Can’t find enough notes? That’s a problem everybody has. But there’s another problem you might not even be aware of. I’ve watched hundreds of note brokers go out of business mainly because they didn’t solve it, and the tragedy is that it’s easy to solve.
Many note brokers don’t know how to cull quickly. They waste their days, and their investors’ time, on unmarketable notes. You can’t do that and last long in this business.
I can’t make it any stronger than this: you must become an expert at screening notes. If not, you will go out of business.
How to use the screen
Here’s a series of questions that can keep you in business. Both the wording and the order matter. Asked in order, they tell you in a very short time whether the caller has a mortgage you can buy, the bread-and-butter note for almost everyone.
This doesn’t replace your intake sheet or worksheet. Use it before you start filling that out. Keep it by your phone and ask the questions every time it rings. If they say, “I’m calling about your ad,” ask the questions. If they say, “What do you mean, you buy mortgages?” ask the questions. If they say, “Hi, it’s Mom,” ask the questions (you never know!).
These questions screen real estate–secured notes. The wrong answer to any one of them is an automatic cull. End the call when you don’t get an acceptable answer.
Questions 1–3: payments, status and property
1. Are you currently receiving payments on a mortgage, trust deed or contract for deed?
If the answer is no, you know what to do.
2. Are all the payments current?
The market for defaulted notes is small, and they’re deeply discounted. It’s essentially a real estate investment. If the payor is in default and you don’t know any investors for defaulted paper, move on to the next note.
3. What kind of property secures the note?
I used to advise ending the call if the answer was industrial property, chattels (such as restaurant equipment), signature notes, gas stations, mobile homes with no land, timeshares, churches, co-ops, taverns and bars, or properties with hazardous waste potential. If someone buys that paper, I said, you’ll go out of business trying to find them.
How the business has changed. When this was last updated, there were investors for all of those except signature notes, hazardous waste properties and co-ops. Still, it remains harder to find buyers for paper secured by anything on that list.
Questions 4–5: value and loan-to-value
4. What was the sale price, and when was it sold?
Some investors won’t consider a note on a property valued under a certain amount, such as $25,000 or even $50,000. This question also tells you whether the note is new, or “green.” Green paper is worth less.
5. What is the balance of the mortgage?
Know your investors’ LTV limits. With some exceptions, notes over 85% LTV are hard to market. Third liens are almost impossible to sell. Small notes (under $10,000) aren’t marketable unless you have private investors. And although there are exceptions to every rule, large single notes (over $500,000) are very hard to place.
Questions 6–7: down payment and balloon
6. How much cash did the buyer put down?
If the answer is “none,” or “rent credits,” or “$1,000,” or “you should see what he did to the property,” or “unnnh… what?” say goodbye. By the way, $1,000 down is almost a guarantee of default.
7. Is there a balloon, and if so, when is it due?
If it’s due in a year or less, end the call. Your investor will ask questions you can’t answer: “If the balloon pays off so soon, why doesn’t the seller just wait for his money? Is something wrong?”
The final test before you quote
By this point you should be able to think of at least one investor who will buy this note. If you can’t, reject it and go on to the next one.
