How to determine in the first few seconds if you can make money on a note, and then go on to further qualify the seller and determine their level of seriousness

timheadshotTim Fitzgerald’s
Cash Flow Business Tip of the Week

Also how to not waste time on duds and zero in on the good notes only

workable-note-dealWhen somebody calls you with a prospective note deal, what you want to do is establish within the first few seconds whether or not this is a workable deal.

What you want to do is zero in on the notes that are going to work.

To this end, a really quick question which I like to ask right off the top is really a twofold question:

1. “Are you collecting payments on [this note, this mortgage, or whatever the cash flow is] now? “

2. “What are the payments and how many are there?”

What you don’t want to do is waste time on deals that are absolutely not going to work. I see people gathering information and getting papers on deals that are absolutely not going to work.

Just to give you one example, you’d really be surprised at how many people will call you regarding a note they’re making payments on and they think that it can be sold. In other words, they are the payor, not the payee.

This actually boggles my mind and has me scratching my head, but you are going to get calls like that (and I’m not sure why exactly why that is) so, at any rate, what you want to do right off the top is ensure that they are collecting payments on the mortgage now– not paying on it.

So, just to reiterate, the questions are ‘what are the payments and how many are there” and “Are you collecting payments on a note now or are you collecting payments on the mortgage now”.

If these initial things check out, then you can continue the conversation.

(At this point, I need to throw in a piece of advice: Don’t even think about buying a note for yourself until you’ve brokered at least a few transactions first. This is how you learn the process. Ally yourself with a professional note investor and learn by watching what they do. More on this below.)

What you want to do is use an intake sheet or a note submission worksheet either supplied by your favorite funder or one of your own, and then just follow the sheet and trust that the parameters on the sheet will give you everything you need to know in order to make a proper evaluation.

Even a first-timer can do this. Don’t worry about what you don’t know yet– just “paint by the numbers” (go through all of the questions on the sheet)- there’s no risk on your part– the worst that can happen is that the funder “no quotes” it, and the best that can happen is that you’ll earn a referral fee. You can’t make a fatal mistake, so enjoy the process and you’ll learn by osmosis.

Among other things, you want to establish, in fact, how many payments have been made, how many payments remain, what is the outstanding balance of the note, what is the interest-rate, what is the payment amount, etc.

If, at this point, this looks like it might be a workable deal (and you’ll develop a feel for what a workable deal is the more you do this by assessing the answers you get back from the funder as you submit these), you’ll want to get a pretty good feel as to whether the note seller is serious or not, so what you want to do is ask for copies of three things: copy of the note, copy of the mortgage, and and copy of the closing statement.

Any serious seller is going to give you those three things. (You’re looking for copies at this point; you’re not looking for the original documents. Those will come later if there is an offer and it gets accepted.)

(If the caller tells you they don’t know where the documents are, you can tell them that the attorney who handled the closing would have them on file.)

So when you have those three documents, I recommend you perform the calculations yourself on the financial calculator and match your numbers up with the numbers that are given to you verbally (calculate the payment amount, current balance, etc. based on the terms of the note)– this way you can determine as to whether everything is on the level and if all the numbers make sense or if you need any additional questions answered, etc. etc.

When you have all of this information, and everything seems OK to this point, then you’ll also have a complete note submission package so that if an offer is accepted and you ultimately submit it for purchase, you’ve already got everything assembled properly for the funder.

You’re learning by watching the institutional note investor complete the deal. I recommend you keep a file on all of the backend paperwork (you’re entitled to see that document package since you are the broker), watch, observe and see how it’s all done and then with every subsequent deal, you’ll build a similar file.

So, then, while you’re earning referral fees as a broker, all the while you’re learning the entire backend evaluation and purchase process from the professional funder. This experience is going to become invaluable to you when you’re ready to invest in a note for yourself once in a while. You’re earning money now and, all the while, you’re not only learning the differences between a good note and a bad note, but also you’re familiarizing yourself with all of the necessary documentation that you’ll need to invest in your own deals down the line.

Tune in to for Tim’s regular posts and columns on notes, investing, and personal wealth building. You can email him here.

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