This is a very small industry. Some seminar and infomercial gurus would have you believe otherwise, that hundreds if not thousands of investors are waiting to buy your note. That is a big fallacy, and it can lead you into trouble.
Why there are fewer note buyers than you think
If you believe there are hundreds of investors, and one investor troubles you for some reason while you’re processing a note, it’s easy to justify jumping to another investor or ending the relationship altogether. In many cases you can. But my word of caution is this: never burn bridges with your investors.
The hard truth is that there are not thousands of note buyers at your fingertips. There probably are hundreds, but most of them are private individuals who buy local notes, and you will meet very, very few of them. They don’t shop websites for notes or call people from advertisements. They have established relationships with the people they work with, and they rarely buy a note outside those circles, much less from a new note broker.
But don’t fear. There are other ways to sell your notes. I put note buyers into three separate groups.
Institutional investors
The first group is the institutional investors. They buy notes nationwide for their own portfolios, with their own money. Later they may securitize the notes and sell them on the open market, hold them, or occasionally trade them to another institutional investor.
These buyers want you to bring them notes. They will pay you a broker fee or let you deduct your fee from their quote to you. But you must know who they are. They advertise to attract brokers, and they often call to introduce themselves.
How to tell genuine buyers from phonies
Why, then, doesn’t everyone know who these buyers are? One word: deception. Many brokers don’t know who the real buyers are because others in the industry use the same tactics to solicit notes. These others are usually new note brokers trying to find notes, just like you, perhaps. They call other note brokers and say they are direct note buyers. They advertise too. They shop notes posted on websites. They do everything the institutional buyers do.
If a new note broker believes them, that’s another broker fee tacked onto the deal. The seller gets less for the note, the broker has less control of the deal, and it’s usually a big waste of everyone’s time.
How do you overcome this obstacle? Research.
- Ask around about the buyer.
- Get references. Any institutional buyer should be happy to refer you to another broker it has bought notes from.
- Talk with the buyer. With a little discussion, if you know which questions to ask, you should be able to tell whether your buyer is really a buyer or just another broker looking for an easy deal.
Second-tier investors
Next are the second-tier note investors. Our company falls into this group. These companies buy notes, usually with their own funds or lines of credit, but their business is trading the paper immediately or within a fairly short time. Sometimes they hold notes for the full term, but usually they sell fairly quickly, either to institutional buyers or to private investors that only they have access to.
For example, our company grew out of my old tax practice. We have funds available to buy notes from many of our former tax clients, money no one else in this industry would ever have access to. If we use those funds to buy individual notes and pool them into a good portfolio, we get more for those notes from institutional investors later. That ends up a win for everyone: us, the note seller, the note broker, and often an institutional investor.
Second-tier companies can be as competitive on price as institutional buyers, for individual notes and for portfolios. Many specialize in hard-to-do transactions such as simultaneous closings (our specialty), rehab notes and flipped-transaction notes.
Broker-buyers: when working with another broker makes sense
Finally, there are broker-buyers. These people are brokers. They put buyers and sellers together and take a fee for their time and effort.
Before you decide never to work with brokers, know that there are two kinds in this group: experienced brokers (sometimes called master brokers) and new brokers. Experienced brokers may have relationships with investors you can’t reach. They may be the most willing people in the industry to hold your hand through your first few transactions, and they may eventually lead you to the institutional or second-tier buyers.
There are many good reasons to work with an experienced broker at times, especially when you’re starting out. But again, do your research, ask around and ask for references. Be sure to tell them apart from new brokers who have no contacts you couldn’t get yourself, and who will lead you into the infamous broker daisy chain.
Never burn bridges with investors
Don’t forget the obvious. Indirectly, you are still most likely selling your note to one of the first two groups, institutional buyers or second-tier investors. This is where my caution about burning bridges comes in.
The logic is simple. You have access to very few institutional buyers and very few second-tier investors. You don’t have thousands, or even hundreds, of choices when you sell a note. At any given time, one decent note would have about 4 or 5 realistic investors, if you knew everyone in the normal circles of this industry. A perfect note will have more. A difficult note, such as a simultaneous closing, will have fewer. That is why keeping all of your relationships open and healthy is vital.
In our many years of brokering, buying, selling and trading notes, we have severed only two relationships completely. In one recent case our integrity was at stake, and integrity is the reason for our success; we will never jeopardize it for a note deal. Even so, it took literally months before we made the decision. We discussed it, its consequences and its benefits, because we know how small this industry really is and how much people talk to one another.
So the lesson is this: unless you really, truly feel compromised, don’t burn bridges with investors. Sellers, notes and brokers come and go; investors and note buyers usually don’t.
- Stay professional when things change. If your pricing changes, for example, look at all sides and put yourself in the buyer’s shoes first.
- Keep the line open. You can almost always use a different buyer later and still keep communication with this one. You never know when you’ll need it.
- End relationships quietly. If you do decide to stop working with a buyer, do it with as much tact as possible, silently if you can, so they may not even notice.
- Avoid knee-jerk statements. If you feel you must explain your reasons, be tactful and respectful. Your needs could change, and word travels fast. A difficult or deceitful broker is exposed very quickly in this industry.
Just remember: there are hundreds and hundreds of new note brokers and sellers, not the other way around.
