I want to share a case with so many twists and turns that it offered a whole series of lessons. Along the way, I’ll add a few other tricks of the trade I’ve picked up: dealing with an angry payor, mailing for recognition, protecting your residual interest, choosing your image and finding new sources of money.
The $19,000 note that wasn’t a simple first
It all started with a simple $19,000 note secured by a mortgage on a $57,000 property. Or so I thought. The person who brought me the note had tried to sell it to someone else, only to find that they couldn’t get title insurance on it.
When we dug into the problem, we found that the note came from a divorce settlement. We also found that the wife, a real estate agent, had placed a new $88,000 loan on the property right after the divorce (the property had apparently gone up in value). The bank making the loan thought it was in first position. So did the title insurance company, which insured the bank’s note as a first.
If the $19,000 note is a second, it becomes a lot less attractive. As a first, it represents a loan-to-value position of 33%. That sent us scurrying to read the divorce decree, the court-ordered basis for the note.
Reading the divorce decree
The $19,000 note was a 6% interest-only note with no payments until the youngest child turned 18 or was no longer attending an accredited high school. The wife wanted to sell off two of the property’s 11 acres.
The decree said she could do this if, when the sale closed, she paid the husband $6,000 and gave him a new mortgage for the remaining $13,000. Handled that way, the new note does become a second. That means no sale for the note.
The husband, guided by my referral source, went back to his lawyer and showed him the mistake in the procedure. The attorney went back to the judge, who corrected it with a nunc pro tunc entry. The new order said that when the $6,000 was paid, a partial satisfaction of mortgage would be recorded and a substitute $13,000 note would be given in place of the original. Now it appears the bank holds an $88,000 second.
Even after these corrections, the bank’s title company refused to issue title insurance. We had to go to a second title company to get it underwritten. Divorces and estates are the two situations most likely to raise title questions, and this one got trickier by the minute.
How the deal closed
The $6,000 has now been paid, and we are closing on the $13,000 note. My referral source had originally told the seller she could get him at most $10,000 for his $19,000 note, and when she first took it to market she stood to earn only a $500 referral fee.
Instead, she and I are splitting a $4,000 profit on the transaction, and we are paying the seller $5,283 for his new $13,000 note. Together with the $6,000 he already received, he walks away with more than $11,000.
Lessons from the divorce note
There are many lessons in this case:
- Tenacity pays off in solving problems. Just be sure the time and effort are adequately paid for.
- Reading pays off, and it is a must. The source or basis for the note is critical.
- Courts can change their minds and their decisions.
- Mistakes happen, even at banks, law firms and title companies.
Remember that we are in the non-conforming paper business. There will always be problems to solve, and the solutions bring rewards. It pays well to become an expert problem solver.
When the payor objects to a credit check
As I was finishing this article, the payor on the note above called me with threats. She insisted that we had illegally checked her credit and demanded that the inquiry be removed from her credit report. Ten minutes later, the credit bureau in her area called to ask why the report had been pulled. After I briefly explained the nature of our transaction and cited the Fair Credit Reporting Act as our authority, they seemed satisfied.
Her tirade suggested she was not in a rational frame of mind. She even assured me that she never intended to pay the note. Since her ex-husband hadn’t paid child support as ordered, she said, that would be her repayment.
When you deal with irrational people, the less said, the better, so I just listened. The fact is that this is a $13,000 first mortgage on her house. It has no current connection to the divorce or any of her other issues. If she doesn’t pay, we will use the remedy the mortgage gives us to be made whole. In other words, we will foreclose.
Mail the same piece, again and again
I’m told you need to mail any list four times a year to keep it up to date. I’m also told you shouldn’t take “no” for an answer until you’ve been turned down at least seven times. And we know that name recognition plays a big role in most people’s buying decisions.
So plan on two years of quarterly mailings if you want full mileage from your mailing program. Keep the letter, card or brochure exactly the same for all of them, so that it becomes remembered, just like a brand. If you want to see what the big players do, read the trade magazines of the direct mail industry.
Option the residual when you buy a partial
I’m a big advocate of getting an option on the remaining payments whenever you buy a partial interest in a note. Here’s how that paid off for me in an unexpected way.
On December 12, 1994, we bought the first 89 payments of a note in Allentown, Pennsylvania. I took options on the three remaining blocks of 89 payments each, to be exercised as each earlier block was collected. On December 12, 1995, one year to the day later, I got a call from an attorney for a large corporation. He had questions about the transaction and wanted certain signed documents. My caution flag went up immediately.
His client had a judgment against the note seller, and the seller had offered his residual interest in the note to settle it. Apparently I had never returned a signed copy of the purchase agreement to the seller. As attorneys often do, this one wanted to get the whole file one document at a time, and he started asking questions I felt were outside anything I should comment on. I told him I would need to pull the file and asked him to call back the next day.
Anything I provided directly could draw me into the case, or lead me to disclose proprietary information. So the next day I told him I had been advised to give anything the note seller was entitled to directly to the seller, not to him. Anything else about the transaction was either proprietary competitive information, such as our pricing, or a matter of public record in the land records.
I then sent the note seller signed copies of two documents. He already had unsigned copies and would normally be entitled to the signed ones. That was it. The only other thing I told the attorney was to make sure we were notified of any future correspondence, with a specific contact person at his client’s company.
The moral of the story: I made over $7,000 profit on the first 89 payments, and I can look forward to repeating that profit every 89 months until the loan is paid off, which is scheduled for 30 years. That means there should be over $20,000 of profit still to collect if it goes to term, and with a 6% interest rate, it should. Without the options, the note seller would have assigned the residual directly to the attorney’s client, and I would have been wiped out. Secure this powerful position on every partial you buy.
Choosing your business image
Marketing is probably the biggest weak spot for most of us in the note business. It is expensive, far from scientific and critical to our success. Defining who we are, or want to be, may be the first step.
When I started, I deliberately chose the down-home image of a private individual investor. No flashy corporate image, no expensive literature. I wanted to come across as accessible, honest and warm, easy to call and talk with. Besides, it was cheap. Eventually I rethought that and decided my image should be upgraded.
Desktop publishing makes a better image much more affordable if you use the right resources. Preprinted brochure paper, a laser printer and brochure software make it easy. Many paper companies will also print your text on the paper you choose, design a brochure for a modest fee and handle runs as small as 100 copies. Some will even run an entire mailing for you, from your list of names right down to putting the pieces in the mail.
Finding money through the right financial planner
Sophisticated private investors have substantial amounts of money to invest, if you know where to find it. Your access to those funds can come through the right financial planner.
Chances are that planner will be fee-only, with at least 10 years of experience. He will charge fees toward the high end of the scale, and he will be self-employed rather than tied to a financial institution.
Your best bet for finding such a person is to ask the most successful people you know for a referral to their planner. That planner should, in turn, be able to refer you to the most successful independent planner. You may have to go through a few levels of referral to find the right person, but it can open up an entirely new circle of contacts.
