How many note brokers do you think there are in America, counting full-time, part-time and even virtually no-time brokers who do one deal a year? 5,000? 10,000? 100,000? The real numbers are much smaller than most people guess, and they say a lot about what it takes to succeed and where the note business is heading.
How many people actually broker notes
One company that sold note broker classes through massive direct mail and TV infomercials said it had trained over 25,000 people. Another, now out of business, claimed 5,000. If you believe those claims, at least 30,000 people took note broker classes in just a few years. What do you think the success rate is, or ought to be, to justify prices of $7,000 for a few days of “training,” mostly from professional speakers? Do most of them make it? Half? More? Less?
A study by Metropolitan Mortgage & Securities Co., then the largest note investor, gives us a big clue. Because of its size, it saw more brokers than anybody else. Its grand total for one year, including everybody, even the one-deal brokers, was 900 brokers. The next year it was 730.
And we’re not done yet. The majority of the dollar volume in the following year was done by 58 brokers.
What the numbers say about get-rich-quick seminars
That means that out of every 100 people who spend $7,000 to $10,000 on a few days of note broker classes from the get-rich-quick seminars, at most 1 will end up brokering a note. Statistically, that’s one note, one time. Only 0.2 in a hundred (58 out of 30,000) will be successful. Almost 500 people have to take the course before one becomes a successful broker. At $7,000 each, the promoters take in $3.5 million before they produce one successful note broker.
Nobody in good conscience can tell people it’s easy to get into or survive in this business. Those who do are saying it to get their money. The data shows the failure rate plainly. One infomercial featured a man making all sorts of grandiose claims about how his brokering course would “change your life.” A $7,000 course will certainly change your bank account. Funny that he didn’t mention the price, or the failure rate.
Four things that make success possible
So why do I still teach people to broker notes? Because I believe you can and will succeed if you have:
- A good education, which the infomercial get-rich-quick promoters aren’t delivering.
- A realistic understanding of what it takes to succeed as a note broker, which those promoters do their best to avoid.
- An enjoyment of the business itself, rather than seeing it only as a way to make money.
- Persistence: the outlook that sees problems as challenges and challenges as opportunities.
How the note business has changed
I spoke at the first Metropolitan Mortgage brokers’ conference and was invited back to speak on “What the Future Holds for the Note Industry.” Here is the essence of what I said.
The first thing that strikes me is that funny word, “industry.” Only in the last few years have people used it to describe the note business. When I started 20 years ago, nobody talked that way. The Oxford English Dictionary defines “industry” as “a particular form or branch of productive labor.” A lot of people who have tried brokering notes wouldn’t call it productive labor, but the select few who succeed would.
I’ve been taking an informal survey of the movers and shakers in the note business. The question is: “How many people do you think are making a living, not setting the world on fire, just making a good living, as full-time note brokers?” When I asked a room full of the most experienced brokers in the nation, nobody thought it was over 5,000. Almost everybody thought it was under 2,000, most thought under 1,000, and about a third thought under 500. Nobody among the top investors, brokers and writers I’ve asked thinks it’s over 500. Some think it’s as few as 150. Either way, it’s an incredibly small number.
When I started publishing on notes in 1987, alongside our own note buying, you wouldn’t have recognized the business. There was no other national newsletter on cash flows, no conventions, almost no institutional investors, and only one seminar on note brokering, Mike Meeker’s. Ten points was the standard broker’s commission. Metropolitan was a contract-buying company in the Pacific Northwest that bought its notes there, and none of the investors whose names are familiar today were buying notes yet. Virtually nobody had heard of the concept. To most people, “paper” meant White Cloud or Charmin.
Since then, the volume note brokers generate has grown dramatically. The 10 winners of one of Metropolitan’s broker contests did a total of $34.26 million; six months later, the winners’ totals were $41.53 million.
The shakeout and who survives it
The good and bad news is that the business is changing at lightning speed. The get-rich-quick seminars that flooded the business with people looking for the “magic bean” are almost all gone, and the few that remain are sinking fast.
The note business is in the latter stages of a great shakeout. The wannabes are leaving in droves, and new wannabes aren’t replacing them. The cream rises to the top, and what’s left is the dedicated few who are the backbone of the business.
To survive in the note business of the 21st century, you will have to do two things: change how you market for notes, and change the kinds of notes you buy. Under that umbrella I see four key areas that will define the future of the business.
Four areas that will define the future of the note business
1. Specialization
Innovators are carving out specialties and sub-specialties no one dreamed of a few years ago. The opportunities are wide open and largely unexplored for brokers and investors alike. People buy and sell many of these notes, and there is real opportunity because almost nobody knows how to buy them properly. Here are some areas to consider specializing in:
- Lottery proceeds, structured settlements and annuities
- Mobile home notes, boat paper and aircraft paper
- Defaulted and distressed paper, failed bank assets and portfolios
- Business notes, home builder paper and contractor paper
- Tax certificates, lease options, and cash flows from rents and leases
- Heavy equipment leases, furniture paper and carpet paper
- Viaticals, military retirement paper and corporate retirement paper
- Book royalties and celebrity endorsement contracts
- Cemetery paper and funeral paper
- Commodity Credit Corporation paper and Conservation Reserve Program paper
- Golf course paper, truck driving school paper and timeshare paper
- Factoring accounts receivable
There is even paper secured by David Bowie’s future earnings. And we haven’t scratched the surface. I recently heard from someone about an investor in lawsuit claims: not settlements, claims. We’ve been offered proceeds from the Australian lottery and notes secured by houses in Puerto Rico, the Virgin Islands, Belize, Guyana and Monaco. Note investor Leon Steinberg was buying in Guam, with plans for the Philippines and Fiji. Metropolitan’s research showed thousands and thousands of seller-held mortgages created each year, and that’s only notes secured by real estate. Include all kinds of alternative cash flows and we’re talking about millions of notes and billions of dollars.
2. More sophisticated marketing
Certain marketing fits certain note types. You won’t buy viaticals with a classified ad or direct mail. The successful people have changed the way they do business to reflect this. One example of niche marketing is finding notes at the point of creation. Another is finding notes through untapped sources. Creating notes from property situations such as preforeclosures and mobile homes is another niche.
3. A deeper understanding of complicated issues
You need to understand issues such as liability in partials, table funding, the legalities of checking credit, Truth in Lending, state licensing laws and holder-in-due-course. If you don’t know the fine points of these laws, you won’t be able to do business in the future.
4. The growing importance of technology
You can already buy and sell paper almost instantly on internet auction sites. New companies offer valuable services to note brokers, such as automated property comparables, video-conference mortgage origination, software that creates contracts you can send electronically, street-level imagery of houses in towns across America, and property data services. Investor software for submitting deals has changed note brokerage, and it keeps getting better. If you’re not using these tools, you’re losing time and money.
This is the best business in the world, and despite the spike in public interest, it is still one of the best-kept investment secrets. What is the note business all about? Simple: we make it possible for people to receive the money they need.
