Hank Harenberg knows as much about finding notes and marketing a note brokerage as anyone. When he sold notes exclusively to Metropolitan Mortgage, he was its biggest producer nationally. Top producers won all-expense-paid trips to Hawaii, and Hank won 18 of them. Later he held the notes in his own portfolio through his own line of credit, and he built a national reputation second to none. In this interview he explains how he got started, how he finds notes and where he saw the business heading.
From land developer to note buyer
Q: Hank, how did you get started in the business?
I first found out about the discounted note business in 1983. I was involved in land development in the Albuquerque area, and as a result I generated a lot of land contracts.
As you know, in business it’s chicken or feathers: some days chicken, other days feathers. Land development was no exception.
At one point I needed income, and a friend told me I could sell some of those land contract notes. So I called somebody who advertised in the paper and we met. Of course I described all the benefits of these land contract notes and how great they were, when in reality they were fairly unseasoned contracts on raw land. When he told me what he would pay, it shocked me. I asked, “How do you do this?” After he explained it, I decided I needed to be on his side of the table, as a buyer, not a seller.
Building a system without a playbook
Q: What seminars did you take to get going?
When I started, I wasn’t aware of any seminars, books, tape courses or newsletters. I didn’t even know anybody outside New Mexico who bought notes, so I had no access to any education.
I was forced to develop my own system, without preconceived ideas and without anybody telling me “you can’t do it that way.” I think I benefited from that. If I had copied someone else’s method, it might not have worked in New Mexico, and I probably wouldn’t be in business today. Doing it our way, the business has grown every year.
New Mexico is unusual in that 99.9% of private notes are real estate contracts, a special form of land contract. When I started, the only institutional investor that would buy them was Metropolitan.
New Mexico is not a wealthy state. We would find good but small contracts that we couldn’t sell to Metropolitan because of the minimum discount it required at the time. We had to use private investors or our own funds for those contracts. Over time our business shifted toward private investors, until 80% to 90% of our product went to them. Now we have our own line of credit and keep the notes in our own portfolio.
Finding notes through the people note holders trust
Q: What’s the best way to find notes?
There is no general best way, only the best way for you. To find it, you have to weigh several factors, mainly the territory you work in and your own strengths and weaknesses. Build your strengths into your marketing strategy.
For instance, if you’re outgoing and like meeting people and building relationships, you’ll do best with certain marketing methods. If you don’t particularly enjoy meeting new people, prefer to work alone and don’t like giving presentations, you need a different marketing plan.
Over the years, as we developed referral sources, we researched the different businesses that send us notes and tried to understand how we could help them. We always make our presentations with the attitude, “How can we help you do more business?” We say to a source, “If we can show you a way to improve your service to your customers and clients, which will increase your profits, and you can do it at no cost, would you be interested?” Obviously the answer is yes.
Part of that research shows why we chose certain industries as sources of notes and left others alone. You don’t just go out and call on anybody blindly. You have to target your market.
I see our industry working in three marketing segments. From my conversations with long-term brokers around the country, I also see new directions they are taking to find notes, and I’d like people to start thinking about how to use them in their own businesses. You not only have to know what you’ll do today to find notes; you have to think about what you’ll be doing three and five years from now.
Researching the industries you call on
Q: You mean working with real estate agents?
No. I’m talking about banks, land developers, the elderly, farmers, the mobile home industry and others. We have actually paid for research on those industries, so when we go in to talk to them we know a little about their business and some of the buzzwords unique to it. We never assume we know their business as well as they do, but a conversational knowledge of someone’s business is a requirement when you ask them to help you.
Q: Are you hoping that they have notes for sale?
It’s much more than that. For example, farmers receive subsidies, and those can be bought and sold. At the time of this interview, the Agriculture Department paid out $23 billion a year to farmers, and the government even had a preprinted form for assigning the subsidies. That’s where research is so valuable: you know enough about the industry to know the program works.
We have given a lot of thought to who sees private notes. We don’t appeal directly to the note owner in our marketing. We go to the people note owners deal with every day.
Who would a note owner contact for business reasons? Who would they call if they wanted to sell their note? They might call their banker, a financial planner or someone else in the financial industry, probably before they would call their real estate agent. So we call on the people note holders would contact if they wanted to sell, or who might know who the note holders are.
Our marketing program is geared away from contacting individual note holders. It is designed to cultivate the business people they deal with daily. That takes a higher level of professionalism, because you are no longer talking with someone who owns a note. You are talking with a business that knows people who own notes. If you can show them it’s to their advantage to help you reach their customers, your program is in place.
The theory is simple and powerful. We contact the businesses that have the clients we want and convince them to help us reach those clients. Suppose you are a business with a thousand customers. If I make presentations to ten businesses like yours, I’ve touched 10,000 people by calling on ten. That’s what makes us successful.
Where he saw the note business heading
Q: Where will the note business be in five years?
At the time of this interview, we were seeing a significant drop in the number of seller-financed notes because of the economy and low interest rates. Newly created high-yield notes were gone, and the supply of seasoned notes had shrunk a great deal. Still, about $150 billion in notes was outstanding, so there were many opportunities. As long as interest rates stay low, the note business will feel it, and a good economy means less owner financing.
Looking ahead, I see more people generating their own notes: buying land, subdividing it, selling it and creating their own paper. More people will work with developers, getting in on a deal at the very beginning and tracking it all the way through. As competition grows, people will have to think harder about how to find notes on a continuing basis, whether they create them or get them through selective sources. Direct mail and advertising are not long-term methods that will keep small note brokers in business.
I also think those of us in the industry need to support it. People have a choice between those who treat the note business as a way to get rich quick with little work and those who want it to move forward as a profession. Support means going to seminars and conventions, reading the industry’s publications, sharing ideas and discussing the things that affect our business.
When I started, I didn’t know anybody outside my state doing this. Now I talk every day with people in the note business all over the country. My knowledge of the business and my ability to succeed are greatly enhanced by the contacts I’ve made over the years. That’s why I believe legitimate industry conventions and publications are a must if you want to be a real player. I don’t make any money if people do these things. I say it because I truly believe they should.
The biggest change I expect is institutional investors marketing directly to note owners. It was already happening in some larger markets, for two reasons. First, more dollars are chasing deals, which increases competition among investors. Second, the broker network is developing and delivering less product, which forces investors to find other ways to get it. Small note brokers will be under more and more pressure to develop niche markets to find or create notes and stay in business.
Wall Street has found us, and that will bring profound changes to our industry. At the time of this interview, the Wall Street firm C-BASS had just bought a major note servicing company and a major note brokerage to solicit its accounts. That will have a far-reaching impact on our industry.
Hank Harenberg was president of Capital Concepts, Inc., which bought real estate notes in New Mexico, Colorado, Arizona and Texas.
