In a competitive market, you’ll be tempted to cut your profit margin drastically just to get the deal. Don’t do it. That “strategy” has put a lot of people out of business. You cannot stay in business making only $500 on a deal.
Why low margins don’t work in notes
Maybe you can be a successful auto dealer by making a low profit on each sale if you have huge volume. Remember the old joke about the store that lost money on everything it sold but claimed it made it up in volume? That store is out of business, and the approach doesn’t work in the note and cash flow business either, because most note brokers cannot deal in volume.
Most people can’t be high-volume note brokers because:
- it takes a long time to put each deal together;
- you probably won’t find enough notes to build a high-volume business; and
- your transaction costs, especially the cost of your time, are high on every deal.
Most people have no idea how to put a price on their time, so they ignore it. That’s a big mistake. Work out what an hour of your time is worth before you decide what a deal is worth to you.
Where high volume is possible
It is possible to be a high-volume note broker. You could tap into a market where notes are created in high volumes. For example, you could develop relationships with land developers, manufactured home dealers or dealer/builders.
But if you are like most note brokers, you have tangible and often-overlooked intangible overhead that will eat up a low profit and leave you with nothing except red ink.
Don’t negotiate a loss
When you are in a negotiation and have your back to the wall, just tell the note seller that $XX is your final offer, and if he can do better elsewhere, he should go there.
Either way you win. Either the note seller is conning you, and when he discovers you are serious he will agree to your price or terms, or he will go elsewhere. That’s fine too, since you cannot stay in business being the cheapest broker in town.
Ten rules to pin on your wall
Here are some rules to consider, based on my experience over the years:
- No matter how low you quote the note, there is always a newbie out there willing to do it for less.
- The more you cut your price to get business, the more likely you are to go out of business.
- The more you try to compete on price, the lower your prices will go. Corollary: your income will follow.
- Increasing your ad size, in any media, increases the percentage of low-profit calls you get.
- The bigger your yellow pages ad, the more low-priced calls you will get from non-repeat customers with junk notes.
- The prize for beating out all of your competitors for the biggest, most expensive ad in all the different yellow pages books is bankruptcy.
- The more you advertise 24-hour service, the more security guards and insomniacs will call you in the middle of the night to ask how much you’ll give them for the mortgage they are paying on.
- Advertise 24-hour service and you will get angry calls from people who stopped by your office at four in the morning and you weren’t there.
- After you teach them the business, your best note buyer will quit, go out on his own and undercut your prices.
- The one who is untrainable will stay with you forever.
Compete on service, not price
If you often have to lower your offers because the seller says he has a better one, you need to change your marketing plan and your level of service.
You need to reach note sellers who don’t even know they can sell their note, much less that there are other buyers. And you need to be able to close faster than anyone else, and advertise that fact. One way is to pay an “express fee” to title companies, appraisers and others to get the job done quickly. What other methods can you think of that will bring in business and keep you in business?
