This Is The Complete Package Of Homework Readings For Paper Source President W. J. Mencarow's E-Course "Profiting From Notes"


Dale Ketcham: Buying Mortgages Since 1970

 

Dale Ketcham is a Charter Subscriber to THE PAPER SOURCE, the only Lifetime Subscriber, and dear friend. This Kansas City octogenarian has more knowledge and energy than most men half his age.

 

What got you into the mortgage buying business? Before I started buying mortgages 28 years ago, I owned rentals, small income properties. My job was as a consultant to small businesses, and the rentals took a lot of time. I wanted an investment that wouldn’t be too time-consuming. We started selling the rentals and holding the mortgages and discovered that owning mortgages was a pretty good investment. It’s nice to have money coming in without having to go out and get it, as we had to do with tenants.

Then I found some mortgages that were for sale and bought some of them, and after that started advertising to buy more. Although I broker from time-to-time, my principal activity is buying for my own account.

 

Does someone need a particular type of experience or education to succeed in mortgages? No, although any kind of experience in which you have worked with the public will help, as well as education and experience in the financial industry. A background in investment, advertising and marketing will help greatly. The desire to progressively succeed is vital.

 

Can one be successful in buying mortgages today? Yes, but it takes persistence and a marketing strategy. And the key to a good marketing strategy is self-promotion.

The greatest asset you can have is to learn to sell yourself: The Art of Self-Promotion. Display happiness and enthusiasm in your contacts. Develop a low cost marketing strategy. Make prospective sellers happy they called you even if they did not make a deal with you. That person talks to many others.

Marketing is the key.

 

How do you market your business and find notes? Both from word-of-mouth and from advertising.

For example, Saturday I received a call from an attorney in a small town where I closed a deal recently. One of his clients, a farmer, went in to get a will drawn up and asked the attorney where he could sell his mortgage. The attorney gave him my number, I looked it over and bought it. That’s how powerful word-of-mouth can be in building a successful business over time.

I also advertise in the small newspapers in rural areas. I also have many Yellow Page advertisements that more than pay for themselves. Some even have my photograph. I’ll be in six Yellow Pages this year.

 

What response rate should one expect from ads? Studies show that people have to see an ad 33 times before they remember it. So the secret is to keep advertising. Don’t cancel after a few weeks or months.

I choose the less expensive, small classified ads and just leave them there, changing them every 4-6 months. I’ve advertised in one paper for over 10 years. In fact, I get more mortgages from that ad than any other.

 

What secrets can you share about writing ad copy? The most successful ad without my picture is:

Mortgage Buyer Since 1970. Let Us Help You With Your Money Problems.

I got a magazine today in which I am running an ad, and there are four other mortgage buyers who also have ads there. Every one of them says, "Sold your property? We buy mortgages, annuities" etc. They all look the same except mine. I know I get calls because mine is different.

 

What are some of the key points you make to callers? I tell them that I always leave money on the table for the other person. I tell them how good their mortgage is, if it is, and that I will try to pay them as much as I can for it. I offer them a price for the whole mortgage and for a partial. I read about Tom Hennigan’s "10 for 12" offer in last month’s PAPER SOURCE, and I’ve never heard it put that way before. I like it!

 

What is the major way you’ve changed the way you do business over the years? I find it is necessary to "go with the flow." Competition is extremely keen at this time. Formerly I had a higher figure for the yield as my level of buying. It was necessary to lower my proposed buying yield, and now I have a satisfactory number of notes paying me with a good monthly income.

Over the years I have tried different investment ideas such as buying homes, remodeling them and then selling them and carrying the loan, but I found if I was to do best, it was to get excited with a worthy ideal...and mortgage buying was it. There have been ups and downs, but fundamentally it has been exciting and profitable!

THE PAPER SOURCE JOURNAL  www.PaperSourceOnline.com    1-800-542-2270


 

Increase Your Business Using

Your Marketing Toolbox

by David C. Calabria and W. J. Mencarow, Jr.

 

Part I

1.  Repeat your message at least 27 times! Your message must be seen or heard 9 times before a prospect becomes a customer. And since prospects are distracted two-thirds of the time, it takes 27 exposures to make 9 impressions.

2. Use visuals to present your message. Selling points made to the eyes are 68% more effective than selling points made to the ear.

3. Refrain from using print, radio or television ads to refer customers to your yellow pages ad, unless you are the only note buyer in the yellow pages. Otherwise, a referral to the yellow pages is a referral to your competition.

4. Tell your customers about your social responsibility projects. People want to support businesses that make the world a better place. If you aren’t corporately involved in charities and community services, get involved — and publicize it.

5. Create a referral-based note business. Form strategic alliances with Realtors, title companies, escrow agents, attorneys, bank trust officers, etc... You will create repeat business from those who have access to many notes instead of spending your marketing dollars on "one-trick ponies" (note holders with one note to sell).

6. Pay attention to where your competitors are advertising. You may need to have a presence in the same media.

7. Even though you have competitors, your goal should be to have no competition. If they all advertise in one section of the classifieds, you should be in another section. Try the personals!

8. Repeat your message. An audience forgets 90% of what it sees within two weeks.

9. Offer your investors opportunities to generate charitable donations when they buy your notes. In other words, offer a discount on each note if they will donate that amount to a charity. Be sure to publicize your program. This value-added benefit can give you a competitive edge.

10. Do the same for your note sellers. Offer to pay them a bonus if they will donate it to their favorite charity (their check must be written to the charity when the note transaction occurs). Be sure to publicize this program as well.

11. Use attention-getting words in your print materials. For example, "You gain money," "What a value!" "Proven benefits!" "The name you can trust" "Trusted by hundreds of satisfied clients since 1971"

12. Build your marketing around an idea, e.g., speed of service, savings, hope, and so on.

13. Repeat your message. Regular advertising takes 3-4 months to show results.

14. Create an outstanding headline for print materials. It must convey an idea or intrigue the reader into wanting to read more.

15. Sponsor a special event that benefits a nonprofit organization. You may be able to attract media attention in the form of news stories, which means free publicity.

16. Establish a media budget at 10-15% of your projected gross.

17. Repeat your message. Always reprint favorable publicity in your brochures or ads.

18. Use color if you can. According to studies, color increases readership by 41% and raises the inclination to take action by 26%.

19. Place your ads through your own in-house ad agency and you will save the agency commission.

20. Promote the work of a nonprofit organization admired by your customers. Buy an advertisement highlighting the mission, the program, or an achievement of the nonprofit and include a message favorable to your business in the ad.

 

Part II

21. Address your message to an intelligent person. Don’t talk over anyone’s head or beneath their dignity.

22. Get personal. Don’t write to groups ("all of you need to," etc.), write to one person — the person who is reading your ad or letter. Use the second person (you, us), not the third person (they, them).

21. Include testimonials. The more your potential note seller or investor can relate to people who have actually bought a note from you, or invested with you, the better for you.

22. Repeat your message.

Enough repetition will eventually secure a share of your market.

23. Stress your benefits, uniqueness and desirability.

24. Don’t just be a "cash for your note" company. Emphasize unique relationships that have special appeal for your prospective note sellers. For example, more and more people expect businesses to protect the environment or address society’s problems. Figure out a way you can do that, and advertise it.

25. Invest in a full-page ad in a regional edition of a major magazine once. Then use reprints of the ad forever. 

26. Write as though you are talking to one person, and that person a good friend of yours.

27. Repeat your message. Many small ads are better than a few large ones.

28. Write timeless ads and brochures. "We were founded in 1995" won’t have to be rewritten. "We are four years old" will.

29. Offer your prospects gifts to try your services. For example, a coupon good for $100 if you buy their note. A premium that also benefits a nonprofit organization is doubly effective: $100 to them, $100 to the orphan’s and widow’s fund.

30. Surprise your prospects with your message. It has to have some element of freshness to stand out. "I Buy Notes" is awful. People want to know what you will do for them. "I Will Solve Your Money Problems!" gets attention.

31. Involve your reader, listener or viewer with your message via a question, contest or some action that earns them a discount.

32. Repeat your message. Design multiple uses for materials, e.g., use brochure copy in your cover letters.

33. Use words that have an announcement quality, that promise something new, that feel newsy.

34. Tell your prospects about your company’s achievements. Especially impressive are stories about volunteer work.

35. Give valuable advice that can help your prospects. Newsletters are excellent for carrying out this function.

36. Be specific about the benefits of selling a note to you. Use few adjectives but lots of names and numbers.

37. Make print materials very readable. Use short paragraphs, short sentences, and short words. Twelve point type is the minimum size for marketing copy. Do not use all capital letters. Do not over-use italics, bold and underlining. You will destroy their effectiveness. Save them for your key message.

38. Work toward a referral-based note business. It is five times more expensive to sell a stranger than someone who has already worked with you on a transaction in the past.

39. Publicize your in-kind donations to nonprofits.

40. Commit to spending one hour a day just thinking of ways to improve your marketing.

 

Part III of III

Re no. 40 (spending one hour a day thinking of ways to improve your marketing): If after 10 minutes you haven’t thought of anything, read marketing books. Start with the "Guerrilla Marketing" series by Jay Levinson.

42. Repeat your message.

Use print media to reinforce direct mail, signs, public relations, electronic media and community involvement. A mixed-media message is far more effective than using one media.

43. Consider the consequences of bulk mailings: 50% is read immediately; 25% is scanned quickly and tossed; 10% is set aside for later; 15% is tossed without opening.

44. Don’t ignore rural weekly papers. For the cost of a few tiny classifieds in a major daily you can run a good-sized ad in a weekly for 6 months or more — with no competition from other note buyers. Plus, people read the classifieds in weekly papers. If you get one note a year this way you’re doing fine.

45. One consumer survey found "environmental friendliness" as the third most important issue in a customer’s decision. How can you use this information in your marketing?

 46. Be crystal-clear about the prime benefits of selling a note to you.

47. Test every marketing idea. What is wildly successful in Boston may be a total flop in L.A.

48. Learn how to make offers your competitors can’t: different partial variations, back ends, reverse partials, deferred adjustable fractional installments (!!), etc.

49. Prove what you claim by specifics, e.g., case histories. Always ask satisfied clients to write you letters indicating their happiness with your services, and ask their permission to show the letters to others. This may be your most powerful marketing tool.

50. Repeat your message.

Remember, your message is a doorway to the unconscious, where many purchase decisions are made.

51. Readers of classified ads are serious buyers. But avoid placing your ad alongside the competition under a heading like "mortgages wanted." Who reads that? Put your ad where people will read it, such as "merchandise wanted" or "money to lend."

52. The highest-read classified column? The personals. Try to get your ad there. (How about: "I’ve got plenty of cash to spend on the right person, and if you are receiving payments on a note or mortgage, you may get lucky!")

53. Challenge the curiosity of your prospects. Cause them to think, then command action. If you want them to do something you have to tell them, i.e. "Pick up the phone and dial now!"

54. Experiment with radio. You reach people in a one-on-one relationship while they are driving or working at home.

55. Use numbers whenever possible rather than writing them out. The eye skims over written numbers such as a hundred and thirteen, but 113 catches the eye.

56. Buy, study and enjoy some of my (WJM) favorite books on the subject: The Art of Readable Writing and The Art of Plain Talk, both by Rudolph Flesch, and The Elements of Style by William Strunk, Jr. and E.B. White. (The mark of a serious writer is ownership of the hardback editions!)

57. If I (WJM) could give only one bit of advice to someone who wants to write well, it would be: Read good writing. The more you read well-written books the better your writing will be.

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Preparing Note Packages That Get Funded

A Six-Part Article by Delbert Ashby

Part I

The first thing a prospective note seller wants to do is talk numbers. That’s the last thing I want to do. How can I talk numbers until I have seen the "car" I am buying (the note, etc.). I might not want it at any price once I have seen it!! Yet, most people let themselves get trapped. They put their foot in their mouth and lose deals by talking numbers first. It appears that we get lulled into thinking that all notes are alike. There must be a reason that they call the things we usually buy "NON-CONFORMING PAPER."

I try to defuse the question of talking numbers by deferring it until later. "Mr. Seller, I’ll get to that in a minute but first I need to get some additional information..." I do not refuse to answer, which would set up an argumentative or confrontational atmosphere, but rather put that part of the discussion off until later. I find it essential to control the conversation to be effective.

Remember that I evaluate potential transactions based primarily on the property, the payor, and THE TERMS AND CONDITIONS WRITTEN IN THE NOTE AND SECURITY INSTRUMENT.

Clearly then, I need copies of the note and security instrument before I can intelligently discuss a potential purchase. I will also need one additional document — a copy of the settlement statement when the note was created. Have the seller provide you these and read them carefully.

 

PROMISSORY NOTE

The note will tell you what you are buying. Some of the things it will show include payment amount, date first payment is due, date subsequent payments are due, face interest rate, the original amount & term of the loan, information on the balloon (if any), if the note is assumable, where the payments are to be made, who the note holder is, terms related to late payments, prepayment terms and possibly foreclosure terms. It will also reference the associated security instrument. You can see that in addition to the note you are buying, it would be useful to see the same information for any underlying senior debt.

 

SECURITY INSTRUMENT

The security instrument, usually a trust deed or mortgage, defines the legal rights and obligations of both the note payor and the note holder. This includes the circumstances under which you can recover the "security" (property) through foreclosure. In this document you will find:

the legal description and address of the property

the name and address of the trustees or mortgagee

the note holder’s name and address

the amount of the debt

covenants and agreements that apply to both the security and the note. These cover everything from insurance coverage and maintenance of the property to whether the note/security instrument is assumable.

The standard "Fannie Mae" Deed of Trust form often used has 23 "standard" clauses plus the possibility of Riders and Amendments. The really important thing with this document is to read it, understand it, AND LOOK OUT FOR CHANGES, AMENDMENTS, RIDERS, AND EXCEPTIONS. If you don’t understand the impact of what you have read, get help. FIND OUT.

Not to over-emphasize, but get copies of both the note and the security instrument and READ CAREFULLY. Then take the time to plan a strategy for your offer/negotiations. I will give you more on negotiating strategies in future issues.

 

SETTLEMENT SHEET

The third document mentioned above — the settlement statement — is often called a HUD-1 since that is the most commonly-used form. It is effectively a financial accounting or balance sheet for the transaction when the note was created. It contains a ton of good information. It will show a lot of financial detail but it will also identify a number of the parties to the transaction and other legal data. In most cases, the settlement officer must sign a certification that "the settlement statement is true and accurate and that funds were disbursed in accordance with the statement." I feel a lot safer using this information than the "approximates" the seller wants to give you over the telephone. Take the approximates but give out no numbers without the actuals. The settlement statement statement will usually show:

The actual sales price of the property

How much cash the property buyer has in the deal

Whether title insurance was purchased and who issued it.

Information on senior debt including who holds it, current balance, etc.

Reports ordered including credit, termite, appraisal, survey

Names including buyer, seller, trustees — if any, casualty insurance underwriter and agent, title insurance agent, the real estate sales company — if any, and anyone else who gave or got money through the settlement process.

If you will look at your "mortgage evaluation work sheet," you will see that most of the material facts that you need related to the actual transaction are in these three documents. What is not in these or usually any other document is the people aspect of things.

It is the people aspects — the motivations — that you must discover to successfully negotiate and conclude a satisfactory transaction. But before planning your negotiation, you must first evaluate the facts and hopefully the above clarifies the significance of these three documents. If you do not have copies of any such documents for study, you can get copies of blank settlement statements from a settlement attorney or lender. You can get copies of real recorded security instruments from land records at the courthouse in your area.

 

THE NEXT STEP

Now that we have seen the note, security instrument, settlement statement and have filled out our MORTGAGE EVALUATION WORKSHEET, we can realistically decide whether we want to buy the note or not. I will address evaluation strategies at another time but for now let’s assume we like the quality so far. I am now willing to begin to talk "numbers."

Before I continue with the DOCUMENTATION discussion and before we talk numbers, I need to touch briefly on the very important subject of negotiations. I am ready to address the "numbers" issue provided that I have learned enough about the seller and his/her MOTIVATIONS! When I talk numbers, it is critical to remember that it’s more than numbers that will make the deal. We know that terms, conditions, when and how we pay for our purchase, what we plan to do with the note and many other issues are variables appropriate for negotiating.

Most note sellers are unaware of these issues. DON’T EDUCATE THEM. Just ask them .... Would it be all right if .... (decide what you want and ask for it). If you don’t ask, you sure as the world won’t get it. Don’t be afraid to ask. It works.

The negotiation process actually begins before you get the note, mortgage, etc. It begins with the very first time you talk with the seller. That’s because the first action in negotiations is COLLECTING INFORMATION. LISTEN a lot and don’t talk any more than necessary to keep them talking. An encouraging grunt to acknowledge that you understand is all you need to say. My personal style is to get on their level on a friendly basis to get them to open up with me. Especially on the telephone, I try to PACE people.

If you are speaking to a "slow talkin’ southerner," you better slow down or chances are that they will get a "fast talkin’ city slicker" impression of you and an immediate distrust will set in. You won’t collect much information then: At least, not valid information. By the way, don’t EVER mistake slow talkin’ for dumb. If you do, I’ll guarantee that you just lost the negotiation!! In a similar fashion, if the person is a fast talker, soft spoken, or whatever, try to get on their wavelength so that they will really share information with you.

Frankly, the information we want is more about them and their needs/motives than the note itself but you will often pick up a lot of info while they are talking about the note. Again, LISTEN, LISTEN, LISTEN and take good notes. After they have stopped talking. I always try to be TOTALLY SILENT for a full 8-10 seconds before I say anything in case they start talking again. If they don’t, I’ll ask another "open ended question" to get them going again ‘til I’ve got all I need or all I can get. More on negotiations later.

Part II

If you have planned and implemented your NEGOTIATION STRATEGY well, you will reach an approximate agreement as to the price, terms and conditions under which you will buy the note. It’s now time to get that agreement committed to paper and signed by ALL PARTIES to the note ownership. This can be done at a one-on-one meeting or by fax, the mail, etc. Either way, it’s time to collect and evaluate some more documents.

If it is a personal meeting, I ask the seller to bring their entire file. I get the agreement signed and a COPY of everything they have in the file. I take two copies of my documentation checklist so that we can check off what he has given me and what he still owes me. If he doesn’t have a recent credit report on the payor, he needs to provide me the name, social security number, address, and hopefully the date of birth of the payor. This is so that I can run a credit report of my own.

Various note buyers have different views on the legality of doing a credit check. (Editor’s Note: See "Can You Order A Credit Report On A Note Payor Without His Consent?"at the Cash Flow Dollar Store www.cashflows.org).

 

Back To The Documentation

Of the documentation check list items, all should be in hand except possibly the home owner’s/casualty insurance information. The reason we want that is to be certain that: (1) The property is insured; (2) that the amount and nature of the coverage will protect our interest; and (3) so that we can call the agent and have ourselves added as covered mortgagee as of the date of the assignment of the mortgage to us.

On the credit report we can tell a lot about the PAYOR (see Part I of this series in the October PAPER SOURCE where I wrote that I base the the transaction on the payor). Usually you will get about a 10-year history of their addresses, places of employment, job titles, and salaries. Also their birth date/age, how many times and by whom their credit has recently been checked, how many credit accounts they have and a summary of their rating on those accounts, and usually a report on any judgments or bankruptcies on their record. You will also see a more detailed list of the accounts reflecting the account summary mentioned above.

Clearly, many conclusions and judgment calls can be drawn from this report. If I am going to resell the note, I find that most investors want to be able to confirm that any judgments have been satisfied. They will probably also use this fact to lower the credit rating and raise their yield a notch. If the credit report shows a bankruptcy in the past, all of my investors say FORGET IT!! If they did it before, they would do it again. I take the same position for my own portfolio.

The next item on our documentation list is an amortization schedule. We will want to see that the amortization schedule agrees with the note and what we are told we are buying (any payments behind, interest or late charges added?) The amortization schedule can be used as a ledger to show when payments are received and can therefore be used as proof of payment history. I consider that sloppy record keeping but many do it that way. For my own records, I copy the front and back of every check or money order. That is solid proof of payment. It also gives me other subtle things like account numbers, etc.

The next item on our list is the plat of the property. It is usually supplied with the appraisal. The plat will show that the structures are not on someone else’s property, show what structures are there (as of the date the plat was drawn), may show flood plain information and other dimensional data. Much more can be gleaned from this document but would be of more concern to developers, etc. than to us as potential noteholders.

The next item, photos, usually also comes with the appraisal. I request PHOTO COMPS (comparables). This means that they supply photos of the subject property AND of the comparables they used to arrive at the appraised value. It will cost an extra $30 or so, but not only does it make me feel more comfortable, many investors to whom I sell require it.

 

 Appraisals

Appraisers typically use three different methods to establish property value:

 

Comparables - This method arrives at a value by comparing recent sales prices of properties similar to the "subject property." Here the appraiser goes to his or her computer and looks at CLOSED TRANSACTIONS in the same area and same price range. (HINT: MLS closed transactions also show whether owner financing was offered.) After selecting three comparables, the price of the "subject" is then adjusted up or down against the actual sales prices of the comps.

Adjustments are made for differences in features (fireplace, extra bath, etc.), differences in square footage and any other differences that might affect market value. There is usually a standard "price list" used to adjust for the various extra features. In addition to closed transaction data, the "tax appraisal" from the local tax assessors office often comes into play.

An appraiser’s failure to pick up on extra interior features (maybe even one or more extra rooms finished in the basement?) can cause an unduly low appraisal and can therefore limit the price you can resell for (and your profit). Comparables that were sold more than six moths ago are generally not acceptable due to possible market changes. Especially in today’s market, they are certainly not considered acceptable by me or by most investors. Many investors also require "PHOTO COMPS." This is a good standard practice as far as I am concerned. I typically pay about $165 for an appraisal with an extra $30 charge for photos of the comps. There should always be a photo of the "subject" property as a matter of routine.

 

Replacement Cost - The second method the appraiser will use in determining value is the replacement cost. In this approach, there will be a basic price per square foot for the structure, based on today’s building costs, for that type of construction. There will then be additions from the "standard price list" for extra features as mentioned before. Once that value has been determined, there will be a "standard depreciation" figure applied to reduce the value from the replacement cost to today’s depreciated value. Once that value of the structure has been determined, the value of the land will be added to produce a total figure.

Of course, you can guess my opinion as to the reliability of a TAX appraisal. (I have protested my tax appraisal every year for the last fifteen years and have always received substantial reductions.) The value the appraiser reports for this method may also be influenced by some "statistical handbooks" that they use.

 

Income Approach - The third approach used is the "income approach." This is generally not used unless we are dealing with an income producing property where there is a substantial rental history. Even then, it is not generally applied unless there are more than four units involved. If you become involved in that type of note, you might end up owning that type of property and you had better understand how to operate it.

The final appraisal report should include values derived from each of the methods and then in a final composite value. (After studying these approaches, you can see why they say that "appraising is an art, not a science.")

 

How To Use An Appraisal

The appraisal is used in several ways:

It lets us decide whether we could foreclose the property and resell it to at least recover our investment and projected note profit (plus possibly additional profits).

It tells us the maximum our investors would pay irrespective of yield and therefore tells us that we must buy for less if we plan to make a profit.

In addition to value, it should tell us a little about the neighborhood and how the subject fits in. I once looked at a 5500 square foot house with ALL the amenities ranging from swimming pool to copper gutter and downspouts. It was gorgeous, BUT.... the builder had built it for his own use during the construction and sales phase of a large project of moderate to low price townhouses. Yes, you guessed it. He build in right in the middle of the project. I investigated converting it to a multiunit but the cost was prohibitive. Gorgeous, but a white elephant in that setting and not something I’d like to be holding a note on. I might be forced to own it.

 

If it is rental property, we should see (or make it a point to get) rental comps to see if we could rent it for a profit if we decided to keep it. If rent comps aren’t supplied, check with two or three realtors who handle rentals in the area.

The appraisal ordered should be a drive by - quick sale appraisal and most good appraisers will know this if they know you are buying a note. I strongly suggest that you not leave it to chance — I recommend that you specify it. A quick sale appraisal generally means the price at which the property could be expected to sell within a 90-day period. If you plan to resell the note, you should check with your investor to see whether they require that the appraiser be on their approved list.

Since the ultimate recourse for a note holder is the underlying collateral, it is important that we know the value of that collateral and what we would do with it if we ended up having to own that collateral because of non-performance on our note. That, of course, means an appraisal by an "expert."

Appraisers have been blamed for many of the real estate loan problems the savings and loans suffered, and their standards and practices have been repeatedly investigated. There is now federal legislation in place requiring states to establish standards for appraisers, test and license them and police the industry to ensure compliance with those standards.

When I am offered a note for sale on the phone the seller will often refer to the "fair market value" ("FMV") of the property. That’s a figment of their imagination and not the basis on which I buy notes or property. The true market value is defined as the price a willing and able buyer will pay and a willing and able seller will take. FMV also varies as a function of market conditions. We should understand the influence of market conditions on values and deal both with today’s reality and with our belief as to what the market will do. I remember the time when we could always count on the market (at least in our area) to go up. Over the last few years, in many areas, we have seen the sellers’ market of the eighties turn into the buyers’ market of today. Both of these extremes should have an influence on how we view appraisals.

I own a mortgage on a property with a current appraised value of $167,500. The previous year’s TAX appraisal was $167,950, and the current year’s TAX appraisal is $163,760. When we see the taxing authority drop values, we know values really are down. If we have a balanced market that is neither heavily buyer or seller dominated, we have an equilibrium where the value is reasonably predictable. These are just extra thoughts on the appraisal aspect of the business. This suggests that maybe we should look at the local market/economy where our collateral is situated before we make a "value" judgment. It should be noted that the "buyer’s market" conditions will be especially harsh on the higher price range properties.

Part III

The next items on our documentation check-list pertain to the underlying senior debt (if any). We will want a copy of the note and security instrument for that debt. We will want to confirm that the amounts, terms, conditions and outstanding balances for that debt are as we have been told. (Some notes allow for extra debt to be added after some paydown has happened over a period of time.) We will want to read them for most all of the same things that we looked for in the documents pertaining to the loan we are considering buying.

Of special interest will be whether it has a due on sale clause, terms under which the loan can be called and from your point of view, what happens if it is called. What are your remedies and options to protect your position? You will also want to check for any terms that might influence your position even if all the debts are performing.

Think about the subordination clauses mentioned in the our last issue. What other things could be lurking around to cause us a problem? Don’t be afraid of potential problems, just be aware of them and know what they mean. They could become opportunities. All we really have to do is to make sure we READ AND UNDERSTAND EVERYTHING!! These documents will also tell us the lender’s name, loan number, where his debt is recorded, who to contact and much more. There will be several times and several reasons why we may want to contact that lender over a period of time.

 

SENIOR DEBT STATUS VERIFICATION

The next item is the senior debt status verification letter. This is where we get in touch with the senior debt holder to confirm that the payments on that debt are and have been current and that the outstanding balance is as reported to us. Yes, people have been known to make payments on the "small second" mortgage and be in default on the first. Clearly, we would not want to buy a second with the first in default. The reason we want to confirm the current balance is that this could affect our loan to value ratio/exposure and lead to future disagreements. Maybe some extra debt has been negotiated with the current lender or maybe some back payments or interest have been added to the balance. In addition, this is certainly going to tell us something about the payor’s current financial condition. In any case, we need to know.

 

PAYOR ESTOPPEL AFFIDAVIT

Next on our list is the PAYOR ESTOPPEL AFFIDAVIT. The purpose of this is to get the payor to acknowledge that the mortgagor agrees that he owes what we have been told that he owes and to ESTOP future possible disagreement on those points. They are effectively told that if they don’t agree with the facts as stated, tell me now or "don’t come back to me later" and say that things were different at the time we bought the note than was stated.

 

CREDIT APPROVAL

Next is CREDIT APPROVAL. This means that we should have received the credit report and should have evaluated it. In addition, if a credit application has been submitted (as in buying right after settlement) we should verify everything on the report. But remember that our ultimate recourse is the property. The credit information does help us in the resale of notes since others may put more emphasis on the payor than we do. The credit history will certainly affect the price we for which we can resell the note.

 

P & L STATEMENT

The P & L (Profit and Loss) statement applies primarily to investor-owned or commercial properties. We would want to see a P & L statement on the properties because a property of this type is expected to produce the revenues to make its own payments. If we had to take the property back, we would want to know that it could pay its own way AND that we would know how to operate the property to make it pay. Since this will not apply to most notes we would personally hold, I will not elaborate further here.

Now we have covered the first 16 items on our documentation checklist. This completes all of the documents we need to allow us to make our purchase decision and to schedule settlement. In future issues of THE PAPER SOURCE I will cover how I use all of the previous documents to make a buying decision, why I might abort the deal early to avoid wasting time and how to potentially take a problem in these areas and turn that problem into an opportunity.

Part IV

It’s time to instruct the settlement agent (a title company or attorney) how you want settlement handled. These instructions will vary from case to case, depending upon whether you are keeping or reselling the note. Let’s assume you are reselling. You simply tell them you are buying a note from party "A" and simultaneously reselling it to party "B." Give them these instructions:

1. You want separate but simultaneous closings. You do not want either party to know who the other party is since they might decide to go around you in future transactions.

2. Your purchaser’s money will fund the transaction. Thus, the purchaser’s funds must be in escrow AND authorized for disbursement before settlement.

3. You require a double recordation with your ownership recorded before the resale to your investor is recorded. This means that you actually own the note before you resell it.

4. You want to be sure that your purchaser’s requirements are fully met before closing so that there will be no complications to cause your purchaser not to settle as scheduled.

5. Per the contract, funds to the seller are not to be disbursed until proof of recordation of the resale to the note investor has been received.

6. Ask the settlement agent to coordinate the closing by being in touch with all parties and to let me know if anything else is needed and/or is delaying settlement.

7. You should let the settlement agent know of any other documents you require at settlement (such as title insurance, affidavits, etc.) so they will have adequate time to respond. If you want them to handle post-closing activities beyond the norm, mention that at this time. Beyond the above items (or anything special to your case), the settlement agent should know how to handle the rest.

When A Seller Is Not A Seller!

Sometimes there are some special considerations. Here are two examples from my files. In these cases the major consideration was, "Does the selling party have the right to sell all right and title to the note?"

The first case involves a note created as a result of a divorce. Whenever you see such a note, your first question must always be, "Who has the right to sell the note?" In this case the seller had a court order authorizing the sale and I made it a part of the closing package.

The second case involves a note where the name shown on the note as payee is different than the name of the note seller. It turns out that the seller is the sister of the payee. Does she have the right to sell? I required a power of attorney authorizing her to act in her sister’s behalf .

I purchased a note on property held by a developer. The note was not held by him personally but rather by a corporation he owned 100%. Notwithstanding his ownership of the corporation, he did not own the note, the corporation did. He did not have the authority to sell the note. It took a resolution from the board of directors (he & his wife) to authorize him to sell the note on behalf of the corporation. The original of that resolution resides in our file with the rest of the loan package. If a note is held by a legal entity such as a trust, partnership, church, estate, etc., be sure that the person signing the transaction has full legal authority to sell the note.

On the right is a sample "Weekly Activity Sheet" that you are free to use as-is, or to modify, or for that matter to ignore. If you ignore it, chances are that what happens will not be of your choosing. For over 30 years I heard my mother-in-law say "Just wait 'til my ship comes in." She waited & waited & waited & waited and regretfully passed away, but her ship never came in. Instead of acting, she waited.

She no longer has the choice. You do. Don’t wait. PLAN FOR AND TAKE THE ACTIVE STEPS TO MAKE YOUR SHIP COME IN — NOW!!!

 

Part V

 

Delbert Ashby authored the book, "Make Money Trading Mortgages," the best written explanation of the note brokering business available. It is $39.95 + $4 shipping, total $43.95. To order, call 800-542-2270 or click here.

 

WEEKLY ACTIVITY SHEET

 

Week Ending _______________________________

Actions Required

Date

Goal

Accomplished

Results

Advertisements
Courthouse
Rotary, Chamber, etc. mtgs.
Mailings
Re-Contact "On The Fence" Note Holders
Networking Contacts:
Transactions Pending/Follow-up
Action Results
Transactions Closed
New Inquiries Generated
Needed (Education, CPA, Attorney,

Research, etc.)

Add’l Education Needed/Received

 

How many people did I tell this week that "I buy mortgages?" _______________

 

Part V

 

How do you prevent the note seller from discovering the amount of your commission?

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Over the last few months we have been examining the paperwork we must contend with prior to actually buying the note in question. At last, we are ready to go to settlement!

The Settlement Process

Lets examine the settlement process from two points of view. First we will look at the process as though we will resell the note. Then we will proceed further as though we will keep it for our own portfolio. While the ultimate steps taken should be the same, our note purchaser will probably take care of some of these things for themselves. In the resale situation, when all parties arrive at the settlement office, we should either have two separate conference rooms or the settlement officer needs to be very careful not to inadvertently divulge information that we don’t want the other parties to have.

Here’s how one of my typical settlements worked recently: I was the broker in this transaction, and my company is the Wellington Company, Inc. My institutional buyer (let’s call it "Astropolitan Finance") had sent a check to the settlement attorney in advance for the amount they agreed to pay for the note. The note sellers arrived with the ORIGINAL OF THE NOTE along with the ORIGINAL DEED OF TRUST, etc. We were ushered into a conference room. The sellers sat on one side and I on the other.

The attorney asked to see the original note. He looked at it, handed it back to them as said, "Please turn the note over and endorse it as you would a check...just write ‘Pay to the order of the Wellington Company, Inc.’ and both of you, husband & wife, sign your names under that and of course date it." He then took the note & trust deed back from them. He then handed them an ASSIGNMENT AGREEMENT for their signature wherein they assigned all right and title to the said note to The Wellington Company, Inc. Next he said, "Since The Wellington Company is paying for all settlement costs, that’s all we need from you. You will get a check in a few days."

The note sellers left. Notice that prices, check amounts, nor the name of my purchaser were never mentioned. He then handed me the note (at that moment it belonged to The Wellington Co./me) and said, "Endorse the note right under where they did by writing ‘Pay to the order of Astropolitan Finance, Inc. and sign it as the president of The Wellington Company." I then signed an assignment agreement transferring all right and title to Astropolitan . The attorney said that he would cash my buyers check and from the proceeds would pay the note sellers, deduct the settlement charges and mail The Wellington Co. a check for the remainder (my profit).

Before leaving the conference room, I confirmed that he would handle the recording of BOTH assignments IN THE ORDER IN WHICH THEY HAD OCCURRED and return to me proof of recording and a full documentation package on BOTH assignments.

That’s it! Unless your note purchaser has required you to do any thing else, settlement is done. Usually anything additional that your purchaser requires will be handled between the attorney and the purchaser or directly by the purchaser. Most people find the first few transactions a bit intimidating, but as you can now see it’s so simple as to be almost boring — once you have done a few.

Settlement When You Are The Investor

What if you plan to keep the note? Once the sellers have endorsed the note to you, your check is given to the attorney and the reassignment steps covered above would not take place. The attorney would then give you the original of the assigned note and trust deed and then have the assignment recorded in your name. After recording, the original of the recorded assignment should be returned to you.

It may take several weeks for the recorded documents to be returned. The transaction discussed above took more than 10 weeks. If you become concerned, check with the settlement attorney or call the recorder’s office in land records to ask what the turnaround time is running.

We now own the note but that doesn’t mean we are finished with the paperwork or with settlement. Next month in our final installment on documentation we’ll discuss what we need in our hands before leaving the settlement table.

 

Part VI

This is the final installment of my series on the paperwork involved in a note transaction. Now we discuss what we need in our hands before leaving the settlement table. Most of these items apply if you are the note investor.

MORTGAGEE’S TITLE POLICY

We must have lender’s (mortgagee’s/lender’s — not just owner’s) title insurance, with us (if we are the note investor) named as the insured. This may be a new policy binder if there was no such insurance purchased when the note was originated. If previous insurance on this note was purchased, it can simply be endorsed to us. We will certainly want to make sure we know what exceptions are listed in "Title B" of the policy before we finalize settlement.

 

ESTOPPEL AFFIDAVIT

We must have an Estoppel Affidavit/Purchase Agreement from the payee. This document defines what the note seller represents to you what he is selling. (Editor’s note: Many investors also get an estoppel from the payor affirming that he is in agreement with the terms and balance of the note, although he is under no obligation to provide this.) In the affidavit, the seller will certify that the loan balance, payment amount, term and status of loan payments are/have been as represented. If the settlement attorney has prepared the assignment document, those terms of the purchase agreement which have long term impact should have been transferred into the assignment. I will sometimes stipulate that the purchase agreement SHALL SURVIVE SETTLEMENT. Unless so stipulated, it usually dies after settlement and is of no further effect. You need to make sure that the assignment document contains the full intent of the contract.

You will also want to obtain two other things at settlement that you will need immediately after settlement. GET THEM BEFORE YOU LEAVE SETTLEMENT! These are a copy of the hazard (home owners) insurance policy on the dwelling and the ORIGINAL of the PAYEE TO PAYOR NOTIFICATION LETTER.

Settlement is now complete.

 

AFTER SETTLEMENT

If you are buying this note for your own portfolio, immediately after settlement you should contact the insurance agent to have your name added as a LOSS PAYEE (LENDER). Be sure you get the name of the person you spoke with and record their name and the date/time you spoke with them. You should be immediately covered and should subsequently receive a copy of an endorsement showing you as a loss payee.

As the investor, the second thing to do immediately after settlement is to send the PAYEE-TO-PAYOR NOTIFICATION LETTER (certified, return receipt requested) to the payor wherein the note seller tells the payor that he must to start making his payments to you. I also put a nice cover letter of my own with the package where I introduce myself as the new note holder, assure them that nothing has changed except where they mail their payments and invite them to contact me if they have any questions.

The last item on our checklist is the SENIOR LOAN LETTER/REQUEST FOR NOTICE. This is simply a letter to the senior (first trust?) loan holder(s) letting them know that we would like to be notified in the event that there is ever a problem with the payments on their loan. I usually also indicate that I may be in a position to help cure any problems should they come into existence. In that letter it is important to reference the property address, the payor’s name and his loan number. I like to call the senior lender to get the name of the person to whom I should send the letter and direct it to that individual.

That’s it. We are now completely through the paperwork that it takes to properly get us into the note ownership and get our cash flow coming in. All we need to do is set up the files to service the note and go on to the next one.

This completes our series on documentation. As I indicated when we started the series, the major part of the documentation already exists from the real estate transaction when the note was created. The real significance of most of the documentation is to allow us to determine whether we will buy the note or not. The paper we buy is based on an agreement between the property seller and the buyer. Since we are really buying someone else’s position in that prewritten agreement, it behooves us to examine carefully what we are buying and what we are committing to.

Delbert Ashby has been involved in notes longer than many note brokers have been alive. He authored the book, "Make Money Trading Mortgages," the best written explanation of the note brokering business available. It is $39.95 + $4 shipping, total $43.95. To order, call 800-542-2270 or click here.


THE PAPER SOURCE JOURNAL  www.PaperSourceOnline.com   1-800-542-2270


How To Answer Note Holders’

Favorite Questions

by W. J. Mencarow, Jr.

"I saw your ad. What do you mean you buy notes (or mortgages, structured settlements, etc.)?"

Your best strategy is to ignore the question and ask one of your own: "Are you receiving payments on a mortgage now?" (Or structured settlement or whatever is appropriate). Otherwise, you may find yourself explaining note investments to someone who is simply curious — or worse, to your competition. Don't waste your time with people who aren’t holding notes.

 

"What do you pay?

Again, don't waste your time.

Make sure they understand that you are only interested in beginning a conversation if they have something to sell. Ask AGAIN, "are you receiving payments on a mortgage now?" It's amazing how many people think they can sell a mortgage they're paying on! If they say yes, the answer to the question of what you pay is, "it depends," and you then proceed to ask them the questions from your intake sheet.

 

"How much of a discount will I have to take?"

"As little as possible. Each note is different." Then ask your questions. I’m always happy when note holders ask this question. It means they realize a discount is involved. It also means they know something about the time value of money, and that lessens the chance that they could later accuse me of taking advantage of a financially unsophisticated person.

I’d much rather talk about how much of a discount is involved rather than try to explain why notes are discounted!

 

"How long does it take before I get my money?"

"Once you furnish me with all the documents I need, the process will take a few weeks." Note the all-important conditions: once YOU furnish me with ALL the documents I need.

 

 "Why does it take so long?"

"The title search and appraisal are what takes the longest, and we have no control over those. It may very well be shorter." In other words, any delays are somebody else’s fault. It’s usually just that way!

 

"Are there any points or fees I'll have to pay?"

My answer is, "no, there are no points, and I'll pay all the closing costs. Nothing will be deducted from what I pay you." This creates good will and a cleaner transaction. If we’re buying the note for our portfolio, it also allows us to keep control of the situation: if we pay the closing costs, we pick the lawyer, and he works for us. This is crucial to our closing system.

 

"What documents do you need?"

"Not many, really. I'll go over that with you when we meet to complete our agreement to buy the note. Would 3 o'clock this afternoon be all right, or would 8 o'clock tonight be better?"

 

"What if I can't find all the documents?"

"That's OK. The lawyer or title company which handled the property sale should have copies of the key documents or be able to get them for us."

 

"Can I use my own lawyer?"

"I would insist on it. I strongly encourage you to have your lawyer review everything in advance. Of course, you’ll have to pay your lawyer's fee."

Most note sellers don’t want to pay for a lawyer, and that last sentence makes them think twice. Another lawyer is usually the kiss of death for a transaction, but a note seller who asks this question is afraid you're going to take advantage of him. The best way to dispel this is to do what he doesn't expect -- insist he consult his lawyer before he acts. "Whosoever shall compel thee to go a mile, go with him two miles." (Matt. 5:41)

 

W.J. Mencarow, Jr. is the editor of THE PAPER SOURCE.

THE PAPER SOURCE JOURNAL  www.PaperSourceOnline.com  1-800-542-2270  


 

Seven Secrets of Successful Negotiators

by John Schaub

Do you consider yourself a good negotiator?

When I decided to teach a new seminar on negotiation, I began studying every book on negotiation I could find. I consider myself an excellent negotiator, and yet I learned many ways to improve.

Whether negotiating for the purchase of the Empire State Building or the release of hostages, professional negotiators seemed to agree on several strategies.

Great negotiators learn their craft from others. Negotiating, like many things in life, is a skill you can continue to improve. Like management, negotiating is more complex than it first appears. It is not simply a matter of haggling over the price, as you would when buying a melon at a roadside stand. Likewise, the best negotiator is not the flashy, smooth talker. The best negotiator is the one who is best prepared. Negotiating is a learnable craft, and one that you should set a goal to learn. It pays better than any other skill you can acquire.

Secret #1 — Avoid Emotional Involvement

First, admit that emotions can play a big part in your decision-making process. When you are angry or scared you make decisions differently than when you are happy and secure. When negotiating with sellers, buyers, note payors and tenants, you can become emotional. Imagine how you would react if just before closing a note seller told you he wasn’t going to go through with the sale until you threw in a brand new Mercedes.

You cannot prevent yourself from feeling these emotions, but you can recognize that you are angry or upset, and refuse to negotiate further until you are in full control again. You can even begin to anticipate situations that may evoke an emotional reaction on your part and prepare for it ahead of time.

 

Secret #2 — Research Before You Begin

When buying or selling notes, you should research the property, paperwork, the market and the people involved. If you are buying, then check out the sellers to learn all you can about their situation. The first step is to ask them a lot of questions. You can learn a lot in this informal stage of negotiation. Once you begin making offers, the sellers will be on their guard and reveal little about their situation. When I teach my Making It Big On Little Deals seminar, students, armed with a long list of questions, call property sellers and get them to reveal much more than they should about their personal situation and the property.

You should know if the seller must sell, if they have any real or perceived deadlines, and as much as you can about their financial situation. This gives you information that will help you craft an offer they can accept, and assures you an acceptable profit.

Know everything you can about the note and property, especially their real market values. Know your market conditions. Do you have an investor for this note, or will it be difficult to find one? Is this a situation where you will have a lot of competition, or will you be the only one making an offer? At what price can you resell this note quickly? The market conditions dictate how quickly you make your offer and how much you offer.

Secret #3 — Have A Game Plan

Whenever possible, negotiate on your terms and at a time and place that you choose. When you are the buyer, you can generally direct how negotiations will proceed. No one can force you to make an offer, although the seller may pressure you by revealing that another offer is coming. I suggest that you don't compete with this other offer. Simply say, "Call me if the other offer doesn’t materialize" (which often happens).

Based on all of the information you have gathered, calculate the highest price you are willing to pay, the lowest price that you can imagine the sellers accepting, and do this for both a full purchase and a partial purchase. Write down the terms that are important to you. Know what you are willing to give away and what you will insist on to make the deal.

Write all of this down, and then formulate your first offer, asking for your best deal. Be prepared to make counteroffers without giving away what is important to you. Sellers ("agents" deleted) will work hard trying to get you to pay more. They may appeal to your sense of fairness, greed, or whatever they can work on. It is important to have a written game plan before you enter into the excitement of the negotiation.

Secret #4 — Be Aware Of Your Power And Use It Wisely

You will often have more power than the other party when negotiating. As a buyer you always have more power. You never have to buy and they often have to sell. That is why you lock in your profits when you buy. When you sell, the buyer has the power. (rest of sentence deleted)

It is possible to overpower or overleverage a situation. Imagine a note seller facing bankruptcy. They have been chased by creditors and possibly harassed by other note buyers. These sellers are close to just throwing in the towel and refusing to negotiate with anyone.

If you make them a take-it-or-leave-it offer, they will probably leave it. To buy a note in this situation, you must make an offer that shows them that you care about what happens to them. At the end of the negotiations, both parties should still have some honor intact. If you take it all, you run the very real risk that the other party will reuse to perform as agreed. Write down the best you expect and the worst you are able to accept before you start, and you won’t be misled into negotiating for more than you should.

Secret #5 — Put Yourself In Their Shoes

If you were declaring bankruptcy or losing your house in foreclosure, how would you feel? Would you be worried about where to move, about what your family and friends think about your financial management skills, and about ever being able to buy a house or get credit again?

By letting the seller know that you can identify with these fears, and that you are willing to try to solve some of their problems, you will have a better chance of buying the note. These sellers often postpone making any decision until the very last minute. I am negotiating to buy two houses today from two different sellers that will be sold this week at a foreclosure sale. The sellers have had months to do something, but have taken no action. A psychologist might say they are in denial.

 

Secret #6 — Know What Risk You Are Taking And Have An Alternative

Whatever you are negotiating for, there is a downside risk that you will not prevail. Usually the risk is small. Children are typically fearless negotiators because they know that perhaps the worst that will happen is that they will be confined to their room for some time to reflect. If you are negotiating to buy a note and you don’t get it, you haven’t really lost the profit you were going to make, you have just postponed it until you find the next deal. It’s not your last chance to buy a note.

 

Try to always have at least two potential deals to consider. If the first seller becomes intractable, shift your efforts to the other note and make them an offer you like better. Perhaps the first seller will come around when he realizes there is real competition for your money.

Identify the worst that can happen: you don’t buy, so you keep your money for another month; or if you’re a real estate investor, you don’t rent, so the house sits empty for a few more weeks; or you don’t sell the house and you have to make another month’s payment. All of these are better than paying too much when you buy, renting to the wrong tenant, or selling a note, a house or anything else too cheaply.

Secret #7 — Know When To Close The Deal

A good salesman knows when to stop talking and start writing. A good negotiator knows when the deal is good enough and stops negotiating. You can negotiate for more than you should, causing the other party to withdraw or even to renege on a previously-agreed deal, even if you have a signed contract!

You can also simply talk too much. Once you have reached your goals and the deal is good enough, stop talking and write down your agreement. When you are buying a note. write down every point you want to negotiate before you start, and note each point of agreement as you go. At the end, you can simply draft a formal contract based on what you have already resolved.

John Schaub has been investing in paper and real estate for over 30 years. His seminar with Jack Miller was the first to teach people how to invest in single family houses. Go to www.PaperSourceOnline.com/products.html

John has several home study courses, on negotiation and other subjects. for information  or call 1-800-542-2270.

THE PAPER SOURCE   www.PaperSourceOnline.com   1-800-542-2270


Persuasive Telephone Negotiation

by Delbert Ashby

 

My best advice for negotiating on the telephone is:

Be quiet and listen. Really listen.

In the initial dialogue, what should our objective be? I suggest that it should be to find out why the person has called. If the call has to do with selling a note, you will want to find out what they have for sale, what they want for it and get to know them and their problems. You will want to do these things BEFORE you give them any information relative to potentially purchasing their note.

You can defer any questions you don’t want to answer right now by saying, "I’ll give you that in a minute, but first I need to know..." and start your questions to get the information you need. In this fashion you can control the conversation without being obvious or obnoxious.

 

A Practical Example

When you ask your questions, keep quiet and listen...really listen to their answers. Don’t be in a hurry to respond. They may only have paused to collect their thoughts rather than really being finished with what they want to tell you. Here’s an example of what I mean:

Jim: Hi, my name is Jim. I understand you buy notes.

Del: Yes, Jim, I sure do. Do you have a note to sell?

Jim: Yes, I do. It’s a 15 year note with an interest rate of 10 percent, and I want to know what you will give me for it.

Del: Do you have the note in front of you, Jim? I have a number of questions I need to ask you first.

Jim: No, it’s in my safe deposit box.

Del: All right, I’ll need to see a copy of it, but first, let’s talk some more about your situation. How did the note come into being? (Listen and possibly develop a line of related questions.)

What can you tell me about the payor and their credit? (Listen and develop more questions like "Did you check their credit?" "How much money do they make?" "What do they do for a living?" etc.)

What prompts you to want to sell the note at this particular time? (Listen...do they give you a real reason or a smokescreen? Develop more questions like "What happens if you can’t sell the note?" "Who else have you talked to about selling the note?" "Did they make you an offer?" "How much was the offer?" "Why didn't you accept it?" "How much money do you need to get done what you need to do?")

At this point we should have learned a lot about Jim and his circumstances, needs, preconceived notions and attitudes than we have about the note. That is our objective. Here is a way to get to the next step:

Del (after listening completely to Jim): Jim, I have a form here that I need to fill out with a lot of information about the note so that I can have our underwriters look at the situation. The information I need is in the paper work you already have, so probably the easiest way to get what I need is for you to get the note and other papers out of the safe deposit box and send me copies. At a minimum, I need a copy of the note, the mortgage or trust deed and a copy of the settlement statement. Within a few days after we have those, I can talk more to you about an offer and how we would propose solving your problem. When can you get those to me?

Try the idea of using a form. People will give you information for the form that they might hesitate to give you if they think it’s just you, rather than the form and the underwriter (investor) asking for it..

It is not uncommon for our customer (note seller) to let us know he is ready to do business by giving us a buy sign. It is also not uncommon for us to miss this important clue because we weren’t listening or didn't know about buy signs. Here is an example: 

One of my readers who is participating in a transaction with me asked, "What do I tell him if he asks whether the quotes I gave him quite a bit earlier are still good?"

That question is a buy sign!

You would not answer the question but instead would ask him a question: "Which of the quotes are you interested in?" After his answer, tell him the market does change quickly so you will have to confirm the quote with the investor (or underwriters), and then ask him "If I can still get you that price, do you want to do the deal?"

If he says yes, get him to sign the agreement before you go back to the investor "so the investor knows that the seller is serious." If he says he is not sure, tell him you don’t want to risk turning your investor off from the deal by waltzing around and using up the investor’s time (and your credibility), so he should think about it and call you when he has decided. Only then will you risk your relationship with the investor by going back for confirmation.

A buy sign is more often a question by the customer where it is implied that the answer to the question is pivotal in his decision as to whether to "buy" (sell his note) or not. Most of the time it really isn’t a pivotal issue but rather an expression of his need for you to help him say "yes"...he has already basically decided.

Typical buy signs are statements such as: "If I go ahead with this, can I...Have the money by (date)?"... "Keep the next payment?"...Will you handle the cost for the appraisal?"

In short, he will be asking you for something or to confirm something. When he does, ask him for a commitment based on "If I can get this for you, do we have a deal?"  Then get an absolute commitment from him before you do what you have promised to do in exchange. He will not be offended: He is looking for you to help him make a decision and commitment.

Remember, a buy sign is usually an expression of the note holder’s need for you to help him say yes. Once decided and committed, he can breathe a sigh of relief as his problem is taken care of.

Del Ashby has brokered, invested in and taught discounted paper for many years in the Washington, DC area. He is the author of Make Money Trading Mortgages, a quality 145-page book that explains the essentials of note brokering. For information, visit www.PaperSourceOnline.com/products.html or call 800-542-2270.

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A No-Holds-Barred Conversation With RAM Funding’s Guy Ercolani, One Of The Top Note Brokers In The Country

 

Guy Ercolani has never been accused of timidity. The #2 most productive broker for the largest institutional investor in for THREE YEARS IN A ROW, Guy has informed opinions about the note business and he’s not afraid to share them. He cares about where we are going, and as a senior leader in the industry his opinions carry a lot of weight. He was interviewed by PAPER SOURCE editor W .J. Mencarow.

How did you get started in the note business, Guy?

I have a background as a tax accountant. In 1989 I took a home study course from the Jefferson Institute (which is no longer in business). I started in 1990 working with just my wife, Sue. Without her mental and physical support we would not be here. She has assisted in making all of the major decisions of the company as well as the very minor tasks involved in running the business. She is truly my best friend.

We now have six people who work for us: Three brokers including me, two full-time support staff and one part-time. We have been recognized by Metropolitan as being their second largest broker — two years in a row. Last year we did approximately $14.5 million in volume. this year we are slated to surpass that.

 

The vast majority of people who take those kind of classes don’t make it in the note business. What makes you different?

I had about two year’s worth of living expenses put aside at the time. Most people don’t put enough money away to cover their overhead while they try to beat the learning curve. I believe that if a person wants to go full-time right from the start — which I would strongly discourage, by the way — they should have enough saved to cover a year of living expenses, including food, car payments, mortgage payments, everything. Many if not most people fail because they’re worried about keeping the lights on, they just don’t have the resources and have to quit before they make it.

My advice to those PAPER SOURCE subscribers just starting out is: Don’t quit your day job. The majority of people today are lured into this business by the "Make $10,000 A Month Part-Time!!" and similar ads they see. That’s just not realistic.

 

You do a lot of mailings to find notes, don’t you?

Yes. Direct mail is responsible for about 60% of the deals we close. We send out between 12,000 and 15,000 pieces of mail a week, right out of our own office. We spend $2,000 a week just on postage alone, not including other advertising. I’ve been accumulating names of note holders ever since I started in the business. Our data base now holds over 400,000 names. Two of our employees spend all their time preparing mailings and keeping the data base current.

When I first started I was getting a 2.75 - 3% response rate. That’s responses, not deals closed. Now if it’s three-quarters of a percent I’d be surprised.

Somebody starting out should never depend on direct mail to find note holders. Now, every time I say that people think I’m doing it so people won’t compete with me. That is absolutely not true. In all honesty it is not a good way to start out and should not be used exclusively to solicit business.

 

OK, what should they do?

Stick to your local county. If you want to dig up names to mail to, fine, but it should be a secondary item. Instead, focus on networking with real estate professionals, mortgage brokers and others who can refer you to notes.

 

What about a broker who is already in business — is direct mail a good addition to his or her other marketing efforts?

It could work, but it is expensive. If someone wanted to spend, say, $300 a week on postage, it might bring in an extra one or two deals a month.

 

You said that direct mail is responsible for about 60% of your business. Where does the rest of it come from?

The other 40% comes from networking, particularly from mortgage brokers, loan originators with whom we have built relationships over the years.

In our county and those around us, we get all the discounted notes from almost every traditional mortgage broker. This is because we make sure they never get cut out of a deal. This works because they don’t have the resources that we have to sell a private mortgage at a competitive price, and we don’t have the resources that they have, to do originations. We are also one of the few discounted mortgage brokers licensed as a traditional mortgage broker.

 

If someone wants to develop contacts with mortgage brokers as you have done to generate note referrals, how should they approach them?

Traditional mortgage brokers like working with other licensed brokers. In fact, a lot of them will not deal with unlicensed brokers. So my advice is: Get a state mortgage broker’s license. It gains you credibility with the mortgage origination community and many of your clients. I can’t tell you how many people ask us, "are you a legitimate business, are you licensed?"

I’m a member of the National Association of Mortgage Brokers, and can use their logo in my advertising. I can tell you that that does help establish credibility. I think brokers should join their local or state chapter of the NAMB. If nothing else, it’s a great networking opportunity. Plus it gives you credibility with traditional mortgage brokers who can refer notes to you.

 

One of the major problems we face is the question of legitimacy. It doesn’t help when one of the companies that lures people into the business (and sells them a $6,000 seminar) advertises that you can operate your note business "out of your car."

Credibility has been one of the biggest issues in our industry. We have our fair share of, shall we say, less than scrupulous brokers, people who will tell a note holder anything to get the deal in the door. And we’re seeing more and more of that.

In the early years of our business we lost a fair number of deals to small brokers who worked out of their homes and maybe made $500 to $800 on a transaction. That’s OK, it’s just part of being in business. Now what we’re seeing is not just the small brokers, but larger brokers, well-known in the industry, promising note holders things they cannot deliver. In many cases they are telling sellers what they want to hear just to get the deal under contract, and just before it closes they tell them they can’t do what they promised. They even have a name for it; taking somebody "to the cliff."

We never, ever quote a deal that we don’t think we can get done the way we say. Many times we’ve had to disqualify a deal for such things as bad appraisals or surprises in the property or paperwork, but never because we changed our mind about what we were willing to do. And it is never done at the closing table. I wouldn't do business that way.

 

Are you also concerned about unscrupulous referral sources and note holders going around you and selling directly to the investors?

That was an issue we worried about when we first started. But we learned how to deal with it by buying the deals in our own name, in many cases now with our own money. If you do get burned on a deal, you’ll never do business with that person again.

When dealing with traditional mortgage brokers we’ve never signed, or asked them to sign, a non-compete or non-circumvention agreement. We’ve had more sellers do us in than other brokers.

 

Are you concerned about investors going directly to note holders and cutting out the brokers?

Yes. I’m concerned that over the next few years the major players in the industry are going to want to do that more and more. I think they see their margins tightening because of larger brokers who are doing more volume putting price pressures on them. I believe they see going direct to the sellers as another avenue they can use to make up some of the revenue lost in price concessions to large brokers.

 

Does it make economic sense for most investors to do that? I know a few, primarily structured settlement investors, are doing TV ads beamed at noteholders. But for years we’ve been told by the big mortgage investors that it wasn’t cost-effective for them to buy notes directly. They’ve said it makes more economic sense to let the brokers do the handholding, due diligence and all the rest of the work involved in dealing with the public.

It’s true that they’ve always said that, but I think that some may conclude that in order to increase profits they will attempt go direct to note holders. It may not be Metro or The Associates, but some may be tempted to go after that direct business again, even though some 10 years ago Metro stopped going direct because of all the wasted time and money in doing that. A lot of investors have learned that it’s easier to have 50 top brokers that bring in 80% of your business than it is to try to go direct to 15,000 note holders.

Remember, brokers pay for all the advertising, we absorb the losses when sellers back out, we take all the ridiculous phone calls, we do the handholding, run after all the documents...we do the dirty work in order to bring a clean transaction to the investor. I’m not begrudging that at all. Taking on those tasks has been very lucrative for us.

Another reason I think some investors may try advertising directly to note holders is because large brokers are moving from being brokers to becoming investors in their own right. Very recently large brokers have been learning more about securitization and pooling. Investors have to be aware that if the large brokers are now able to pool notes on their own, get credit lines on their own, the investors might not be needed as much in the future.

 

So a possible scenario in the future is this: A few investors working exclusively with brokers, some buying from both brokers and note sellers, and what are today large brokers becoming smaller investors in their own right.

Yes, absolutely. After all, in mortgage originations, there is a wholesale and a retail level. There’s no reason our industry couldn’t go the same way, as much as I think that may be a mistake.

 

A relatively new product in the industry that many brokers are getting is a line of credit designed for the specific purpose of allowing them to buy notes in their own name. There are several note investors that offer it. How do you see this changing the business?

I have a tax accounting background, and I’ve been looking at this issue for some time. I’ve added up the figures every possible way, and, frankly, it’s very difficult to see how these programs can be profitable for brokers, with using the credit line to keep all of the notes in-house.

What’s happening is that larger brokers are using the credit lines to facilitate their efforts to pool loans in the $500,000 - $1 million range. Now the credit line can be profitable because it is their facilitator of cash. They keep an interest in the notes, pool the notes and sell them off.

There’s no problem in doing this, but just because we are good brokers doesn’t mean we are good underwriters. We know how to package up a deal and send it to an investor. We make money and it’s gone. If it defaults you never hear about it. But if you own these loans on your credit line, you are responsible for the foreclosure costs and for the money owed on that line. Your liability is both business and personal. It’s always dangerous to go into a business which you aren’t accustomed to, in this case, loan underwriting.

Things happen to loans that you cannot even anticipate. We’ve seen some deals that were A quality when we submitted it and we find out that it defaulted six months after we sent it to the lender. How many large brokers can afford to buy that back, cure the default or foreclose or whatever it takes?

Things look sweet right now because the economy is good, rate a re low, everything is stable, everybody is hyped up. But what happens when you are holding a pool of loans and interest rates start rising and the cost of funds on your credit line starts going up? And what happens if some of those loans can’t be sold conventionally any longer because they’ve gone into default?

I’ve been fearing that we might see one of the major brokers with a credit line start to falter. We haven’t, or at least haven’t heard of them. But I’ll have to fill you in on the ups and downs of the credit lines when I start using the ones we’ve been approved for. As of this interview I have no hand-on experience in this area.

 

So where do you see this industry going?

I think we’ll see further consolidations of large investors in the form of partnerships and mergers and outright sales of firms to holding companies.

There is plenty of business to go around, more business being created than we ever thought possible. If someone wants to get into the business they should not be afraid of competition. There is plenty of it, but if you’re afraid of competition you can’t get into any business. You’re not in a desert selling water, you’re in a business where there are tons of Realtors, tons of mortgage brokers, tons of bankers who touch our industry ever single day. In the last decade it has become more and more popular for people to sell their notes. At least the large brokers are better at cultivating, at digging out those notes.

The other side of the coin is that as people have realized they can sell their note, they also realize that there are many potential buyers. Sellers will shop these deals to death, trying to squeeze every last dime out of the deals. It’s harder for a large broker to do a deal for a very low profit that it is for a small broker.

It used to be, 20-25 years ago, that you could make 18 points on a deal. Now if you get 5 points, 5%, you’re doing well.

 

If you had one lesson to teach new brokers, what would it be?

Don’t try to retire from one deal. You need to make enough to cover your overhead and some profit, then move on to the next one. Don’t gouge the customers.

 

If they do, they won’t get the deals.

Yes, but sometimes they do get those deals. One if the biggest problems is students coming out of the so-called "training centers." They poison the waters, Bill. They don’t have the knowledge to sell these deals. They overpromise and underdeliver. As a result, the seller’s mind is poisoned. The broker didn’t do the deal at the price he said he would, the seller now has a bad attitude and when he gets a card or a letter or a phone call from you, the legitimate broker, he doesn’t want to do the transaction because he doesn’t think you can deliver.

 

You do business all over the country. You have to do almost all your negotiation over the telephone. What advice do you have for successful telephone negotiation?

You have to achieve credibility over the telephone with note sellers, and that’s a very difficult thing to do sincerely. I believe people should do business locally, at least at the beginning. It’s far better to meet face-to-face with note sellers. You will build credibility far better and faster sitting with them in their living room or your office, speaking and looking professional. This can overcome the fact that you don’t have the size or the pricing of a large broker. You can make that up in service. When you are a large broker and you have the benefits that being large gives, you can bring deals in the door without going face-to-face. For example, we can offer note holders extremely quick closings because we have title company relationships all over the country, we have our own money to buy deals, we have the knowledge and experience such that when we tell someone we can do something, we know we can deliver. A smaller broker may not have some of those advantages, so they have to make it up in personal service and face-to-face sincerity.

And I mean sincerity. One of the things our industry lacks a bit of is people who are sincere in their convictions, people who will deal at the price quoted. There is so much bait-and-switch going on, such as brokers who promise to pay 135% of the balance for notes, offer to buy the note in installments, send out multi-page contracts with huge penalties for all sorts of things and worse. I’ve seen contracts where the promised installments aren’t even mentioned!

 

In my opinion, most of what is taught as "negotiation" is simply how to lie and manipulate people.

I agree with you 100%. You used to think, "well, those people won’t stay in business long," but guess what — some of them are still out there.

People are being lured in to this industry by promises of big dollars. Ask anyone why they sign up for one of these expensive courses. They’ll say it’s because they were told they could make $10,000 a month part-time. You know as well as I do that’s impossible. I’m not even sure you can be a part-time broker any more. I think it would be hard to work a full-time job and be a part-time note broker.

I don’t want to sound negative, I’m not at all. I’m not afraid of competition, I think there’s plenty of business to go around, I just think that we have to find a way to grow these people into being ethical businesspeople. If you’re a Realtor or licensed mortgage broker, you have codes of ethics that you have to abide by. In our industry we lack that. Even if we had a code of ethics, there’s no enforcement. There’s no one to pull your license or to pull your fraternal relationship with the national association.

That’s another reason I think note brokers should become licensed mortgage brokers and join their local mortgage brokers association. We are, and we have to abide by the law, and the Code of Ethics and rules of the National Association of Mortgage Brokers.

That’s one of the glaring weaknesses of our industry. We don’t have a code of ethics and we wouldn’t have any enforcement if we did. If someone has a complaint about a note broker, there’s nobody they can turn to unless there’s a gross violation of the law. But we are getting larger, so if there are enough complaints, the government will force regulation on us.  

Contact Guy Ercolani at www.ramfunding.com, or call 407-799-2229, Fax 407-799-2108.

THE PAPER SOURCE JOURNAL  www.PaperSourceOnline.com  1-800-542-2270  


5 Things A Successful Note Buyer Must Have

by Jon Richards

I think there are five things that a successful note buyer must have. I define successful as making over $100,000 net per year. How does he or she do it? Here are my observations.

 

1. Money

First you must invest money in your business. The good thing about our industry is that you can truly start without laying out huge sums, unlike, for example, a franchise. However, unless you devote a substantial amount of money to marketing your note business, you simply will not break into the ranks of the high-income note buyers. We get too many calls from people who cannot even afford George Coats’ $23 book on Smart Trust Deed Investment. These people will never make it.

My observations are you need somewhere between $5,000 and $10,000 to invest in your business. This will allow you to develop professional marketing materials and to buy minimal office equipment. In my case, we spent $5,000 developing a brochure to give to Realtors. It has returned many times that amount, but I had to make the initial investment. I’m afraid that too many novices think that if they pay for the training they are ready to begin the business.

It is not unreasonable to expect new buyers to make this kind of investment in their new businesses. Above all, you must commit many thousands of dollars to a marketing program. You also need to commit money to an office, a fax machine, a separate telephone line, a computer and minimal software. After all, note buyering can be very lucrative, and can be one of the most effective ways to achieve early retirement in the world.

 

2. Amazing Marketing Plan

You need to develop a powerful, if not incredible marketing plan to find notes. The good news is that there are more notes in the world than any of us could ever hope to buy — the bad news is they are damn hard to find in large enough numbers to make you wealthy.

You need a well thought-out marketing plan to which you commit money, time and most of your efforts. Hank Harenberg says if you are not spending at least 80% of your time finding notes you have your priorities wrong.

I have found that no one way of finding notes works for everyone. You need a marketing plan that fits your skills, budget and your abilities. There is no magic secret. There is no hidden secret for success in the note business. In short, you must build on your marketing strengths and spend most of your time finding notes.

 

3. Credibility

Whether dealing with note sellers or professional referral sources you must appear credible. I think we are seen sort of like bankers. This means dressing the part, acting like you can perform and doing what you say you will do.

You need to know the vocabulary of the industry and you need to be comfortable when talking to a note seller. Metropolitan has exceptional material that'll walk you through the technical aspects of packaging and then closing a deal.

You will need some computer expertise. At a minimum, you must be able to write good looking letters on a laser printer. Dot matrix letters on poor paper mark you as a rookie. Credibility means not being too cute in your business name, your logo or your stationery. Remember, we are seen as bankers and it is to our advantage to maintain that look. Some of the best logos use, in small amounts, marble motifs and steel-looking logos They imply strength and integrity, your most important assets. Flaunt them.

I tell people I work with Metropolitan Mortgage, a billion dollar company that does not advertise locally. I flaunt my associations. I tell people I have access to an unlimited amount of cash with which to buy their notes. This is true. I don't think I'll spend all of Met's money. Flaunt your associations. It just enhances your credibility.

 

4. Technical Knowledge

You must take classes to keep updated, and I don't think you are in the business unless you attend conventions. You need the contacts, the new ideas and to meet like-minded colleagues. This simply cannot be overstated.

Secondly, to be credible you must understand at least some of the math in this note business. If you don't know what a "reverse partial" is, or if you must leave the financial calculations to the people you sell the notes to, you will find it hard to look credible and believable. So become comfortable with the calculator and you can certainly close more deals. Buy a few books on note buyering. The more you know the more deals you can close, the more respect you will get from the sellers and the more money you will make. It is true. Knowledge equals income.

 

5. Staff

The fifth thing I think you need to become a successful buyer may surprise you and you will probably resist it. But you should think seriously about hiring some minimal staff. Once you have done one or two deals and feel this business is for you, it becomes a major burden to do the paperwork.

BrokerNet has alleviated some of this, and more software is being developed to make it even easier. But I think it is too easy to get bogged down in the minutiae of this business and fail to see that marketing is everything.

A part-time helper is not that expensive, and I have found that they can repay much more than their salary. I know it's a big step for many of you, but hire a neighbor on an hourly basis and I'll bet you'll quickly find that person is more than worth what you are paying. This business can easily bog you down in details so that you can't keep your eye on the 20% of what you do that earns you 80% of your income.    ©1997-2000 by Jonathan Richards

Jon Richards is a veteran note buyer and the editor of NoteWorthy Newsletter: www.noteworthyusa.com    He has also produced several software programs for the note buying business and written two popular books:  Calculator Power! and MORE Calculator Power!   His software and books are available at www.papersourceonline.com/products.html


THE PAPER SOURCE MORTGAGE TRANSACTION CHECKLIST

___ Completed Mortgage Worksheet
___ Signed Purchase Contract
___ Signed Seller's Representations and Warranties (to be signed by note seller at closing)
___ Copy of Note
___ Copy of Mortgage, Deed of Trust or Contract/Agreement for Deed
(If purchasing a junior lien: ___ Copy of senior Note and Security Instrument)
___ Copy of Warranty or Grant Deed
___ Estoppel letter from senior lien holder (Not Desired By Some Investors)
___ Copy of Property Settlement Sheet (a.k.a. Closing Statement)
___ Settlement attorney's or title company's address and phone number
___ Copy of paid receipt or binder from hazard insurance co. showing mortgagee as additional insured
___ Copy of Mortgagee's Title Insurance Policy if in effect
___ Payor's name, current address, phone, Social Security No., prior address if recently moved
___ Credit Report on Payor
___ If green paper, payor's signed FNMA credit application
___ Seller's name, current address, phone
___ Verification of payment history/If serviced, name, address, phone of agency, acct. no., history
___ Tax and insurance escrows - complete record of amounts paid and balance in escrow
___ Note amortization schedule
___ B-Schedule (only if buying partial using B-Schedule Purchase Contract)
___ Directions and map to the property
___ At least 10 photos of the property and area (4 sides of improvement, views in all 6 directions)
___ Property appraisal including area median value for type of property
___ Address and detailed description of property improvements & neighborhood
___ Attorney's Title Report (Search or Title Bring-down)
___ Assignment of Note and Security Instrument from Seller to purchaser with original signatures
___ Original Note endorsed to purchaser with Seller's original signatures
___ Original Mortgage, Deed of Trust or Agreement/Contract for Deed___ Notice of Substitution of Additional Insured and Loss Payee signed by seller to hazard ins. co.
___ Notice of Substitiution of Insured and Loss Payee signed by seller to title ins. co.
___ Notice of Change of Mortgagee to purchaser's name and address signed by seller to payor

SPECIAL CASE ITEMS:
___ If vacant land, plat map and parcel no.
___ If income property, net operating income statements, very comprehensive set of photos on property and surrounding area, seller's tax returns, copies of leases, tenant credit apps.
___ If mobile home, copy of UCC-1, mobile home title, serial no. description (size, year, make/model)
___ Special case documents: Probate documents for estate sales, powers of attorney, executor certifications, divorce decrees, and any related legal documents regarding the ownership of the note
___ If seller is a corporation, copy of corporate resolutions showing who can sign documents for corp.
___ Copy of escrow instructions if appropriate
___ Seller's Escrow Deposit

POST-CLOSING ITEMS:
___ Copy of recorded Assignment and Note showing clerk's stamp, deed book and page number
___ Original Note and Deed of Trust (or Mortgage or Agreement /Contract For Deed)
___ Title Insurance
___ Notices sent via certified mail, return receipt, to hazard and title insurance co. and to Payor
(If purchasing a junior lien: ___ Notice of Default Request sent to senior lien holder)


Dear

Here are the documents we will need to process the cash purchase of your mortgage:

1. A copy of the Note and a copy of the Mortgage document (or Deed of Trust or Agreement for Deed).

2. A copy of the settlement sheet (also known as closing statement) from the sale of the property. This is the document that shows the purchase price, downpayment, etc. and itemizes the money that was required from the purchaser and what you received at the time of sale.

3. A copy of your Mortgagee Title Insurance Policy if you have one.

4. A copy of the paid receipt from the hazard insurance company showing that insurance is in effect on the property and that you are named as additional insured.

5. The note payor's full name(s), current address and Social Security number. If you do not have their Social Security number, it is not necessary to ask them for it -- it is not mandatory.

6. Some document to show that your payments have been received in a timely fashion. If your bank or an agency has been collecting the payments on your behalf, they will be able to furnish you with a copy of the payment history. If you have been receiving the payments directly from the payor, the ideal document would be the section of your bank statements showing when the payment was deposited, monthly for the past two years. If that is not possible, any document you have, such as a ledger book, would be helpful.

7. Directions for driving to the property. If you have a map of the area, please make a copy of the area where the property is located and mark the exact location on the copy.

8. Eight photographs of the property -- one of each of the four sides of the building, and one of each looking in all four directions outward from the property. For these, we will need a photo looking straight out toward the back of the property, one looking straight across in front, and one each looking left and right from the front of the property.

9. If a lawyer or title company handled the property sale, please send their name and phone number.

In order to expedite the processing of your funds we will need the above materials immediately. If you do not have some of the documents, just send copies of what you do have. We can contact the lawyer or title company for copies of what is missing. If you have any questions, please call us.

Sincerely,


THIS CONTRACT IS OFFERED WITH NO WARRANTIES EXPRESSED OR IMPLIED.  BEFORE YOU USE IT, YOU ARE ADVISED TO HAVE IT REVIEWED BY AN ATTORNEY FAMILIAR WITH THE APPLICABLE LAWS OF YOUR STATE.

 

STANDARD FORM PURCHASE CONTRACT (Full Purchase)

THIS CONTRACT entered into this ____ day of ______________, ____, by and between __________________________________________________, hereinafter referred to as Seller, and __________________________________________________, hereinafter referred to as Purchaser.

1. Seller represents and warrants to Purchaser and Purchaser's assigns that he is the legal owner (or current assignee) of the following described note and (mortgage) (deed of trust) (contract for deed), hereinafter referred to as Note and Security Instrument, executed by _________________________________, herinafter referred to as Payor, in favor of _________________________________, original Principal Balance $_________________ (____________________________) bearing interest at the rate of ____ percent per annum and being amortized over ____ (interest-only) (equal monthly principal and interest) payments of $__________ (__________________________________), dated _____________, with a final payment in the amount of $____________ (________________________) due and payable _____________, ____ and recorded in Deed Book _____, Page _____, ___________________ County records, State/Commonwealth of ______________. Legal description of real property securing the Note and Security Instrument:

 2. In consideration of the agreements contained herein, Seller agrees to sell, transfer, convey and assign to Purchaser and Purchaser agrees to purchase upon the terms and conditions hereinafter set out, all of Seller's rights, title, powers, interest in and to the above styled Note and Security Instrument, together with:

all of Seller's rights, claims and causes of action which Seller has or may have against the Payor of the Note and Security Instrument, and

all of Seller's rights, title, powers, interest in and to the real property which is described in the Note and Security Instrument, and

all of Seller's rights, title, powers, interest in and to any insurance policies, both title and property damage.

The purchase price shall be the sum of $___________________ (___________________________), payable at (issuance of title insurance policy) (after ____ payments have been received by Seller) (Other:

subject to proportionate adjustment if the balances, terms, payments or conditions stated in Paragraph 1 are incorrect or inaccurate.

3. Purchaser shall receive (______) ___________ Note and Security Instrument payments (hereinafter referred to as payments) beginning on ______________________, 19___, and a final balloon payment of $__________ (________________________) due and payable on _____________________________, 19___.

4. Seller represents and warrants to Purchaser that the Payor has been late ____ times and the payments are now _______________________.

5. Time is of the essence of this Contract. Purchaser shall have thirty (30) days from the date of this Contract to examine all documents, property and information deemed necessary by Purchaser to satisfy all contingencies and to close the transaction contemplated by this Contract, and to cancel this Contract without penalty or liability if any of the same is found unsatisfactory to Purchaser as determined by Purchaser in his sole opinion. Seller shall cooperate with Purchaser or Purchaser's attorney in obtaining any information necessary for such timely examinations and verifications. Purchaser shall have the right to extend this date for a maximum of 15 days if in his sole opinion it is necessary in order to complete due diligence. The closing shall occur at a mutually agreed-upon time and place. In the event the transaction contemplated by this Contract is not completed within the above period including extension this Contract shall become null and void and there shall be no liability between the parties.

6. Closing costs, including attorney's fees, mortgagee's title insurance, appraisal and credit check shall be paid by (Seller) (Purchaser) (Other: ________________________________).

7. At time of closing the principal balance due under the Note and Security Instrument shall be no less than $____________ (___________________) or there shall be no less than ___ payments of $________ (______________) each remaining due and owing on the Note and Security Instrument or an appropriate adjustment shall be made.

8. Any payments received by Seller during the term of this Contract or of any extension shall be credited to the cash required of Purchaser at closing and to the purchase price. There shall be no proration of interest.

9. Seller shall not sell, convey or assign any interest in said Note and Security Instrument or attempt to negotiate for the sale, conveyance or assignment of any interest of said Note and Security Instrument to any other party during the term of this Contract or any extension.

10. Seller authorizes Purchaser, its successors or assigns, to order, receive and review on Seller's behalf one or more consumer reports on any Mortgagor(s) in connection with this transaction from one or more consumer reporting agencies, all as permitted by the federal Fair Credit Reporting Act and applicable state law.

11. This Contract shall be construed in all respects with the laws of the State/Commonwealth of ___________. It is the intention of Purchaser and Seller that this Contract be interpreted in conformity with those laws. If, however, any portion of this Contract is deemed unenforceable, the remaining portions shall remain in full force and effect and be fully binding on the respective parties. This Contract may not be assigned by Seller without the prior written permission of Purchaser. Handwritten or typewritten provisions initialed by all parties to this Contract shall control if inserted herein or attached as addenda hereto if in conflict with any provisions of this agreement. In the event of any litigation concerning this Contract the prevailing party shall be entitled to reasonable attorney's fees in addition to such other relief provided by the Court. Seller acknowledges that this Contract may be recorded in the appropriate county land records at Purchaser's option and that such recordation will cloud the title of the instruments.

12. This Contract shall inure to the benefit of, and be binding upon, the parties and their respective heirs, executors, administrators, legal representatives, successors and assigns.

13. Other terms and conditions:

14. This Contract represents the entire agreement between the parties on this subject matter and supersedes all prior agreements, written or oral and may not be amended except in writing signed by the parties. Addenda attached: YES ____ NO ____

This Contract is entered into the day and year first written above.

 

 

_________________________________

Seller                                                                    

 

_________________________________

Seller

 

_________________________________

Purchaser

 


Explanation Of The Note Purchase Contract

 

THIS CONTRACT entered into this ____ day of ______________, ____, by and between __________________________________________________, hereinafter referred to as Seller, and __________________________________________________, hereinafter referred to as Purchaser.

1. Seller represents and warrants to Purchaser and Purchaser's assigns that he is the legal owner (or current assignee) of the following described note and (mortgage) (deed of trust) (contract for deed), hereinafter referred to as Note and Security Instrument, executed by NAME OF PAYOR, herinafter referred to as Payor, in favor of NAME OF NOTE HOLDER, original Principal Balance $_________________ (____________________________) bearing interest at the rate of ____ percent per annum and being amortized over ____ (interest-only) (equal monthly principal and interest payments) of $__________ (__________________________________), dated _____________, with a final payment in the amount of $EITHER THE AMOUNT OF THE BALLOON OR THE AMOUNT OF THE FINAL PAYMENT (________________________) due and payable DATE BALLOON OR FINAL PAYMENT IS DUE and recorded in Deed Book _____, Page _____, ___________________ County records, State/Commonwealth of ______________. Legal description of real property securing the Note and Security Instrument:

INSERT THIS INFORMATION FROM THE DEED

2. In consideration of the agreements contained herein, Seller agrees to sell, transfer, convey and assign to Purchaser and Purchaser agrees to purchase upon the terms and conditions hereinafter set out, all of Seller's rights, title, powers, interest in and to the above styled Note and Security Instrument, together with:

all of Seller's rights, claims and causes of action which Seller has or may have against the Payor of the Note and Security Instrument, and

all of Seller's rights, title, powers, interest in and to the real property described in the Note and Security Instrument, and

all of Seller's rights, title, powers, interest in and to any insurance policies, both title and property damage.

The purchase price shall be the sum of $THE PRICE FOR THE NOTE AGREED UPON(____________________), payable at (issuance of title insurance policy) (after ____ payments have been received by Seller) (Other: NORMALLY CHOOSE "ISSUANCE OF TITLE INSURANCE POLICY." IF THIS IS A NEWLY-CREATED (GREEN) NOTE, YOU MAY WISH TO WAIT UNTIL THE SELLER HAS RECEIVED ONE OR MORE PAYMENTS IN ORDER TO DISTANCE YOURSELF/YOUR INVESTOR FROM THE SETTLEMENT TABLE subject to proportionate adjustment if the balances, terms, payments or conditions stated in Paragraph 1 are incorrect or inaccurate.

3. Purchaser shall receive (______) ___________ Note and Security Instrument payments (hereinafter referred to as payments) beginning on ______________________, 19___, and a final payment of $__________ (________________________) due and payable on _____________________________, 19___. ESTABLISHES EXACTLY WHAT YOU SHALL RECEIVE.

4. Seller represents and warrants to Purchaser that the Payor has been late ____ times and the payments are now IF CURRENT, SO STATE. IF ONE MONTH LATE, TWO MONTHS LATE, ETC., STATE THAT.

5. Time is of the essence of this Contract. Purchaser shall have thirty (30) days from the date of this Contract to examine all documents, property and information deemed necessary by Purchaser to satisfy all contingencies and to close the transaction contemplated by this Contract, and to cancel this Contract without penalty or liability if any of the same is found unsatisfactory to Purchaser as determined by Purchaser in his sole opinion. Seller shall cooperate with Purchaser or Purchaser's attorney in obtaining any information necessary for such timely examinations and verifications. Purchaser shall have the right to extend this date for a maximum of 15 days if in his sole opinion it is necessary in order to complete due diligence. The closing shall occur at a mutually agreed-upon time and place. In the event the transaction contemplated by this Contract is not completed within the above period including extension this Contract shall become null and void and there shall be no liability between the parties . NOTE THAT YOU HAVE 45 DAYS TO COMPLETE DUE DILIGENCE, AND YOU HAVE THE RIGHT TO CANCEL ANY TIME DURING THIS PERIOD. AS A NEGOTIATING DEVICE, YOU MAY WISH TO FOREGO THE SECOND 15 DAY TERM, OR SHORTEN THE FIRST OR SECOND TERM.

6. Closing costs, including attorney's fees, mortgagee's title insurance, appraisal and credit check shall be paid by (Seller) (Purchaser) (Other: ________________________________). YOU MAY WISH TO PAY FOR ALL CLOSING COSTS (BUILD THE COSTS INTO YOUR QUOTE). IT GIVES THE SELLER A NET FIGURE, REMOVES UNCERTAINTY IN HIS MIND ABOUT WHAT COSTS HE’LL HAVE TO BEAR, AND, MOST IMPORTANTLY, PUTS YOU IN CONTROL. OR YOU MAY WISH TO SPLIT COSTS 50-50 WITH THE SELLER.

7. At time of closing the principal balance due under the Note and Security Instrument shall be no less than $____________ (___________________) or there shall be no less than ___ payments of $________ (______________) each remaining due and owing on the Note and Security Instrument or an appropriate adjustment shall be made.

8. Any payments received by Seller during the term of this Contract or of any extension shall be credited to the cash required of Purchaser at closing and to the purchase price. There shall be no proration of interest. IF A PAYMENT IS RECEIVED BY THE SELLER BEFORE YOU BUY THE NOTE, SUBTRACT THE AMOUNT OF THE PAYMENT FROM THE PURCHASE PRICE. THIS BOOSTS YOUR YIELD. FOR EXAMPLE, IF YOU BUY A $10,000, 10 YEAR, 10% NOTE AT 18% AND A PAYMENT IS RECEIVED BY THE SELLER AFTER THE CONTRACT IS SIGNED BUT BEFORE THE CLOSING OF THE NOTE SALE, AN AMOUNT EQUAL TO ONE PAYMENT IS SUBTRACTED FROM THE PURCHASE PRICE OF THE NOTE AND YOU WILL NOW RECEIVE 119 PAYMENTS INSTEAD OF 120. IF YOU CALCULATE YOUR NEW YIELD YOU WILL FIND IT IS 18.43% — AN INCREASE OF 43 BASIS POINTS!

9. Seller shall not sell, convey or assign any interest in said Note and Security Instrument or attempt to negotiate for the sale, conveyance or assignment of any interest of said Note and Security Instrument to any other party during the term of this Contract or any extension . A VERY IMPORTANT PARAGRAPH, SINCE NOTE SELLERS ARE NOTORIOUS FOR SHOPPING THEIR PAPER EVEN AFTER A CONTRACT IS SIGNED. YOU MIGHT EVEN HAVE THE SELLER INITIAL THIS PARAGRAPH TO INSURE HE UNDERSTANDS ITS SIGNIFICANCE.

10. Seller authorizes Purchaser, its successors or assigns to order, receive and review on Seller’s behalf one or more consumer reports on any Mortgagor(s) in connection with this transaction from one or more consumer reporting agencies, all as permitted by the federal Fair Credit Reporting Act and applicable state law.

11. This Contract shall be construed in all respects with the laws of the State/Commonwealth of ___________. It is the intention of Purchaser and Seller that this Contract be interpreted in conformity with those laws. If, however, any portion of this Contract is deemed unenforceable, the remaining portions shall remain in full force and effect and be fully binding on the respective parties. This Contract may not be assigned by Seller without the prior written permission of Purchaser. NOTE THE PREVIOUS SENTENCE! Handwritten or typewritten provisions initialed by all parties to this Contract shall control if inserted herein or attached as addenda hereto if in conflict with any provisions of this agreement. In the event of any litigation concerning this Contract the prevailing party shall be entitled to reasonable attorney's fees in addition to such other relief provided by the Court. IN SOME STATES IT IS NECESSARY TO HAVE THE PRECEDING LANGUAGE IN A CONTRACT IN ORDER TO RECOVER ATTORNEY’S FEES. Seller acknowledges that this Contract may be recorded in the appropriate county land records at Purchaser's option and that such recordation will cloud the title of the instruments. IF YOU WANT TO INSURE THAT HE WILL HAVE A HARD TIME SELLING THE NOTE ELSEWHERE, RECORD THE CONTRACT.

12. This Contract shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and assigns. NO MATTER WHAT HAPPENS TO THE SELLER, YOU STILL HAVE THE RIGHT TO BUY THE NOTE.

13. Other terms and conditions: ANYTHING ELSE YOU’VE AGREED TO SHOULD BE INSERTED HERE.

14. This Contract represents the entire agreement between the parties on this subject matter and supersedes all prior agreements, written or oral and may not be amended except in writing signed by the parties. Addenda attached: YES __ NO __

 

This Contract is entered into the day and year first written above.

_________________________________

Seller    

_________________________________

Purchaser

 

 

If you plan to record this contract it must be notarized.

 

State of ________________ )

) ss

County of ______________ )

I, the undersigned, a Notary Public in and for the County and State aforesaid, do hereby certify that ____________________________________________________ whose name is signed to the foregoing as Seller, appeared before me this ________ day of _____________, ____, and acknowledged that the foregoing is their true act and deed.

________________________ Notary Public

My Commission Expires: (Seal)

 

 

 

 

 

State of ________________ )

) ss

County of ______________ )

I, the undersigned, a Notary Public in and for the County and State aforesaid, do hereby certify that ____________________________________________________ whose name is signed to the foregoing as Seller, appeared before me this ________ day of _____________, ____, and acknowledged that the foregoing is their true act and deed.

________________________ Notary Public

My Commission Expires: (Seal)

 

State of ________________ )

) ss

County of ______________ )

I, the undersigned, a Notary Public in and for the County and State aforesaid, do hereby certify that ____________________________________________________ whose name is signed to the foregoing as Purchaser, appeared before me this ________ day of _____________, ____, and acknowledged that the foregoing is their true act and deed.

________________________ Notary Public

My Commission Expires: (Seal)

 

 

 

ADDITIONAL NOTARY ACKNOWLEDGEMENTS:

 

 

 

 


 

NOTE SELLER'S REPRESENTATIONS AND WARRANTIES

 

I/we, __________________________________________, hereinafter referred to as Seller, make the following representations and warranties to the best of my/our knowledge:

1. That Seller is the legal owner (or current assignee) of the following described note and (mortgage) (deed of trust) (contract for deed) ( ), hereinafter referred to as Note and Security Instrument: Executed by _____________________________, hereinafter referred to as Payor, in favor of ________________________, original Principal Balance $_________ (____________________) bearing interest at the rate of _____ percent and being amortized over ______ (interest-only) (equal monthly principal and interest payments) of $_________ (_________________________), dated ___________, ____, with a final payment in the amount of $_________ (____________________) due and payable ____________, ____ and recorded in Deed Book _____, Page _____, _______________ County records, State of ______________.

2. The Note and Security Instrument is a result of a bonafide sale of the property therein described and was executed by the person or persons whose signature or signatures appear thereon.

3. The Payor who executed the Note and Security Instrument was of legal age and competent to execute the same at the time thereof.

4. The property which is the subject of the Note and Security Instrument is truly and accurately described therein.

5. The property is in the possession of the Payor of the Note and Security Instrument and/or his successors and assigns.

6. The amount due the undersigned on the Note and Security Instrument is not disputed or subject to any offset, deduction, credit or counterclaim.

7. The Payor has not indicated by act or statement an intent to stop paying on the Note and Security Instrument.

8. The Payor has been late ____ times and the payments are now ______________________.

9. There have been no defaults by the Payor under the Note.

10. There is no undisclosed delinquency or default existing on the Note and Security Instrument.

11. The undersigned received cash or its proper equivalent for the down payment.

12. There are no undisclosed agreements, modifications, concessions or litigation of any nature affecting the Note and Security Instrument.

13. The undersigned has full and perfect title and right to convey the Note and Security Instrument free of any encumbrance, lien or interest of any third party of any nature whatsoever.

14. Seller is named as additional insured and loss payee on a title insurance policy and a hazard insurance policy on the real property securing the above styled Note and Security Instrument in an amount sufficient to cover the combined outstanding principal balance of the first and, if applicable, second mortgages (or applicable security instrument).

15. Seller warrants that the Note and Security Agreement has not been obtained or created in any fashion which violates any state, federal or local laws, or administrative regulations and specifically not in violation of any usury laws.

16. Seller is not a creditor under the Truth in Lending Act and is not subject to the Truth in Lending Act.

17. Seller is not aware of any legal or equitable defenses to the payment of the said obligation or basis for offset, and in the event that there are any defenses to payment of the Note, Seller shall be solely liable for any defenses and shall be liable for all attorney's fees incurred in defending such action.

18. To Seller's knowledge there is no litigation threatened or pending regarding the instruments.

19. Seller has made no prior transfer, assignment or conveyance of Note and Security Agreement or any portion thereof.

20. This agreement and all transactions contemplated herewith have been duly authorized by all necessary corporate action should the undersigned by a corporation.

21. The real property described in the Note and Security Instrument has not been used in the past and is not presently used for hazardous and/or toxic waste storage and that all such real property complies with all federal, state and local environmental laws.

22. The real property described in the Note and Security Instrument has no asbestos used as a building material and the real property has not been used in the past and is not presently used for asbestos storage and all such real property complies with all federal, state and local laws and regulations regarding the use and storage of asbestos.

The representations and warranties and undertaking set forth herein shall be continuing and any waiver of such shall not constitute a waiver of any subsequent breach. No waiver thereof shall be implied from any forbearances, failure or delay and enforcement thereof. The liability of the undersigned in respect to any waiver or breach herein shall not be affected by the granting of extensions, adjustments or compromises of claims by ________________________________. The undersigned hereby consents to and waives notice of any and all such extensions, adjustments, compromises or settlements in respect to the Note and Security Agreement.

The undersigned shall indemnify and hold harmless __________________________________ from any and all liability, loss or damage s/he/it or assigns may suffer as a result of any claims, demands, costs or judgments which may result from the representations and warranties herein made being untrue.

DATED this ______ day of ________________________, 19__.

_________________________________

_________________________________

State of ________________ )

) ss

County of ______________ )

I, the undersigned, a Notary Public in and for the County and State aforesaid, do hereby certify that ____________________________________________________ whose name is signed to the foregoing as Seller, appeared before me this ________ day of _____________, ____, and acknowledged that the foregoing is their true act and deed.

________________________ Notary Public

My Commission Expires: (Seal)

 

State of ________________ )

) ss

County of ______________ )

I, the undersigned, a Notary Public in and for the County and State aforesaid, do hereby certify that ____________________________________________________ whose name is signed to the foregoing as Seller, appeared before me this ________ day of _____________, ____, and acknowledged that the foregoing is their true act and deed.

________________________ Notary Public

My Commission Expires: (Seal) SUBSCRIBED AND SWORN to before me ______ day of _______________, 19 ___.

 

 

__________________________________

Notary Public in and for the State of

__________________, residing at ___________________________ hereby assigns his interest in and to this agreement to _________________________________.


What Being a "Broker" Really Means

by Harold D. Fryar

What’s wrong with this picture?

"I'm brokering a note. At closing, it's assigned to me, then I assign it to my investor. The investor's attorney says this is a problem (usury - he looks at the discount as points, etc.). Also, I think there's a possibility the investor could sue me if the note goes bad."

First, the writer needs to clarify his position in the paper business. Is he going to be a broker ("one who acts as an agent for others in negotiating contracts, purchases, or sales in return for a fee or commission" -- The American Heritage Dictionary), or is he going to be a principal for his own account, buying at one price and selling (concurrently or subsequently) at a higher price and profiting on the net spread?

If he is going to be a broker, he should act accordingly. In this way, he structures transactions as do real estate agents and those who work for others on a commission basis. In so doing, if he has an appropriate brokerage agreement to represent the seller in place, he can bring the seller and his investor together and let them work out the details.

His statement "I'm brokering a note" notwithstanding, I suspect that being a broker in that transaction was not his intention. His next statement: "At closing, it's assigned to me, then assigned to my investor" indicates (at least to me) that he wanted to be a principal in that transaction.

With a bit of planning and research (asking others how the transaction might have been structured), he could have eliminated or at least minimized his concern about being sued. With that in mind, here are a few steps he could have followed:

1. Sell only to institutional investors experienced in buying notes.

Bill Mencarow has mentioned this countless times and the advice becomes no less valuable with the passage of time. In the above example, an attorney representing an experienced institutional investor would know that the note holder was simply selling an asset he owned (his note) and that he has the right to sell it at any price he agreed to.

Moreover, inasmuch as the transaction did not affect the note maker financially, points and usury were not at issue.

2. By using the investor's purchase agreement and naming himself Or Assigns as the Buyer, the principal would usually satisfy the institutional investor's appetite for "form" because the investor and the investor's attorney are familiar with it, and that's half the battle.

3. Although the agreement would have initially been between the note seller and the principal Or Assigns, the institutional investor will almost always perform the necessary due diligence (title search and policy, property valuation, document review, evaluation of maker's credit worthiness, etc.). Thus, if there was any indication that the note could "go bad," the investor should have been aware of it.

4. I go a bit further in that I incorporate an "Assignment of Contract Rights" Agreement in conveying my interest to a subsequent investor. Contained therein (paragraphs 4 and 5) are the following statements:

"Assignor makes no warranties with regard to the Note and Mortgage/Deed of Trust beyond those expressly contained in this Agreement and does not adopt any of the Seller's warranties set forth in Exhibit "A."

"Assignee acknowledges having read the Mortgage/Deed of Trust Purchase Agreement (Exhibit "A") and assumes all of the responsibilities, duties, and liabilities of Assignor under the terms of that Agreement."

I have used this document with several investors over the last seven or eight years and have experienced few, if any, problems. Of course, there have been instances when a particular investor chose not to use this exact form. However, those investors were amenable to permitting me to accomplish the same goal in their own way. The bottom line is, the letter writer -- and anyone else who is somewhat unsure of his position in a mortgage transaction -- needs to get a better handle on how he intends to do business (broker or principal) and structure his transactions accordingly. 

 

ASSIGNMENT OF CONTRACT RIGHTS

THIS AGREEMENT, entered into this _______ day of ___________________, 20____, by and between ______________________________, hereinafter referred to as "Assignor", and ______________________________, hereinafter referred to as "Assignee".

WHEREAS, Assignor is a party to a Full or Partial Note and Security Instrument Purchase Contract dated the ________ day of _________________________, ____, by and between Assignor as Buyer and _________________________ as Seller, a copy of which Contract is attached hereto for identification and marked Exhibit "A"; and

WHEREAS, Assignee desires to purchase Assignor's interest in said Contract upon the terms and conditions set forth hereinafter; and

WHEREAS, Assignor is desirous of selling and assigning the Assignee all of its rights, title and interest in said Contract upon the terms and conditions set forth hereinafter.

NOW, THEREFORE, THIS AGREEMENT: Witnesseth that for and in consideration of the sum of: $________________ paid by Assignee to Assignor, the receipt of which is hereby acknowledged, Assignor does sell, assign, transfer and set over to Assignee all right, title and interest in money now due and payable under the subject Mortgage/Deed of Trust Purchase Contract dated the ________ day of ________________, ____, between Assignor as Buyer and as Seller, the subject of which is the Purchase by Assignor from the Seller of the right to receive all or a portion of the periodic payments (including

a balloon, if applicable) to become due under the terms of a Note executed by ______________________________, as Maker. The said Note is more specifically identified in the subject Note and Security Instrument Purchase Contract attached hereto as Exhibit "A". The Parties to this Contract make the following Warranties:

Assignor warrants that there has been no breach of the above-mentioned Note and Security Instrument Purchase Contract by Assignor, and that there has been no known breach of the above-mentioned Contract by the Seller, or of the Note and Security Instrument by either the Seller or Maker thereto.

2. Assignor warrants that its rights, title and interest under said Note and Security Instrument Purchase Contract have not been assigned or encumbered.

3. Assignee is authorized to notify Maker of the subject Note to deliver subsequent required payments (including balloon payment, if applicable) to Assignee. Assignor (if not accomplished by Seller) shall also direct Maker to remit subsequent required payments to Assignee. Assignor shall execute documents as appropriate to effectuate this assignment, to include (but not limited to) an Assignment/Certificate of Transfer (or other appropriate document of similar purpose) in a form which may be recorded in the appropriate Public Records Office.

4. Assignor makes no warranties with regard to the Note and Security Instrument beyond those expressly contained in this Contract and does not adopt any of the Seller's warranties set forth in Exhibit "A".

5. Assignee acknowledges having read the Note and Security Instrument Purchase Contract (Exhibit "A") and assumes all of the responsibilities, duties and liabilities of Assignor under the terms of that Contract. (Assignee's initials: _____).

6. This is the entire Contract of the Parties relative to the Assignment by Assignor to Assignee of all contract rights to the Note and Security Instrument Purchase Contract attached as Exhibit "A". Waiver, modification or additions must be in writing to be effective.

This Contract is entered into the day and year first written above.

____________________________________

Assignee

________________________________

Assignor

 

THE PAPER SOURCE JOURNAL  www.PaperSourceOnline.com  1-800-542-2270  


Brokers at the Crossroad: The Return of the Private Investor

by John W. Moren

The seller-financed mortgage industry is again at a crossroad.

Fifteen years ago the business was a cottage industry dominated by broker-investors with real estate backgrounds working from home offices. John Behle taught how to run a profitable mortgage business using private investor money. A few years later, as some people were unknowingly violating securities and lending laws, Bill Mencarow offered classes on how to avoid that and still use private investors. Brokers frequently "stayed in the deal" by either investing some of their own money or by taking their profit in the form of ever-compounding payment streams.

Money was tight in those days--there was not much of it available for investment and what money there was commanded rates in the upper teens and higher. Markets that are taken for granted today didn’t exist then. For example, it was virtually impossible to sell a note on a commercial building.

The First Significant Industry Crossroad

As rates eased and the money supply grew, long-time investor Michael Morrongiello (707-939-9450, MikeM@sunvestinc.com) warned me that the industry would not look the same in 5 years. He was right, and private investors faced their first significant industry crossroad.

Insurance companies and investment houses took an interest--so to speak--in seller financing. Broker business proliferated due to the quick money and ease of passing a deal to large investment companies such as Metropolitan Mortgage and The Associates. Investors had a harder time securing quality deals because they were competing with brokers anxious to pay today's bills by selling tomorrow's payments.

Successful industries always undergo a period of consolidation. Just as McDonalds consolidated the hamburger business and Blockbuster consolidated the video tape industry, investment companies are consolidating our industry. The largest corporate investors are beginning to advertise directly to the public, which puts companies such as Metropolitan Mortgage in a competitive position with the same brokers who had been channeling them profitable notes for the last ten years.

The Second Significant Crossroad

Brokers are now at another crossroad. Their growing numbers increase competition with each other for the fixed number of deals. Further, they may be at the mercy of corporate buyers advertising in the brokers' back yard. As this trend continues, watch for the extinction of the independent broker. The entrepreneur who will succeed during the next 15 years will be the one who can find and fund his or her own deals.

Investors have a fixed floor under their income level and are immune to corporate politics, restructuring, and downsizing. The balance of this article will list many points devoted to fine-tuning your investor skills. Those of you who are strictly brokers should find a few tips for easing yourself into the investor role, balancing out the risk in your business plan, and successfully negotiating the next crossroad for your business.

- Hypothecate, don't sell. When you sell a note, you finance your business at the investor's yield. That's great if you're a high risk internet startup, but too high if the security is a quality first mortgage. You face an immediate tax consequence when you sell a note and you give away the windfall when the note pays off early.

- Cut it thin, you never win. When investing with other people's money and your name is on the documents, we've estimated that it takes 2 yield points to stay profitable. If you need a financial calculator to analyze your spread, it's too thin. Hypothecate profitably.

- Disclosing everything to an investor is common sense: Be sure to have them disclose to you. You don't want to take a widow's $10,000 only to find out it was her last $10,000. You do want to pledge second mortgages to investors who have held seconds before. Our investors include CPAs and attorneys we met in mortgage seminars who were privy to the same knowledge we have. It would be hard for them to claim we took advantage.

- Borrow long and lend short. The banks tried this the other way around some years ago and we all paid for it. Controlling a portfolio of 10-year mortgages with an adjustable rate line of credit is risky. Add a short term call provision and it's suicide. Rates are at historic lows--watch the fallout when they creep up a point or two. Have your money come back to you faster than you pay it out (time value of money) and you can always pay your debt off early if rates move against you. Low rates, and especially flat rate environments, are very forgiving. Protect yourself against rising rates and short term calls.

- Restructure for profit. Large investment corporations buy a note and immediately go to work on the payor. They encourage an early pay out to reap a higher yield. Offer to halve the interest rate of the note if the payor will double the payment. Try it out on a financial calculator and see if it doesn't raise the investor's yield by 4% or more. That's just one trick--there are many others.

- No paperwork, no money. The days of handshake deals ended 15 years ago.

- Compare the quality of the debt you give to the quality of the debt you receive. When you sign a line of credit, you are guaranteeing the payment and you know you will make the payment. This is high quality debt. Use that money to buy a note with similar or better quality so you can be sure the cash flow is there to make your payment. Check with Peter Fortunato (727-397-1906) for more details (Ask Peter about his next seminar, and go! -- Editor)

- Disdain partnerships. Partnerships fail due to the perceived inequity of what each partner brings to the table. Set up your deals so that each party is independent. If investors insist on buying in on your deal, give them the paperwork, assign them the entire note, let them do the servicing, and be done with it. - The best predictor of foreclosure is a small down payment. So says the FHA and isn't that ironic? Our late friend, Earl Woodell, told us that every note he bought behind a $1000 down payment eventually defaulted.

- Find additional profit centers in your existing deals. It takes about $10 per note per month to make a profit as a loan servicing company. If you service payments your own contacts receive, however, you can be profitable in the $2-$7 range by keeping your name in front of them. We recommend you do not service the same notes you sell to your investors to avoid potential securities issues. The servicer keeps all insufficient funds (NSF) and late fees. Structure the servicing so that incoming payments are due, for instance, on the 1st and investor payments are due out on the 15th. Get some float, make sure the receivable check clears, and try to get outgoing payments bunched up so they are due on just one day each month.

- Nothing should come between you and your payor, least of all an investor. If you pledge your receivable notes instead of selling them note off, stay in the middle of the deal where you know exactly what is going on. Payments should come directly to you so you can track the payor's history, then forward on the investor's portion. Large principal payments and lengthy delinquencies are significant events of which you need to be aware. You only can be sure if all payments come through you first.

- Bunch up your note holdings geographically so you could give an attorney repeat business. You'll get much better service if you ever need legal help. Trade out any note that is the only one you hold in that state unless you plan to increase your note portfolio there. At the same time, be sure to spread your risk by holding notes in multiple states.

- Check out your collateral after the closing. Few deals are closed without an appraisal, but be sure to do a quick follow-up every few years. Inspect the property if the payor files bankruptcy. You then can have your attorney petition the court for relief if you discover your collateral is being wasted. We had a payor go into bankruptcy although he never missed a payment--until he came out of it! When we took the property back, its only value was the land. Fortunately that was enough but we didn't get the windfall we expected. A cheap, quick market analysis by a local Realtor would have clued us in much earlier.

- Make it easy for people to pay you. Payment coupons, deposit slips, credit card payments, automatic checkbook debits, and prewritten checks all can simplify your collections. Offer an interest rate discount to payors who agree to increase their monthly payment. Your yield, trust me, will increase dramatically. Have your attorney draft a note modification agreement to accomplish this and make sure there are no junior lien holders who would be adversely affected. We once left an account open at a bank for a year after we moved out of state. Two payors preferred making their mortgage payment ten days early every month--the day their Social Security check arrived--and they did not want to risk mailing their payment to us.

- Buy a note then buy the property. One of our best note purchases was in Summit County, CO. As you probably can guess, Summit County is not exactly in the middle of the suburbs. Corporate America would not go over 50% ITV at the time, so we overpaid the best offer and got a great yield based on a sizable discount. One day the payors called for a payoff. They sold the house with 35 acres, which had a commanding 360 degree view of white-capped mountains, and we recaptured all the discount in only a few years. A while later we drove by the area and it dawned on me that we could have bought the property at a huge cash savings by using their note to us to cover part of the purchase price. And we might have gotten them to finance the difference!

- Don't spend what you earn, spend what your earnings earn. This is difficult to do when you first get started. Read "The Richest Man in Babylon" for guidance--George Clason says it so much better than I can.

- Don't eat your seed corn. Of all the pearls Jimmy Napier has given to me, this is the most valuable. Stated another way, you can spend your $2000 paycheck on luscious groceries or you can eat cheap and invest $1000 of it toward your future. There is something warming about waking up in the morning and not worrying about where the money is coming from. Eating beans today sure beats eating pet food when your Social Security checks start coming in.

- Good paperwork doesn't make a good deal, good people do. No matter how many clauses, how many contingencies, and what who says to whom, if the payor won't pay, the payor won't pay. We have systematically improved the quality of our portfolio over the years to the point where we have only IRA quality notes: good seasoning, low LTV, and above average credit. This maxim holds for your choice of investor, too.

- Don't sue anyone for less than $10,000. The legal fees combined with the uncertainty of collecting your judgement makes anything less uneconomical. Unfortunately, the corollary is true as well. It's not worth defending yourself for less than $10,000. A sad commentary on life and a sad commentary on the American legal system: You can be right or you can be happy.

- Maximum productivity is achieved at a point just behind the leading edge of technology and way ahead of the pack. The PC, PalmPilot, and Internet will put the pencil and paper crowd out of business. Use tools to reduce your grunt work and spend more time marketing for the next deal. Picture a Norman Rockwell bookeeper reconciling the checkbook with a visor and armbands hunched in front of a green banker's lamp. Meanwhile, the techno-investor, whose Quicken books are continuously balanced, just closed another note.

- Exceptions will kill you. Regiment as much of your business as possible and you'll get 80% of the work done in 20% of your time. Our portfolio contains only high quality notes--we give up a bit on yield but spend no time managing it. Hunt down Michael Gerber's outstanding book "The E-Myth" for details. - Float like a butterfly, sting like a bee. Although Muhammed Ali was referring to boxing at the time, it's applicable to any entrepreneur. Profitable opportunities come your way regularly and you need to jump on them. We moved to Colorado and discovered that rental houses would generate the same gross return that a mortgage would, so we moved some of our investments into real estate. This was just before the Californian invasion of Colorado and the 50% uptick in prices.

- The best investment of all may be to pay down your own debt. Debt that you pay is the highest quality debt you manage and often can carry some of the highest interest rates. Pay it off early. Think how reassuring your future will be when you are not continually borrowing against it to pay today's bills.

- The more you hoard, the less you have. We really own nothing anyway, but are merely stewards of the property under our control.

John W. Moren has been a note and real estate investor for almost 20 years. He has taught classes for THE PAPER SOURCE, been a keynote speaker at many note industry conventions, and specializes in business applications and organization specific to this industry. He is perhaps best-known as the author of NoteSmith™, the premier servicing software for note investors, NoteWorks™, a complete electronic office for cash flow brokers, and RealtyWorks™, which includes contracts and forms. Visit www.NoteSmith.com for more information.

THE PAPER SOURCE JOURNAL  www.PaperSourceOnline.com  1-800-542-2270  


YOUR NEXT STEP
The next step is to take my live 2-day class "NOTE BROKERAGE 101."

In a live class you can ask questions and go further in depth into issues and concepts. Another great advantage of the live class is the opportunity to meet and make friends -- and potential business contacts -- with the other students. You also come away with energy and excitement! When you take Note Brokerage 101, I will give you a year's subscription to THE PAPER SOURCE JOURNAL, plus all the contracts, forms, worksheets, sample advertisements, etc., etc. you need, the "Registry of Note Investors," and much more.

Information on my class is at www.PaperSourceOnline.com/101course.htm

And be sure you keep up with the business by visiting our main website at www.PaperSourceOnline.com at least every few days. We keep the "Hot News" section updated frequently, the "Notes Lounge" discussion forum is always full of new questions and answers, investors looking for brokers, sellers with notes, reviews of seminars and "gurus," people's experiences with note investors, and much more.


Websites you need to check out:

The Cash Flow Dollar Store: If you've been doing your homework
for this course, you already know about this great site!
Unique site where you can download contracts, checklists, forms,
sample letters and advice on almost every cash flow
topic you can think of. Save it to your "favorites" on your
web browser and come back often, since new articles, contracts,
etc. are added often.
www.cashflows.org

The Profit Center: Home study courses, software, books, tapes,
you name it, all centered around helping you with notes and real estate.
http://www.papersourceonline.com/products.html

The PAPER SOURCE: Home of the "Voice of the Note Business."
We have stuffed our site with daily news of the industry,
frequently-asked questions, sample issue of THE PAPER SOURCE
JOURNAL and much more. It grows constantly, so bookmark it and
come back often:
www.PaperSourceOnline.com

The Notes Lounge: If you're not a regular
at the Notes Lounge, you are missing the hottest gathering place
for cash flow brokers, note and real estate investors on the Net.
Discussion areas include "I Have/I Want" (buyers, sellers of all
sorts of cash flows), "Advice" (post your q's and a's), "Reviews of
Seminars and 'Gurus'" (this is a hot area!), "Reviews of Investors"
(ditto!), "Real Estate Financing Forum" (for those looking for and
giving loans), "Financing Forum (Everything But Real Estate)",
"Mentors" (wanted and supplied), "Real Estate" (ask and answer
questions about real estate, even buy and sell properties), even a NOTE
AUCTION. Go to the Paper Source main site at
www.PaperSourceOnline.com and follow the link to the
Notes Lounge.


Your Instructor
W. J. Mencarow, Jr. is the editor of THE PAPER SOURCE JOURNAL
and president of The Paper Source, Inc., which he co-founded with
his business partner and wife, Alison, in 1987. In addition to
numerous articles in his newsletter and other publications, he is
the author of "How To Get Started In Notes Without Using Your Own
Funds," "Almost Everything That Could Go Wrong With A Note
and How to Prevent It!)" and several seminars. He received the
Founder's Award for founding the first nationwide exclusive paper
publication and national convention, and was inducted into both the
Mortgage Report Hall of Fame and Metropolitan Mortgage's Note
Industry Hall of Fame.

His opinions on financial and other matters have been quoted in
The Wall Street Journal, Newsweek, Time, Life, The Washington Post,
New York Times and many other media outlets, both print and broadcast.
The nation's best-selling personal finance author, Newsweek columnist
Jane Bryant Quinn, recently wrote,
"William Mencarow is an expert on real estate notes." (Newsweek 8/22/00)

He served as Minority Counsel and Staff Director of the
Subcommittee on Government Operations during a decade with the U.S.
House of Representatives in Washington, D.C. He was the principal
Republican staff member during a wide-ranging investigation of
President Reagan which ended in an exoneration of the President.
He also served as a congressional press secretary and legislative
director, having responsibility for the drafting and shepherding of
many bills through Congress. He and Alison met on Capitol Hill
when they were both Congressional press secretaries.

Before his service in Washington, D.C. he managed over a
dozen political campaigns, was a Field Director for Ronald Reagan's
presidential campaign, served as the coordinator for all Reagan
volunteers at the Republican National Convention, and served as an
advisor to the Presidential Transition Committee. In addition,
he was a television and radio talk show host for eight years in the
Chicago area and a producer for the NBC-owned Chicago radio station,
helping to bring the ratings of the morning show to number 2 in the
market.

During his political career he appeared on many radio and
TV programs including Good Morning America and most networks and
major U.S. newspapers. He has engaged in numerous formal debates
before audiences. His opponents have included Jane Fonda,
Gore Vidal, Dr. Paul Ehrlich and many others.

He believes his highest political honor came when a speech he
wrote for a member of Congress was attacked by Pravda, the
official newspaper of the Communist Party of the former Soviet Union.

He is ordained in the Presbyterian Church (OPC) as a Ruling Elder
where he teaches and preaches when called upon in the Presbytery of
the Southwest.

He and Alison give glory to the Lord for all He has done in their
lives, whether from a human perspective they are "good" or not:
"And we know that all things work together for good to them that
love God, to them who are the called according to His purpose. For
whom He did foreknow, He also did predestinate to be conformed to
the image of His Son, that He might be the firstborn among many
brethren." (Romans 8:28-29)

"Trust in the Lord with all thine heart; and lean not unto thine
own understanding. In all thy ways acknowledge Him, and He shall
direct thy paths." (Proverbs 3:5,6)