Mailbag: How much money can I make as a note broker?

>>> QUESTION: HI Tim, How much money can I make as a note broker? What is the average discount or buy rate on a note? And, what is the best way to find notes for sale?
Thanks, George

>>> MY ANSWER: Assuming a 1st position seller-financed note in the current market, 80-90% Loan to value, depending on borrower credit, seasoning, terms, etc., we’re seeing broker fees falling anywhere between $2,000 at a minimum to $10,000 on the high side, with an average investor buy range of somewhere between 0.70 and 0.80 cents on the dollar.

Which is the highest price we’re seeing today for grade A performing notes on the secondary market, with current note terms for seller financing being written at the very least somewhere around 9% which is around 5% higher than a conventional loan in today’s market. Investor yields on seller-financed notes are running at a minimum of 11% and often higher.

What I really like about real estate notes is that you don’t have the volatility of an investment in, say, a U.S. Real Estate Investment Trust which, broadly speaking, is now yielding around 12.99% but HAS run quite a bit lower and WAS actually TRAILING the S&P 500 as recently as the 1,3 and 5 year periods ending August 31st, 2013. (The S&P 500’s average return historically runs somewhere around 10%.)

Our particular niche, note investing, actually beats the S&P and is buy-and-hold at a fixed, pre-determined rate (but, at the same time, being quite liquid, it CAN be sold quickly for a lump sum) and is ALSO secured by real property, so the note holder CAN expect an eventual payout SHOULD there be a default. Conversely, alternative investments such as REITs or stocks tend to be considerably more volatile, as their value (and dividend yield) can fluctuate with the market.

It’s fair to say that I LOVE the note market. It’s quite fluid; my best guesstimate is that our primary institutional funding sources, collectively, are currently purchasing upwards of $40 million dollars’ worth of product per month. This is a fantastic time to be in the note business! And, we’re seeing SOME experienced, higher volume brokers averaging as much as $5,000 per note transaction although this is going to depend on your level of experience in the marketing and negotiating end.

To be sure, there are many variables involved; every property and payor is different; so deal flow is the big key here to success and the top earners that I’m interacting with every day almost always have deals in the pipeline at various stages along the buy process. I love this business, I love my subscribers and we’re constantly learning from each other which is the way it should be!

In terms of what I tend to focus on, my bread and butter products right now are individually-held, performing first position seller financed notes that were taken back by the property seller.

And, as of now, my preferred criteria for notes on these types of residential properties are:

• – At least a 10% CASH Down Payment at the time of origination (and 15% or more for a non-owner-occupied property)
• A 9% Interest Rate or higher at this time – A 30 Year Amortization with perhaps a 7 Year Balloon –
• A Buyer Credit Score of 650 or higher (and at least 675 for non-owner occupied)
• A Minimum 3 Months Seasoning but I can begin my due diligence process after the first payment has been made
• The Property MUST appraise for the original sales price or higher through my preferred appraisal companies.

Direct mail is where I’m currently getting approximately half of my business from… the key is using a good list company and sending the right message which has always been true and my subscribers really have this down to a science.

Try to go for a newer, fresher list of names, no older than 3-6 months (or perhaps 6-12 months if you’re looking to cast a wider net-)- I’ve found the response rate tends to go down for anything older than that.