Types of notes brokers and investors can pursue

timheadshotTim Fitzgerald’s
Cash Flow Business Tip of the Week

Notes generally fall into one of the following category types:

Seller financed




If I were starting out today, I could make an argument for pursuing any of these note types, so long as I am brokering and not buying the note for myself. The investor’s going to assume any and all of the risk, and I will have no risk. Worst that can happen to me (assuming I’m going about the transaction in the right way legally which is why I always use an institutional or corporate funder who does business nationally as opposed to a smaller, private investor) will be if the deal doesn’t happen and I make zero dollars (in which case I’m still learning by gaining practical experience as to what the investor will or will not buy).

Best that can happen is I make money on the referral fee if the deal does go through and all the while, I’m learning how to conduct due diligence and becoming familiar with all of the documentation necessary to close the note transaction.

Having said that, I cut my teeth on performing seller-financed notes and I would say you’ll do well pursuing this area at first because, for one thing, individual private note holders are easily reached by direct mail through court records and you’re dealing one-on-one when you get a call. You also (oftentimes) have little to no competition because very few brokers follow up with them after the initial wad of mail hits them right after the note is recorded. These people are generally easier to deal with for beginners. There is also no mark-up and there are no extra fees as part of the transaction like you’d see in the online note exchanges (more on this below). You set the purchase price that you negotiate.

On the other hand, the re-performing and non-performing loan market is dominated by a larger, more sophisticated crowd. As opposed to dealing with an individual note holder, you are dealing with a hedge fund manager who buys these delinquent assets in large pools from banks and GSEs and you’re going to need to talk their language, forge relationships and build lots of trust and cred.

Then there are the online note exchanges. I don’t like them for a number of reasons. For one thing (and this is a big thing), seller and borrower information is not disclosed until much further along in their process, i.e. after you’ve submitted an offer. I find that ludicrous because proper vetting is paramount to making good offers. I do not trust the note exchanges to do my vetting for me. Not to mention my abhorrence for mark-ups and extra fees as touched on above.

I also find it extremely unlikely that the vast majority (if not all) of private note holders would seek out these exchanges and “list” their notes there. Typically, private note holders (those who have taken back a note perhaps once in their lifetime which I believe make up somewhere around 99.9% of all of the individual sellers we’ve historically dealt with) need to be educated as to their options on managing and/or cashing out of their asset and how to go about it if that’s what they would like to do, and they simply lack the wherewithal to seek out and actively participate on these sites.

The vetting process is largely the same with any note; however, you’re going to find many more encumbrances on the title and more problems such as tax liens or other liens on the underlying property besides delinquency in the case of sub or non-performing loans. If you’re an investor in this arena, you’re going to need to develop a special knack for identifying fixable problems that others miss and crafting together deals. These skills are learned (nobody’s born with them) through experience and if you can ally yourself with a reputable funder who purchases non-performing notes and accepts leads from brokers, you can develop these skills through osmosis while you’re making money on the referrals.

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

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