Note Brokering FAQ

Notes, also called cash flows, income streams, debt instruments or paper, are often thought of as just discounted seller carryback mortgages. Today the terms mean much more.

Investors and brokers buy almost any marketable debt that is paid over time, whether or not it is secured by real estate:

• Seller carryback mortgages, trust deeds and contracts for deed
• Annuities, leases and royalties
• Structured settlements (insurance benefits paid in installments) and lottery winnings
• Tax lien certificates, contractor’s liens, medical receivables and commercial accounts receivable (factoring)

In short, a cash flow note is any marketable IOU that represents a promise to pay over time, usually backed by something of value the note owner can claim if the payments stop. Notes are normally sold at a discount from their balance, which is what gives investors a yield well above bank CDs and money market funds.

It is a note created privately when someone sells a property or business and “carries back,” “holds” or “takes back” some or all of the financing. All three terms mean the same thing, and these are the easiest notes to find and work with.

Depending on the part of the country, you will hear them called seller-financed, owner-financed or private notes (or mortgages, or trust deeds), seller carryback notes, or purchase money mortgages. The property can be a house, apartment building, commercial property, land or even a business with no real estate.

In many ways. You can buy notes as an investment, at yields above bank CDs and money market funds. You can buy them at one price and sell them at a higher one, because a note’s value is not fixed like a stock’s; it is completely negotiable.

You can also contract to buy a note and sell it to an investor for a profit without any cash outlay of your own. That is note brokering: you use the investor’s money and earn a commission.

Someone owns a house free and clear. They sell it for $200,000, receive a $40,000 down payment and take back the $160,000 balance as a note secured by the house. If the buyer defaults, the seller can foreclose. In other words, the seller is the bank.

Years later the seller wants more cash than the monthly payments provide, and the balance is down to $150,000. As a broker, you get the details, check with your investor, and offer the seller less than the investor will pay. If the investor quotes $141,455 and you offer $137,455, you make $4,000. You don’t need the cash: the investor wires the funds to the title company, and the title company cuts you a check for the difference.

Or you can be the investor, keep the note and collect the payments at a double-digit yield. If the payor defaults, you get the house for your $137,455 investment, less the payments you have already received.

Plenty can go wrong, which is why education matters. And there are many other structures: buying a “partial” (the next set number of payments, after which the note goes back to the seller), half of each payment, all the payments but not the balloon, half the balloon and no payments, and more.

A handful of companies buy notes nationally, a few buy regionally, and many private investors buy locally. The national and regional firms have sources of funds note brokers don’t, such as proprietary investors, pension funds and large lines of credit.

Beginning brokers should not sell to private investors; there is too much work and liability involved.

Nearly all of them aren’t investors at all. They are brokers selling to the very few true full-time end investors. They want other brokers to do the work so they can take a piece of what should be those brokers’ commissions.

There are hundreds of private investors buying notes, but selling notes to them can be very risky. Until you are very experienced and understand the potential pitfalls, deal only with reputable national investment firms.

Not the way the expensive seminars promise. The note business is simply another small business: a very good one for some people, but still a business, not a magic bean. You wouldn’t expect to open an accounting practice with no training, no money for advertising, and a profit from day one. The same goes for notes.

The author cites a Newsweek study putting the first-year failure rate for people who take the expensive brokering courses at 99%. The main reason is inflated expectations: people sold on a get-rich-quick scheme quit when they find out it is hard work. In his 20-plus years of experience, people who treat it as a serious business, especially those with some financial or real estate background, succeed far more often.

Those who stick with it can build a very good business. In one year the top 10 brokers for the biggest note buyer averaged $8.3 million in real estate note volume, about $415,000 gross at an average 5% commission, before staff, overhead and heavy marketing costs. Results like that are rare, and every broker’s long-term goal is to become an investor.

If you have a job, don’t give it up. Commissions come in slowly and are few and far between at first; plan on making no money for the first six months. Note brokering is a part-time business for all but a very few.

Let the business tell you when it is time to go full-time: when you are making more from notes than from your regular job, and enjoying it more. Give that situation a year or two. If nothing changes, then make the jump. If you don’t have a job, look for one while you broker notes.

No reputable investor will touch a note listed on them, so asking one to quote a note you found there wastes everyone’s time. Think about it: most noteholders don’t even know their note can be sold, let alone post it on a listing site.

These sites are mostly marketing bait for boot camps and coaching. The notes on them are posted by other brokers who usually have no control over the note and no contact with the noteholder. They got the details from other brokers, who got them from other brokers. This “daisy chain” is the bane of the note industry. Don’t fall for it.

Infomercials, slick magazines and mass mailings sell cash flow seminars, boot camps and coaching with claims like “the note business is easy,” “there’s almost no competition” and “make $10,000 with a couple of calls from the golf course.” The competition claim in particular is simply false.

These programs charge thousands of dollars for a few days of training, which shows whose path to riches notes really are. Some throw in a title such as “certified cash flow broker” or access to exclusive note lists. There is no certification recognized by the note industry, and the lists are the same daisy-chain notes described above. The Federal Trade Commission has gone after infomercial pitchmen, and several have paid large fines or gone to jail.

The note business is not a get-rich-quick scheme. It can be an excellent get-rich-slowly plan. One pitchman was routinely introduced as “a man who has made millions with the information he’s about to share with you.” True enough: the information was his sales pitch for his own products and boot camps.

No one has a secret to getting rich quick, and if they did, they would be too busy using it to sell it. Anyone who sells something promising easy riches is conning you. As Proverbs 21:5 puts it, “The plans of the diligent lead surely to plenty, but those of everyone who is hasty, surely to poverty.” Instead of trying to get rich quick, try (in Jimmy Napier’s words) to get smart quick.

If a seminar promoter has victimized you, contact your local and state consumer protection agencies and your state Attorney General. You can also file a complaint with the Federal Trade Commission.

The FTC can’t intervene in individual disputes, but your complaint may help show a pattern of violations that leads to action. You may also want to talk with an attorney about a class action lawsuit.

Probably not on their own. Very likely you won’t build a viable business brokering only structured settlements and lotteries. Every broker the author knows depends on real estate notes for the vast majority of their business.

For the broker, this paper is less complicated than real estate notes because the investors do most of the work. You find the lottery or settlement, contact an investor, and they tell you what to do next. You don’t need to pay thousands to learn it. Structured settlements, lotteries, annuities and other non-real estate paper make a lucrative addition to a real estate note business, not a replacement for it.