The business of flipping discounted notes, mortgages and cash flows requires some easily acquired knowledge and skills but requires little or no cash—and none of the hassles associated with owning real property. That is one of the many reasons the discounted cash flow business requires serious consideration.
The best time to be in the discounted cash flow business is RIGHT NOW. If you have never been involved with paper, or have tried in the past without success, now is the time to get involved. The discounted paper world is changing rapidly and creating many opportunities for you for a number of reasons, not the least of which are the rebounding real estate market coupled with record demand for cash and the ongoing conventional lending crunch.
The latest figures from the Federal Reserve tell us that seller-financed real estate notes in the marketplace now number in the billions of dollars (and are snowballing); not to mention trillions more dollars’ worth of non-real estate notes (also growing at an exponential rate). Our business focuses on tapping into all of this by creating a win-win-win situation for you (the broker), your client (note seller), and the funder(s).
Let me first explain what a discounted cash flow transaction is for those of you who are not familiar with this concept
Step #1–Find someone who has either:
A. sold a property or a business and as part of the transaction has taken back a mortgage or seller-financed note;
B. been awarded a court settlement or lawsuit award and is now collecting monthly payments;
C. is receiving other types of income streams in the form of installment payments (i.e., accounts receivables, invoices, lottery winnings– the list goes on and on)
For any number of reasons (probably because you told them it was possible), they are now willing to sell that mortgage, note or payment stream in exchange for immediate cash.
Step #2–Find a buyer for that payment stream.
Step #3–Facilitate the transaction.
Step #4– Pocket the difference between what the seller wanted and what the buyer would pay. This may be somewhat simplified, but there really is not a lot more to it once you know what you are doing.
Go with a Pro
We highly recommend that you flip cash flows only to professional institutional note buyers. There are several reasons for this. Professional buyers put up all of the money, do almost all of the work and take all of the risk. As far as we’re concerned, those are the only reasons you need to be in this business. The discounted cash flow/note business has dramatically changed in the last few years when more and more institutional buyers entered the market. Our best guesstimate is that our primary institutional sources are buying in the range of over 40 million dollars’ worth of cash flows per month.
Some of the commercial buyers make you conditional offers on the payment streams you bring to them, as long as you provide them with information such as amount, terms, number of payments made, number of payments remaining, etc. None of this is very difficult.
When the note seller accepts your offer (what the note buyer has offered less your profit), it is now your job to collect the necessary information such as copies of the contract, the note, settlement sheet if applicable, etc. After you have collected the necessary information, the commercial buyer then takes over and does all of the things you do not know how to do. They order credit reports, do title searches, order appraisals, prepare all of the settlement documents and a lot of other things.
Best of all, they fund the transaction and pay you the difference between what they offered for the right to collect the future payments and what you offered the note seller. For example, if they were willing to pay $100,000 for a mortgage and the note seller was willing to accept $95,000, your profit would be $5,000. They really do not care how much you make. I suggest that you remain reasonable, do not try to get rich on every deal and you will make your fair share of transactions.
When Things Go Awry
Things do not always go as planned. There are instances when the institutional buyer discovers that there are problems with the transaction. These problems range from innocent mistakes to outright fraud by the note seller (can you imagine such a thing?). What happens now? Who gets stuck with all of those expenses that were incurred along the line if the deal breaks down? Guess what?! The commercial note buyer does, as long as they agreed to this in advance. Now, that is really a good deal!
Another recommendation we would make is to start this business part time. This is a business that has a way of growing slowly but steadily if you will just stick with it. Starting part time has a way of reducing the pressure and the need for immediate results. In this business, instant success is the exception and not the rule, regardless of what some gurus would lead you to believe.
Let’s talk about what you need to get started in your discounted cash flow business. There is one absolute necessity that you cannot do without, and that is a phone. We do not know how you could run this business without one. What we are really getting to here are all of the things you do NOT need to start your business. We have seen many people pay big money to buy into a business or franchise opportunity, but that is often only the beginning. There may be many additional necessities to operate that business. A location to operate the business may be needed, which can be costly and may obligate you for a long period of time whether your business is successful or not. You may be required to stock inventory, buy equipment, hire people, etc.
Many people run their discounted cash flow businesses for many years without taking on any of these obligations– no employees, no inventory and very little equipment. Besides a phone, which is a must, you should, of course, have voicemail with a professional greeting (unless you can take every call), and a computer with scanner or fax. You can literally run this business from a card table in a rented room where you are living.
This business offers tremendous freedom. You can work out of your house if it suits your lifestyle. You can roll out of bed when you want to, and you are at work. However, if you like to travel, you can do this business from any location and never skip a beat.
As long as you have a cell phone, you are in business. This business knows no geographical boundaries. You can successfully close transactions from Hawaii to Alaska to Pennsylvania and so on. The best part is that you can do it all regardless of your physical location.
A Tax Break
A report of this nature would be incomplete without mentioning the enormous tax benefits that accrue to those who have their own business, even if it is part time and especially if it is out of their home. I am not an accountant or attorney, so I will leave the sophisticated tax lessons to those more qualified than I. But I do know that too much wealth is eroded by taxes, and one of the best, if not the best, defense against this is having your own business. I have been told that the average person can save about $5,000 per year just by having their own business.
It is better to pay your children to work for you than to pay them an allowance; it is better to be able to put $30,000 per year toward your retirement than $2,000; it is better to be able to write off gas mileage starting from when you leave your house rather than from when you get to your business destination; and on and on.
A Very Simple Business
This is really a very simple business. You find someone who has something they probably do not want and match them with someone who wants what they have, and you get paid handsomely for that service. What is nice is that you can do this without ever leaving home.
There is one final benefit that I would like to mention, and it is an important one. Two things are happening simultaneously as you become more experienced and close more discounted note transactions. (1) You become an expert in discounted cash flows. By working with the institutional buyers, you learn to tell the difference between good and bad transactions, what documents you need, what research needs to be done, etc. In other words, you are being taught all of the intricacies of the business by experts. (2) The best part is while you are learning, you are getting paid. So, when a really good note comes along, you are in a position to invest in that note for your personal portfolio at rates of return other people do not even dream about. This is the way you create wealth. It does not get any better than that!