One year ago, armed with what I thought was at least adequate knowledge of the note business, I stepped into the arena to conquer the note world. Surprise! It hasn’t turned out at all the way I expected.
What a first year of mistakes taught me
The year went far better than I had hoped. I earned about $80,000 in commissions, I have agents working for me and a central office that handles paperwork, and we are moving into other states. I have a priceless support group, and my business now comes from referrals. What I’ve learned has made me much more competent and resourceful in business. If I lost everything today, I could rebuild in even less time.
That is because of all my mistakes. Piles and piles of them: little and big, business, personal and financial.
Mistakes are our single biggest asset. Nobody tries to go wrong, but errors are our greatest teachers, if we let them be. The right attitude toward mistakes is the single biggest requirement for success. If we study our mistakes with interest and curiosity rather than judgment, we can’t fail.
The crucial moment in this business comes when everything seems to have gone wrong. (My very first deal fell apart on closing day!) Most people move on to the next get-rich-quick plan at that point. No one succeeds immediately in this business. No one.
How my first deal went wrong
My first deal was a disaster. The group I worked with presented themselves as buyers, but they were actually brokers. My clients were promised 95 cents on the dollar with $800 in closing costs. When the dust settled, they received 79 cents with $2,600 in closing costs, and my commission was cut from $3,000 to $1,000 without anyone consulting me.
I went looking for genuine buyers and was lied to, and had commissions and deals stolen by unscrupulous people.
In my naivete, I also thought all I had to do was create a transaction and collect my check. Wrong! Putting a deal together was actually the easiest part. Following through on every step needed to close it was much harder. The paperwork must be done correctly to protect everyone involved, and that isn’t easy. Many novices run up heavy expenses for credit reports, appraisals, title work and legal fees, and end up with a deal that never closes.
Build your support system before you look for clients
Wising up, I realized that finding honorable, competent people to work with had to come before anything else. It took time to find them, but once I did, everything changed for the better.
Many note brokers think they should create the deal and then find a buyer. I suggest the exact opposite:
- Find people you can work with before you look for clients. Make reasonably sure you aren’t talking to other brokers, because each extra link in the payment chain lowers the price you can offer your client. You can’t know for certain before your first deal, so talk to enough people to get a feel for it. A deal that never closes, or a disaster like mine, only creates ill will for your program.
- Understand the paperwork, at least in general, before you start a deal. The more inept we appear, the more we harm a brand-new business.
- Find an attorney, or in some states a title company, you can work with. This was a real problem for me. Note closings differ from mortgage closings, and many attorneys refuse to learn new ways.
I did it backwards and caused all kinds of trouble for myself: angry clients and unreasonable delays while I floundered around trying to finish deals. Once your support structure is in place, it’s time to look for note deals.
Investors: the easiest group to work with
There are two categories of notes to broker: seasoned notes and brand-new ones. There is less competition from other note brokers on new notes, but there the real competition is the mortgage industry. When I wrote this, money was cheap and easy to get. Even so, most of my deals were new notes.
Most of my business has come from three sources: investors, real estate agents and FSBOs (for-sale-by-owner sellers), in that order. Each group has its own problems and rewards.
Investors are a wonderful source of business, and I strongly recommend getting to know the investors in your area. They already understand real estate and need less education. An investor who doesn’t buy at a bargain is soon out of the game, and one who buys at a big enough discount can make large profits with very little risk.
Here is an actual investor deal. My investor bought a house for $250,000 and immediately put it on the market with owner financing. It appraised at $335,000 and he sold it for $330,000. How did he do?
| Step | Amount |
|---|---|
| Sale price | $330,000 |
| Buyer qualified for 90% financing | $297,000 |
| Paid by our note buyer | $279,180 |
| Investor’s original purchase price | $250,000 |
| Cash profit at closing | $29,180 |
| 10% down payment from the new owner | $33,000 |
| Total to the investor | $62,180 |
His total risk was the cost of the appraisal and an ad in the paper. Closing costs on these deals also averaged around $1,500 at the time, rather than the usual 3–4%, which makes this an easy group to sell.
Real estate agents and other professionals
When I began, I thought hard about whom to approach to build the business as quickly as possible. We can either look for the people who hold notes or for the professionals who can send those people to us. I prefer the professionals, for two reasons:
- Repeat business. Once you complete a successful transaction, they come back again and refer others.
- They are, at least in theory, easier to educate. The average FSBO owner doesn’t understand what we do and doesn’t care to learn, and that leads to suspicion.
Real estate agents present a peculiar challenge. They are a great source of business, they talk with other agents and can spread the word about your program, and it would seem the education problem is simpler. As a group, though, agents are trained to see transactions a certain way and have a hard time seeing the potential of what we do. There are many bright, creative exceptions. There are also many like the agent who stared at me coldly and said, “I have been in real estate for 24 years and understand everything there is to know about this business.” As you can guess, my program was not part of her business plan. Fortunately, it doesn’t take a large number of agents to build a profitable note business.
Another plus: agents care about the deal as much as we do and will do much of the work. My most dramatic deal involved a seller in the Witness Protection Program who had to be paid in small, untraceable bills. The real estate agent spent a couple of hair-raising hours carrying more than $100,000 in cash to meet two government agents.
Working with FSBO sellers
FSBOs seem like a huge market, and they are. Many houses sit unsold for long periods, and some owners are in trouble and simply must get out. We can offer them real benefits:
- Their house sells much more quickly. Many buyers need help with financing, so owner-financed properties are very desirable.
- There is no need to haggle over price. At the time, most houses sold for 92–93% of the asking price. Owner financing is valuable enough that quibbling isn’t necessary.
- Closing costs are much lower.
- There is no agent to pay.
There are hazards, though. Education is the biggest problem. The program is very difficult to explain, and I’ve found that the simpler we keep it, the better. We developed a brochure that shows the owner three options: listing with an agent, a regular FSBO sale and an owner-financed FSBO sale.
Many owners confuse us with agents. Will you show my house this weekend? Will you put a sign in the yard? Can I put your number in the ad so you can answer the calls? If you don’t set clear boundaries at the start, you can waste huge amounts of time this way. Ask me how I know!
And after all that effort, a buyer with a traditional bank loan may come along and buy the house. Even so, FSBOs are a great source of business. I now work with a jumbo note program, which has increased my interest in this market because the larger loans mean larger commissions.
Follow up: my biggest marketing mistake
My single biggest marketing mistake has been lack of follow-up. Think of marketing as a campaign. One contact is not enough; we must go back to potential clients again and again if we want their business. Once you set up a system, it takes very little effort to keep this part of the business running on autopilot. For example, make a habit of getting contact details for every potential client, so it’s easy to follow up regularly with new programs or special deals.
A new note broker recently told me how hard it is to get started, and I smiled to myself. He is starting with agent manuals that explain the programs, a complete support system with funding, forms and even someone to do the office work, and a marketing plan that only needs his effort. When I began, I was completely alone, with no support system at all, only determination.
The note business has no fixed ceiling. The limits are mostly the ones we place on ourselves, and that makes it an exciting field to work in.
