should show you how to write one. Your goal should be
to market to people who think you are the only mortgage 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 Mortgage 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 client-finding tool I have is my filing cabinet, where
I have all the rejected loan applications.
Simply thank the client, make sure he 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. Ask about them
at a stationery store.
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
clients, 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.
Meet with the client 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 application 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 client away!
Once you have a signed application, fax
it to your lenderr immediately. When you get the documents, organize them
as you've been trained to do in a professional package and overnight it
to the lender. . Always make a copy of everything for your files.
Keep in touch with the lender; 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 mortgage 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.
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