One of the most interesting “alternative cash flow” areas to work in is helping state lottery winners who want cash now for some or all of their future payments. As an investor in this field for almost five years, we have learned quite a bit about the business and want to share it with you.
Admittedly, there may not be as many lottery prospects as there are for other kinds of cash flows. But there is enough potential business to make lotteries well worth a note broker’s time.
Finding lottery winners
Before you can cash out a prize winner, you have to find one. As in any business, success is hard without proper marketing. A courthouse search, the way you’d find privately held mortgages, doesn’t work for lottery winners, and neither do many of the other techniques used to find real estate paper. Here’s what does work:
- Tell everyone you know and meet what you can do for lottery winners. Focus on professionals such as financial planners, attorneys, accountants, real estate and mortgage brokers and insurance agents. They come across lottery winners all the time, because winners buy homes, get mortgages and use financial professionals.
- Follow up on media stories about winners.
- Search newspaper archives at public libraries for past articles about winners, even going back 10 years or more. The winners may have moved or unlisted their numbers since winning, but you can often find relatives with the same last name in the same area who can introduce you.
- Get lists of past winners from state lottery commissions, where available. These lists usually include names (no addresses or phone numbers), win dates, amounts won and where the winning ticket was bought.
Persistence with these techniques pays off over time. There are thousands of winners to be found, and many don’t even know that cashing out at a discount is an option.
Approaching a winner
Once you’ve found winners, you can approach them by letter describing your service, or by phone if the number is available. A simple question is a good starting point: “Would you be interested in converting some or all of your future payments into lump-sum cash now?”
You can also ask (thank you, Joel Cassway, for this one) whether the winner would like to know what the future payments are worth today, like getting an appraisal, for net worth and estate planning purposes. Once they see the figures, winners who weren’t interested sometimes change their minds.
Besides a full buyout figure, we recommend presenting partial offers, such as:
- The next ten years of payments
- The next five years of payments
- One-half of each future payment
Many winners find that last option appealing, because they get a lump sum and still receive half of their original annual payment from the lottery each year.
What the investor needs from you
Once you’ve found a possibly interested winner, at a minimum you should contact a lottery investor with the winner’s name and phone number, so the investor can talk with the winner directly to get what’s needed for an accurate quote. Or you can collect the information from the winner yourself and pass it on. The investor needs to know:
- The state the winner is from
- The win date
- The total prize amount
- The annual payment, before and after tax withholding
- The annual payment date
Once the winner agrees to the price and terms, the investor will need copies of documents such as the winner’s original award or congratulatory letter from the state and the two most recent W-2G tax forms the state sent the winner.
Why lotteries are simpler than real estate paper
In our opinion, working as a referral source on a lottery assignment is much easier than dealing with real estate paper or other future cash flows. The information and documents needed from the winner are minimal.
The investor handles everything needed to complete the assignment, including petitioning the court for an order when necessary, which it usually is. Often, after the referral source introduces the winner, there is nothing more to do but wait for the referral fee when the transaction closes, which may be one to two months later.
How the referral source gets paid
What you can earn as a referral source is open-ended and set mainly by competition. If no one else is bidding, the referral source reduces the investor’s quote to whatever lower figure he believes the winner will accept. Once accepted, that lower figure appears in all the documents, and the investor pays the difference to the referral source at closing.
We have paid referral fees over $50,000 on some lottery acquisitions, and many times paid referral fees larger than what we expected to earn on the transaction ourselves. Results depend on the deal and the competition.
We can’t cover every detail of the business here, but the investors you approach should be happy to work closely with you to get the transaction done.
