Selling notes to investors: potential pitfalls

I always recommend people start out brokering notes before even thinking about buying notes for themselves. However, you want to be careful about who you broker that note to. Institutional investors are best- they know how to mitigate potential losses, as they assume all of the risk themselves– they have strong knowledgeable management and hedge on their own against losses.

Private investors, on the other hand, are a much more plucky, finicky lot, more prone to potential errors (in many cases due to inexperience) and will likely come after you to be made whole if, down the line, the note defaults, something is misrepresented or a host of other things occur that can potentially go wrong.

I’m not trying to steer you away from private investors as a longer- term partner-forging strategy, but I want to make sure you really know what you’re doing before you go seeking out people you don’t know well or even worse, people who know less than you do. You can run afoul of securities violations if things are not done correctly and to the letter. All in all, the very best risk-mitigating strategy by far for the newer broker is to work exclusively with institutional investors, at least until real practical experience is acquired as to how and how not to do things.

Also, institutional investors know how to operate within the legal framework which is some cases call for certain types of licensing. Let the institutional investor handle all of the backend purchase details. They work with broker referrals from all over the country and they will not work with a broker if there is anything at all that may preclude them, legally, from buying a note and paying out a referral fee to the broker.

To find these institutional investors, one can attend any # of note-related conventions held every year, where the most active investors roll out the red carpet for brokers at their booths, exhibits or sponsored events and you can learn about broker programs or incentives they have, how to go about requesting quotes, what degree of help for new brokers they may offer, what types of notes they are looking for (mortgage notes, inheritances, boat paper, etc, etc).

Or, more easily, you can get involved with programs like this one.

Once you obtain the necessary quote request or note submission forms, when you find a note you’ll request a quote and you’ll learn from their responses and by interacting with them as to what they’ll quote on, what they’ll pass on, what their preferences are and why, what’s good, bad, etc.

Granted, you’ll be going through a learning curve, but the big key is that there is no risk on your part. I cannot overemphasize this– the investor is assuming all of the risk for note purchases that go through. They are funding the transaction with their own money; you are not putting up one dime of your own money. The worst that can happen to you is that the transaction does not go through or is “no quoted’, etc. In which case you are learning (at no cost to you except for a little time) what NOT to go after as well as what TO go after.

You will discover soon enough that every note is different. That’s why I recommend doing at least 12-24 transactions with institutional funders before you even think about going outside of that crowd and selling to a private party. One or two dozen note transactions by no means will totally prepare you for anything you’ll ever see, but it’s a whole lot better than starting from scratch.

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