You’ve heard of flipping houses, haven’t you? This has become very well known in recent years, mainly due to the many real estate “gurus” teaching seminars, writing books, selling tapes, etc. There have even been some bad connotations of various forms of government; Mainly because they don’t understand it, instead they believe and do what the banking industry tells them to do. I do not intend to get on a political platform; however, the type of home exchange that I know of and have written about is perfectly legal and, if done right, benefits all parties.
So what’s up with this “paper flip” thing? Well, it’s a lot like flipping houses. It’s also pretty similar to being a Bird Dog for homebuyers, as I discussed in one of last week’s articles.
What I am going to discuss with you now is exactly what I did when I first got into the paper business. I took a seminar given by Mike Meeker, a very well known and excellent teacher, who I believe is now retired from teaching. I also believe he is living in Florida, or was the last time I had contact with him.
Anyway, back to our story. This was in the late 1980s and I had no money available to invest. Here’s the concept: You want to find Real Estate “paper” (Land Agreements, Deeds of Trust, Mortgages, Notes) that is “For Sale” or will become “For Sale”. To keep it simple, let’s call all of these different types of paper, “Notes.” You are looking for notes that were created at an owner-financed real estate sale. Due to the current market, these types of bills abound; however, in any type of market these “Private” Notes will always be available because many buyers cannot qualify for Bank Financing and many properties will not qualify for Bank Financing. To give you an idea of the current market, simply take a look at the “Real Estate for Sale” section of any major newspaper and look for ads that say “Owner Financing”, “No Bank Qualification”, “Special Financing”, etc.
trust me on this point; There will ALWAYS be Private Bonds available and many of the owners of these bonds would prefer to have a large amount of cash now instead of monthly payments for X years. Furthermore, there will always be private investors (and sometimes large corporate investors) who buy these bonds. Why? Because almost ALL private notes can be purchased at a substantial discount. Why? Because of the greater risk involved in these unqualified buyers and/or properties. In fact, I have never seen or heard of anyone who would pay 100% of the dollar for a ticket.
So let’s start putting this together. Remember, you are going to function as a “middle man”, not unlike the “bird dog” mentioned above. This is how we start:
Find the notes. There are numerous sources; such as real estate agents, title companies, real estate attorneys, etc. You can run a short ad in your local newspaper, such as – “Buy Real Estate Notes” or “Top Dollar for Your Real Estate Note”. If you scan the ads, you may see other people looking for notes. Don’t worry, there is enough for everyone.
You can also search for listings that offer “Owner Financing” to sell a property. Call the person, then ask if they would like to sell your note after the sale is closed.
So let’s say you find a note for sale, now what? You need to have funds available to purchase the note. Where do we get that? How do we know how much to pay for the ticket?
Just as we figured out how to find and buy real estate paper, which we’ll refer to as “notes,” we’ll use more or less the same tactics to find someone we can deliver these notes to, for a profit. Good sources are realtors, real estate attorneys, CPAs, financial planners, stockbrokers, loan officers, etc. However, the most likely form is the old “Newspaper Ad” formula. You can advertise with words like “Real Estate Note For Sale” or “Investor Needed To Buy Real Estate Notes.” Check the newspapers and yellow pages for ads like “We Buy Tickets” and/or “Top Dollar for Your Tickets.” In other words, look for the same ads we saw and used to find Notes to buy & flip.
When you find an Investor or Note Buyer, you need to determine the Note Buyer’s requirements and perimeters, such as:
What types of properties will you accept as collateral for the promissory note? For example, Single Family Homes, Land or Lots, Apartments, Business Premises or Mobile Homes with or without Land.
What types of minimum returns do they want on the notes they buy? This will vary depending on many factors, such as the security of the ticket.
Investors will want higher yields on riskier notes. For example, a note secured by a single family, owner-occupied (with excellent payment history) would likely require the lowest return, say a 12% return on investment. At the other end of the scale could be Raw Land, where an investor may require 18% or 20%. In this article I am not going to go into how to calculate performance. However, I will recommend that anyone interested in these types of deals buy a good calculator or financial software.
Examples of other things an investor may require are title insurance, appraisals, credit reports, accident insurance, etc. These things discussed above should be tailored to the investor you may be dealing with.
Okay, now we’ve found a note to buy on a single-family home. The face amount of the note is $80,000 with 10% interest payable monthly for 20 years. You know that the “Going” investor yield requirement for this type of note is 12%, so you could sell this note for $70,115. So to make a profit of, say $4,000, you bid and accept an offer of $66,115. In fact, you must obtain a written contract to purchase the owner’s note, preferably an “Option to Purchase.” You need to consider who will pay for things like title insurance, closing costs, etc. If you are going to pay these costs, it is best to subtract the amount of these costs from your offer to the owner of the note. Investors do not normally pay these costs.
What you’re going to do is have a “Double” or near-simultaneous close where you’ll close with the owner of the note first. Then a few minutes later you close with your investor who is buying the note. The seller(s) will then disburse the funds; $4,000 to you and $66,115 (less title insurance fees and closing costs) to the seller of the note. Actually, I found that it works better if I pay these costs and buy the ticket at a lower price, say $64,500. Sometimes when people go to a closing, they are unhappy when they realize they are receiving less money than they thought they were going to receive.
I know I’ve covered a lot here that seems complicated, and it is, a bit; however, once you’ve made a few deals, it becomes routine. I remember when I first started testing this. I got discouraged and it took me a few months to close my first deal; however, since then I estimate that I have bought and sold more than 6,000 tickets, and most of them one at a time. Of course, once my volume increased, I hired people to help me.
The ticket business is a great and very interesting career; Something new or different all the time. One thing I want to emphasize is that it is very important to have that double closing so that you actually own the note, even if only for a few minutes, before you sell it to your investor.
I will publish a book in the future, showing in detail how to prosper in this great business. I will be selling the book for a nominal price, which I have not determined at this time. It will depend on how much time you dedicate to it; however, I want it to be as complete as possible. I will tell you this, if a person enthusiastically enters this business, the business will always be there with excellent financial returns.
These publications are the opinion of the author who is not engaged in providing legal, accounting or investment advice. If such advice is required or desired, the services of competent professionals should be sought.