Tuesday, March 30, 2021

Discovering Notes - Note Investing 101



In this first episode of Note Investing 101, we will be starting at the beginning. Why so many people choose notes instead of real estate or renters. Just how big is the real estate note industry? (Spoiler Alert: It is in the BILLIONS). Who the note players are and how you get to profit from it. How to refer a note for profit using other people’s money. The difference between performing and non-performing notes which one is right for you? How to CREATE your own notes. And much more.

Timestamp: 0:05 - Introduction: How To Get a Note Business Up and Going in 90 Days 1:27 - Who Is this Note Industry For? 3:18 - Disclaimer 3:55 - Why us? Why Should You Listen to Us? 7:00 - www.noteinvestor.com 7:57 - Personal Profit Series 8:21 - How We Used the Note Business for Ourselves 9:05 - 3 Main Areas of Opportunity for Deal Sourcing 11:03 - Seller Finance Notes 11:40 - How Big Is A Seller Carry Market? 13:10 - A Decade of Seller Financing Usage 14:26 - Seller Financing Transaction 23:40 - Let’s Talk About the Numbers 31:00 - Is there a Usury Concern? 32:45 - Do you use a Title Company? 33:58 - Would the group be paying $94,150? 34:46 - Why would the original seller now only take $90K? 36:14 - Partial Purchase 36:45 - www.noteinvestor.com/101

About Fred Rewey and Tracy Z Our goal is to separate the myths from reality when it comes to seller financing and investing in private mortgage notes. There are simple truths surrounding owner-financed notes that should be revealed. Too many people leave money on the table through lack of knowledge. Worse yet, others prey on their lack of information. Whether a note seller, buyer, broker, investor, real estate agent, or cash flow consultant, we can all benefit from the knowledge and straightforward answers. The note or paper business is a legitimate industry that many people use to liquidate what may be their most valued asset. It has been providing my full-time income since 1988 and Fred Rewey, the co-founder, has been at it for over 25 years. In fact, Fred and Tracy met through the note business, became business partners, and married in 1997. It has provided them a good life and financial independence for their family. What is the best way to handle a seller-financed transaction? Where do you go for the best price? How do you find qualified professionals and avoid the less than reputable? How can you make money in the note business? We will answer these questions drawing from our 50 years of combined experience, sometimes gained through the school of hard knocks. We have bought and sold our own properties using seller financing rather than bank loans. https://www.NoteInvestor.com/101 #NoteInvestor #MortgageNotes #RealEstateInvesting

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Tracy Z:

Hello and welcome! This is Tracy Z.


Fred Rewey:

This is Fred Rewey.


Tracy Z:

And we are excited to be here for Note Investing 101 series. We're going to talk about how to get a note business up and going in 90 days. So, welcome everyone. We see people logging in. People saying they're excited to be here and looking forward to learning about notes. We are very, thanks. We are too someone else from Colorado. Nice to see a whole climb on the beach somewhere. We're in Florida, we're not currently on the beach, but Scott who's our producers in Hawaii. We know he's on a beach, so welcome everybody. We understand. We used to live in snow. So, we understand that. So, we are here today to talk about notes.


Fred Rewey:

Yeah. And we're live. Actually, this is the physical part. So, we do these occasionally and we used to record them and put them up or something.


Fred Rewey:

So, we decided to create an entire set of videos, kind of like a crash course, if you will. That's why we're calling it Notes 101. So, we have the ideas to show you how to build a business. If you're new, then you're in the exact right place. Cause we're going to start at the very, very beginning. And some of you have seen these little guys before, but we're gonna bring these out and start at the very, very beginning. If you're experienced, then you're going to get something out of some of the later episodes, as well as maybe a couple of things along the way as well. But, it's important that whether you're here to get started or whether you want to get your business to the next level, we hope to accomplish that and share a lot of information with you.


Tracy Z:

So we're going to talk, just to get started. Who is this industry for? So Fred and I have been buying and selling real estate notes for over 50 combined years. And we see this applying to three main groups is people who want full or part-time income either now or in the future.


Fred Rewey:

So, we're also talking about real estate without tenants. We're going to talk about this a little bit later, but you know, everybody loves real estate certainly right now. And you know, it's like Mark Twain said, Mark Twain said to basically buy land, they stopped making it, something like that. See if this wasn't live, I would have prepared for that. And I know, I mean, I think he's the one that said that, but basically, hey there's only one downside to having tenants. You know, it's great when they're paying your bills, but then you have the phone calls in the middle of the night and everything else like that. So, this is the advantage of being able to invest kind of in real estate and get all the benefits of real estate without having the headaches of the clogged toilets and the roof and the repairs and things like that.


Tracy Z:

Right. Right. Definitely. Well, the three T's tenants, toilets and trash. Sometimes they call it termites or whatever they all are all headaches.


Tracy Z:

So, we're going to talk about having a real estate backed-asset, which is a known mortgage, a deed of trust. And so you have an asset that you're familiar with. Yet, as Fred mentioned, you're the bank and banks don't get calls at 2:00 AM for stopped up toilets or lockouts or kids flushing something down the toilet. So, the third group that might be here are people who are just looking to diversify their portfolio. So, we work with a lot of people who have self-directed retirement accounts and they're looking for something besides the stock market or besides physical assets, like real estate. And so real estate notes can be an alternative investment form for a self-directed retirement account and it can be done in and outside of a retirement account. It kind of depends on what your purpose is for the income. And we'll talk about that today.


Fred Rewey:

Yeah. So as, you know, I guess real quick before you're going too far though, we do want to have a, we have to do a disclaimer. So, just because we're not, we're not investors, we're not telling you what to do with your money. Here's the fine print. We're not attorneys, we're not giving you legal or financial advice. I know you've seen this, don't eat yellow snow, whatever it is. So, you know, just saying, I don't know what it is, but basically just understand that, you know, obviously you have to do your own dollars. We have to say that because usually, that's when we have all the weird warning labels to somebody at some point that's something they weren't supposed to. So just be aware,


Tracy Z:

We're not trying to sell you an investment or an asset or a security. We're just here to talk about deals that have worked for us over the years.


Fred Rewey:

Yeah. And which leads me to where I was going was, which is the, why us? Why would you be listening to us? And as Tracy mentioned earlier, we have over 50 years combined experience in the industry. We've done this for a very, very long time. Early in the nineties, late eighties, nineties, I was actually in a 500 square foot apartment. And I was taking some night classes by a gentleman by the name of John Richards, who's well known in the instance since passed away, but well known in the note industry. And in that class, we were learning to buy real estate. But one week, he taught me the financial calculator and he purchased notes and he taught me that. And I thought it was the coolest thing ever. I, you want me to say a lot? I don't like math, but I do like money. And so he taught us, taught me how to do that. He taught the entire class and I was hooked. So, I actually started my business in a 500 square foot apartment. I spent a ton of money on a computer, which, you know, now computers cost, you know, nothing by comparison back then and a fax machine. And not even like a really nice fax machine. That was well, yeah know it wasn't like the regular papers that roll, that like the thermal paper that would to fall behind the desk.


Fred Rewey:

It's not, look it's not important. I did learn that by the way, again, 500 square foot apartment. I did learn that the fax machine with thermal paper should not be in the kitchen where you have a stove. Cause then basically it turns the roll, all black. But anyway, so that's where I started. And then, I actually joined up with another investor and was one of the largest investors in the country. Then I went to the other side and joined a funding team where I met Tracy. And then we left it all. How many years ago? 25 years ago.


Tracy Z:

Yes. So, what's interesting about your story that I really like is that you learn about this taking a real estate class in college. Don't you wish that they taught this sort of information in all classes? I mean, you just were fortunate that the person teaching the class knew about real estate notes.


Fred Rewey:

Well, schools don't teach you real, or they don't teach you money and they don't teach you relationships. And they're probably the two biggest things in your life. Ours were together, which is really weird.


Tracy Z:

So, yeah, as Fred mentioned, we come out a little bit differently, but we met through the note business. So, he started out on the side of flipping notes and I started out on the institutional investor side. So, I had a real estate and closing background worked for an attorney and a small company that had a title company. And it was really, I learned about seller financing because it was a small rural area. And I moved to what was called the big city of Spokane. And that was in 1988. And I went to work for a gentleman, that had already been buying and selling seller finance notes for 30 years. So, they had started in the forties and fifties. So, I got started in 1988 and I was the person doing all the paperwork and understanding the due diligence and helping them expand their portfolio so that they were buying $20 million a month from people like Fred and that group that would bring the notes to us.


Tracy Z:

And so we came up from an institutional investor side and from that side, we also were securitizing notes and putting them on, usually it could be sold into wall street. And so we were taking that seller finance paper and trying to turn it into something that will look more like what the bank taper was. And so, then for the night I met through the note business and in 1997, we started our own company together. And we also started the NoteInvestor.com blog, which is really was a labor of love, right? It's not going to hold over a hundred articles on that.


Fred Rewey:

There's a ton of information. If you go to www.NoteInvestor.com , there's a ton of information there. And it's grown over the years. It became, well, you know, one of the most what's that? What's not an affinity site. What's that called?


Tracy Z:

Authorities.


Fred Rewey:

Authority site. Thank you. Yeah, there's an authority. It's an authority site on that. And we, wouldn't always been very giving with the information same as these videos and you'll see going forward. We don't hold anything back. I mean, I think at this point in our lives and what what's happened to us and we've been fortunate to do is it's a matter of giving back. So, we created NoteInvestor.com a couple of years back, we created CashFlowExpo.com , Which I noticed several people here that were at Cash Flow Expo, where we had, we brought together a bunch of speakers that we're not selling anything. We're just passing on information, paying it forward, if you will. And then, you are largely behind the creating the Personal Profit series.


Tracy Z:

Yeah. So, we have a Personal Profit series manual it's a 475 page manual. It's for all the detailed people like to see the documents and how the due diligence works. And we also did a calculator class. So, it teaches people how to use financial calculator. I noticed that somebody said in the comments, it kind of caught on my eye that they take in that class. Well, thanks for being here as well. But today what we really want to talk about is, how we have used the note business for ourselves. So, we've seen it from the institutional side and how, and then we started our own company and we bought and sold notes and retirement accounts. We've used lines of credits. We've flipped some notes or rehab, some notes and some are for profit. And so we're here to talk about that because we think it might be valuable to you to see how we've done it. And because we stand three decades of doing this, we've seen this work in good economies and slow economies and crazy economies, 2008. So, we've seen it through all different cycles. And so, today we want to talk about where's the opportunity. And then we want to hone in on the seller financing side as well. So, there are three main areas of opportunity for deal sourcing, in my opinion, if you want to buy yourself notes. And so the first one would be


Fred Rewey:

Seller financing and that's the deal we're going to talk about. And that's sort of traditional deal. That's probably where there's more often than not. And we're going to go through an example of that. And you're going to have that down cold here in just a minute with our little magnet people.


Tracy Z:

Yeah. And so, that's where we got our start. That's where in eighties, we were [inaudible] They also could be the form of re-performing notes. You usually see a lot of those on the note listing sites that you might've seen, like notes direct or paper stack. Although, they sometimes also have seller finance notes as well. But what's interesting is until the 2008 subprime lending crash. Non-performing notes, wasn't really something we dealt with. We had all, we found our inventory were seller finance notes. So, there are still non-performing notes out there today. We're going to talk primarily about performing notes. We can say the non-performing notes maybe for a future session. And then, the third thing that we want to talk about is the creating outside.


Fred Rewey:

Yeah. And that's basically where instead of going out and trying to find notes, you're actually creating notes you're, and this is really attractive to people that are used to flipping properties or people that have properties they want to sell.


Tracy Z:

Yes. And so in creating notes, in addition to doing that with property, do you want to buy or sell. And also you could actually originate a loan as a private lender to another investor. So, that's something else popular. So, those are the three main areas of deals sourcing. People always wonder where these deals come from, seller finance notes, non-performing or re-performing, and then also the create your own notes. So, we are excited to have you here. So, what we'd like to do now is kind of hone in on the seller finance notes. So, in general seller financing is about 6% of all real estate transactions. Now, that can be more or less. Some States have less. It's not as familiar. Some States have more, but that's just an average. So, we've actually got some cool stats that we're going to bring up on the screen to show you just how big it is, because this always surprises people.


Fred Rewey:

Well, I think it's one of the things that people talk about, where they haven't heard of it. You know, they haven't heard, is that, well, sick, if you think of all real estate transactions, 6% plus or mining is a really big number. So, the first thing we want to show you, graphically up here is just how big, how much money we're really talking here. And the answer to this from last year, because where it's trailing year and gathering information is 23.9 billion with a B. So, that's 113.8 billion in the last five years. So, it's really, really big market, much bigger than people think it is.


Tracy Z:

Yeah. So, you think you just need a little slice of the pie. So, in addition to there being 113 billion plus in the last five years, this is made up of a lot of different things. This is made up of residential, commercial, land. And so we can look at that slide that shows us the stats on that. We've got the residential made up about 39%. And when you're talking about the dollars land made of about 25%, commercial made up 18%, and then we had this little bit that was unknown and it pretty much all comes out about similar ratios on that. That just meant that the county where this data was obtained from, didn't identify easily with the property was. So, where did this data come from? Well, this is public records data. So, whenever you buy or sell property, a deed gets recorded. And whenever you get a loan, a mortgage or a deed of trust gets recorded. And so this data that shows that the person that sold the property also to get the mortgage or the deed of trust. So, this comes from public records. We work with a company to get this data and they've been tracking it for us for quite some time.


Fred Rewey:

Yeah. So, we have a graph that shows the tracking of it. Scott, if you could put that up there. Yeah. So this actually gives you a decade of seller financing usage. This is how much, and you can see that it went up, obviously back in 2013, 2014, you can see where it kind of hit the highest position there. And if you'd look, take a look that, and you look at interest rates, you know, and you can see where these corresponding go back. You can see lately it's come down, but it's still a huge, huge number. It doesn't matter to us as long as there's always inventory, which there is. So, in this case, and I think what's going to happen now is you're going to start seeing it up tick back up pretty soon here.


Tracy Z:

Yeah. So, financing fills a need when the lenders start to restrict their criteria and they want a higher down payment, a higher credit score than fewer people qualify for traditional bank financing. And so in those situations, we see that the percentage of seller financing goes up or if their credits and hits because they've had some slow pays. Unfortunately, we can't deny what's happened in last year. Wow! It's been a crazy year. So we hope we find people well and healthy and also trying to think, how can they help people in the future? And this is one of the ways I believe is that, seller financing is going to help some people get back on their feet that have been hit and hit a little bit hard by life. So let's, you know, that, so those are all the numbers and now we're going to go to the board and we're going to kind of show them a transaction, how that might look, right?


Fred Rewey:

Yeah. So we're going to take a step back. And those of you that are, have been in the industry for a while, just kind of bear with us for just a second. This is, we always find this, the easiest way to explain to the people and the purpose of this series is to not leave anybody behind. So, we're starting at the very basics. And then as you see, as the series progresses and we do more of these videos, you're going to see that we get more and more advanced, but we do want to start at the very, very beginning. So, basically what we're doing with is a house, there you go. This is high tech. We spent all our money on this camera, so that's not true, but it makes for a good story. So, this is the way a typical transaction would work without any type of notes situation. And what we call this guy?


Tracy Z:

Sam, the seller.


Fred Rewey:

Sam, the seller. There we go. It is the Dr. Seuss of home sales. So, Sam the seller who's much bigger than the house, by the way. Sam, the seller just wants to sell his house and somebody comes along to buy the house.


Tracy Z:

And we'll call her Barb, the buyer. And what traditionally happens, right? Is Barb, the buyer goes and gets,


Fred Rewey:

Yeah. So, she's going to borrow money from a bank to pay Sam. So, Oh, I want some money. Well, first let's say the bank has the money. So, she's going to get a loan from the bank. And then the bank is going to send the money to Sam the seller. And then, she gets the house and is not, and then he's going to go away with his money and she's going to continue to make payments to the bank.


Tracy Z:

Yeah, Traditionally 30 years.


Fred Rewey:

Yes.


Tracy Z:

That's, you know, we start here because everybody understands this. So, if you bought or sold real estate or bought or sold a home? You understand that, if you don't have the money to pay cash, you borrowed the money from the bank, the seller gets their money and then they just, the buyer just makes things to the bank. So, in seller financing, it's just a little bit different. So, in that situation, we still have Sam the seller and we'll still have Barb, the buyer.


Fred Rewey:

So, there's a couple of reasons this happens. Well, it depends what happens in the environment, but this could have been a property that was harder to sell for some reason. Sam could have been insisting on getting a higher sale price. He might've really liked Barb, but Barb didn't qualify at the bank. So she, you know, maybe she went to get a bank loan and doesn't qualify, maybe heaven forbid she's self-employed and doesn't qualify. You're going to see a lot of people come out of here that are really good people to have a single life circumstance like what's happened in the last year, that all of a sudden don't qualify for bank loans. And even as low as the interest rates are, they're just not going to be able to get loans or in some areas it's very common. Like, you know, we said 6% is a plus or minus national average, but in some States it's a much higher percentage because this is a normal way of doing it. He may also simply want to carry back a note cause it's a good return for him. And we're going to talk about that in a minute. So, in that particular case, he's going to carry back a note and you want to talk about how he does that?


Tracy Z:

Yeah. So, in this particular case to Sam, the seller sells to Barb, the buyer. Now, she's still going to hit her deed. So she closing, will get a deed and, so she'll still get her deed. But what she's going to sign, is a lien over to Sam, the seller. And so in this case, she's going to have a lien and that's going to be secured either. The lien is evidenced by a promissory note and most all States. But what might change is that instead of a promissory note, that's always the last of my pitch. So, in some States it's a deed of trust. That is what secures the promissory note. And in some States it's a mortgage, but basically the lien is what's recorded either the mortgage or the deed of trust in the County. So, Barb the buyer gets the deed and she signs a note back to Sam, the seller.


Tracy Z:

And then they put a lien on the real estate that says, if I don't honor my promise to pay, you can take the property back. So in this situation, then what happens is, instead of there being a bank, remember we took the bank away, Sam, the seller becomes the bank. And every month Barb, the buyer, sends the payments to Sam, the seller, and hopefully they use a third-party servicing agent to collect those payments every month. Because they'll keep packing principal and interest and do the collections. And that's what makes it so passive. It's kind of like, think of the servicing company as a property manager for your note. We're not managing the property, right? They're managing the note. But the great news is, is that they usually are available for 20 to $30 a month. So less than a traditional property manager. So, every month Barb, the buyer makes the payments to Sam, the seller and they, she put some money down and he stays in the picture. Right?


Fred Rewey:

Yep. So to pause for just a second, because I think this is an important distinction. I'm going to lose the paperwork just briefly, just to understand that all happens behind the scenes. And it's no different than if this was me and this was Tracy. And I said, Hey, do you want to buy my house? And Tracy's going to pay me so much a month to own my house. We're going to do all the paperwork to protect Tracy. We're going to do all of the paperwork, protect me. But as long as she mails me payments every month, she will eventually own the house. And we have paperwork in the back that, which happens if she doesn't mail me and things like that. But that's essentially what we're doing. We're removing the bank. I'm happy because maybe I didn't want all the money in a lump sum, or because I'm going to create an interest rate and say, Hey, Tracy, you're going to pay me 8% a month on that. And so now I'm going to earn money while I have the note. So we're going to talk about buying those in a second, why this is very important, but this is how essentially this person created their own note. We talked a little bit about creating those. This could have been a rental property that he no longer wants to run out inside. Do you know what I'm going to sell it? And then he sells it to Barb and now Barb is going to make payments to him. But the important distinction is there's no bank involved.


Tracy Z:

Yes. Now, sometimes Sam, the seller might still owe money to a bank. And we can talk about that in a more advanced strategy, because this can be done without owning properties free and clear. But in this particular instance, he sold it to Barb, Barb makes payments to Sam, the seller. So now, okay. So, there Sam, the seller. So how, where we come in, how can we get involved?


Fred Rewey:

Well, I think we'd do the numbers.


Tracy Z:

Oh, I thought we were going to show how to flip a note and bring it in investor.


Fred Rewey:

Yes.


Tracy Z:

Yes. You want to do that and then go to the numbers?


Fred Rewey:

Okay. Yeah.


Tracy Z:

So, there's a couple of ways that you can participate in industry. And so, let's say Sam, the seller is getting payments every month because he sold to the Barb, the buyer, and he likes being the bank. He has all the rights of the bank, but he would like to get some cash.


Tracy Z:

He's tired of a small, monthly payment trickling every month. So people market including Fred and I, and you can too. We market to these people and we get our own pictures on there. We party, we say, are you receiving payments on property sold? We pay cash today, sell all or part of your payments and you receive a lump sum of cash. And so we market to people like Sam, the seller, and they contact us and ask a quote. And in that situation, we can either buy the note and earn a great yield, or we can flip the note to another investor and earn a fee. So if we were to come into this situation and buy the notes, say in our retirement account, then Sam, the seller would get his cash. So, he gets his cash from us.


Fred Rewey:

He goes away.


Tracy Z:

And we get an assignment of his interest. And we now get the payments from the part of the buyer. So, in that situation, we're happy. We're an investor, we're learning a great return. We have the same position as a bank, as far as like, if Barb does not make the payments, then we are able to foreclose and take the property back, but Barb's paying along great. And we're receiving payments, but if we don't have money to buy the note, or we don't want to buy that note and we another option.


Fred Rewey:

Yeah. So, what we can do is actually flip that note over to a group of funders. And so, and we're going to show you the numbers in a second. So if we have our own money, then we are basically going to pay Sam, the seller to step in and take over his position. And we're going to take his place. We're going to give him cash, whatever we agree on. And then we're going to receive the payments. If we don't have our own money, then we are going to flip the deal to an investor simultaneously. So that, they put up more than the money. So we agree on a price. They put up more than enough money to pay for Sam plus something else for me, for the flipping on that. So we're going to use their money to buy Sam's note. And then what happens when this is all done? Is Sam walks with his money. We walk with every little money we made. The funding source is the one that's going to get the payments.


Tracy Z:

Yep.


Fred Rewey:

Hope that made sense. If not, where you're going to see this over and over again, because we will be talking about the same type thing.


Tracy Z:

Excellent. All right. So, let's go to the numbers now, like, so we'll take it away our magnet people.


Fred Rewey:

All right. So we're going to look at the numbers and this is where it really gets kind of fun. And this is the exciting part because, and you're going to see why this industry is so flexible and yes, we are putting a piece of paper over a chalkboard. I don't want to hear anything about that because it's just too hard to read if we don't.


Tracy Z:

Yeah. Okay.


Fred Rewey:

All right. So let's talk and I'm going to use some round numbers and we have a tendency to always use these round numbers. So interest rate aside, and, you know, maybe the properties cost more or less than your area. Maybe the interest rates are more or less depending on what's going on the market, but I'm just going to use this number. And we're going to say the sales price is $120,000. I'm just going to put SP this is the sale price of the home. This is what they've agreed to purchase for. There's going to be some sort of down payment. What do you think she wants to pay for down payments? So there's going to be a down payment of $20,000. Is that a good down payment?


Tracy Z:

Yeah. I like to see personally 20% or more, but yeah, that would be a little bit less than 20%. It's what about 18%?


Fred Rewey:

Yeah, I think it's a pretty solid down payment. Yeah. I think that's a really good amount of money. You know, and in the last year, by the way, and I did see some interesting numbers the other day. There's a lot more people having cash. This down payment is not surprising right now because a lot of people haven't been able to eat out at Olive Garden and all this other stuff people were talking about and they started to have a lot more cash. So, that means after the down payment, we're going to create a note of a hundred thousand dollars. That's going to be the note. That's the amount. So it was $120,000 sale price, $20,000 down payment. We have a hundred thousand dollar note. So, we're going to do that over. How long are we going to give her to pet? Let's do a traditional 30 years. Okay. So it's going to be a 30 year note, which is 360 payments. So we're going to say 360, and we call that N for number of payments, and we're going to do an interest rate. I'm going to do 10%.


Tracy Z:

And I know you're all thinking, this is shocking. Who's paying 10%, but we find a lot of seller finance notes that are in the eight, nine, 10% range.


Fred Rewey:

I mean, you know, as an aside, you know, this number's all negotiable. So I could all, if I really didn't want to carry back a note, and this was my hot button and go, you know, I want 10%, if you don't want to pay me to 10%, go get a bank loan or go find another way to do it. So, but this never could be whatever we agree on, but let's just say for the purpose of the example, we've done 360 months, which is 30 years traditional mortgage at 10%. So the payments on that are actually going to be 877.57. That's how much Barb is going to mail, Sam. I'm really bad at names. But I'm good at numbers.


Fred Rewey:

I don't have a vested interest in this magnet people, I don't know, they're not going to be around. So, $877 every month to Sam, the seller. And that's the note, that's the cash flow. That's what we're looking to buy. Now, let's say Tracy comes along and Tracy is this group here. Tracy is the investor. And she wants to buy it for herself. Let's not talk about flipping or anything right now. She wants to buy it for herself. What do you want to earn on your money?


Tracy Z:

I would like to get 11% return.


Fred Rewey:

Okay.


Tracy Z:

Yeah.


Fred Rewey:

So Tracy wants to get earned 11% on her money. Now we're going to, there's a whole lot of reasons this wouldn't happen because we always have some sort discount, goes some costs. But let me say this. If Tracy wanted to earn 10% on her money, and she came in at the exact moment, this all started, she could pay him a hundred thousand dollars. She would receive the 877.57 and a 360 payments. And she would be earning 10% on her money. But this is where the magic of the industry comes. She doesn't want to earn 10%. She wants to earn 11% on her money. Now we cannot go back to her tomorrow. Thank you. We can't go back to Barb and change the numbers. So what do we do?


Tracy Z:

So, we understand the time value of money. And we put it in our financial calculator. And we say, if I have a hundred thousand payable at 877.57 for 360 months, and I want her 11%, what's the present value of that cashflow. And that is the amount that we would pay. So in this case, it turns out to be approximately


Fred Rewey:

92,150.


Tracy Z:

Yes. So I wanted to earn 11%. I could pay Sam, the seller, 92,150. He would get his 92,150. He would sign an assignment of mortgage or assignment of deed of trust. And you would endorse the promissory note. I would get the original promissory note. I record an assignment and he gets money and go away. And then Barb, the buyer would make things too. So, that would be how that transaction,


Fred Rewey:

So, the way we get the money is, is we're paying less money. We're paying 92,150 for a hundred thousand dollars. So that's the discount. So we're paying less money for the same cashflow. So, the cashflow is always the cashflow and somebody changes it, but it doesn't change. So it's always going to be 360 payments of 877.57 that cannot change or will not change unless we agree on something. And that's a whole different scenario, but that is what, so basically that's a hundred thousand dollars. If we pay less for it, then the yield is going to go up. The return is going to is going to go up.


Tracy Z:

So in that case, we could buy that a retirement account. If we leveraged it, if we had costs of funds say 5%, and we're making 11, we've got arbitrage of 6%. Those are different ways as an investor that you can do it. But let's say you find this note and you don't have the funds available right now to buy it, but you still want to do the deal. There is opportunity. So, let's look at flipping a note or wholesaling a note.


Fred Rewey:

So what we would do is, is we would actually contact the funder. And we would ask the funder, we'd say, Hey, this note is for sale. How much are you willing to pay for this note? And they would give us a quote and let's just say they chose. They wanted to earn, okay. So they said, okay, so we're going to pay, we're going to pay 92,150. Now, Tracy, you don't have 92,150 right now. So you're going to flip the note on to these people, but you're going to get paid for finding the notes so much. Do you want to make


Tracy Z:

I would be happy making, I mean, it would be a low fee, but yet be happy making that 2000. Okay.


Fred Rewey:

So we're going to take off the funder, came back and gave us this amount. We're going to take off $2,000 for ourselves and that's going to give us,


Tracy Z:

90,150 to pay them. So at closing, we signed an option, agree with Sam. And then at closing, that's assigned to the funder. They know this all transparent. They know exactly what's happening. It follows their due diligence procedures. They ordered the title, they ordered a BPO or some kind of valuation of the property. They do their check on the payer, the three P's as we call them the payer, the property and the paperwork. And then at closing they'll wire 90,150 to Sam, the seller. And they'll wire the difference, the $2,000 referral fee to us. And in this case the funder is paying all the costs associated with that. So that's just a net fee. So on transactions like that, we see on average, the average tree is about three to 6% of this amount the funders and investing. Now, sometimes it's more on smaller deals, a higher percentage. Sometimes it's less on bigger deals as far as the percentage, but that is how you can make a referral fee in the industry if you don't have funds to invest on your own.


Fred Rewey:

Yep. So let's see if we have any questions here. I'm gonna look at the board here. Ron, is there a usury concern? It's a great question.


Tracy Z:

So, there are different usury rates in different States. So you do have to check that out. There's also, if you're creating notes, there's something called Dodd-Frank and high-cost QM, more Qualified Mortgages. So, what we recommend in those cases is that you work with an MLO a Licensed Mortgage Loan originator in that understand seller financing. And we have some that if you're going to create a note, if you're brand new, the seller creating that, then we recommend that you do that to create the note, just to make sure the buyer qualifies, but as you an investor discounting the note, that's not usurious, you're not making a loan, you're not charging them interest. You it's just like buying a property at a discount. So if you're buying a note, at a discounts just like buying a piece of property at a discount or usury would come in is what the interest rate is being charged on the note.


Tracy Z:

That's where usury potentially could come in. And that's where you would use an MLO. We do all above board. There are some exemptions to Dodd-Frank and using an MLO if you're doing a one seller finance transaction in 12 months, but I recommend you just go ahead and use it anyways, because it just paperwork and paper set up just like a banquet qualifies and you get to choose the underwriting as far as what score and down payment, those sorts of things that they would have. And that's been a big change in our industry since 2014 and we all adapted a little bit, but I think at the end of the day, it probably made the paper better quality.


Fred Rewey:

Yeah. And again, this only applies if you're creating notes, which will go into another video. If you're not creating notes, if you're just buying notes, then that's not [inaudible].


Tracy Z:

You're just buying at a lower price and that's not usurious because you're not charging anyone interest. You're just discounting it.


Fred Rewey:

Yep. Darryl said, do you use a title company? Absolutely. Yeah. That's what we do the closing through. So we close it similar to a real estate transaction, except it's just different paperwork, but basically you're what I mean, how else would you say it,


Tracy Z:

If your mind there's, we always use a title company. There's two different types of title. There's a title report and there is a title insurance policy or commitment for insurance. If you're working with seller finance transaction, then we definitely suggest getting title insurance because you want to make sure you're coming in after the fact that the note was created properly. If you're creating note, you want to make sure that is also done properly. If you're buying that bank paper that we talked about and that title policy called the lender's title policy already exists, then you might be able to just get a title update because that lender's policy will often go to your benefit to this successors and assigns. That would be definitely a more advanced topic, but the title is where I learned the business. So I love, look, you have follow-up questions on that. We can all definitely discuss that, but we do involve the title company, whether you get title insurance or title report will vary on the type of paper you're buying and whether or not a title policy parties.


Fred Rewey:

Yep. And one more question that we're going to stop for this video cause we've got some, you know, we've got to save stuff for other videos. Theresa said, would the group be paying 94,150? No. And let me explain why such a great question. It's a common one. So before this exists, what we're doing is we're actually finding out how much will the funder paid for this note? And the funder said 92,150. So it's an important thing. And a lot of people have made this mistake before you don't add your fee, you subtract it from what they're going to pay. So if they're offering 92,150, we have to take something off of that to offer Sam the seller, to cover our fee and how we do that? And we say, okay, we want to make 2000.


Fred Rewey:

So, we're going to take $2,000 off of the 92,150. Now, the net we have the offer Sam, would be the 90,150, and that's how we would be able to do it. I'm going to do a follow-up question. She had a up question. Why would the seller only take $90,000? And it's a great question. A lot of times when the Sam, the seller worlds first make the transaction, they think that they're going to be happy for 30 years. They're going to be happy collecting 877.57 a month. And that's just the way it's going to go for the rest of their lives. In reality, and usually in either a short period or two to three, three to four year on average, something changes in their life. It could be good. It could be bad. It could be, they're going to send their kid to college. It could be something medical. It could be, they just need to sell it to do something different. So a lot of times, you know, now this 877 a month is just not going to cut it. Maybe Sam wants to buy a boat. Maybe he wants to invest in a business. Maybe he wants to buy another house. It could be anything, but this is not enough money. And he can't just walk into, you know, bank


Fred Rewey:

And say, Hey, I got this note and I, you know, sell it to you because most banks won't even have a clue or won't even touch it. So, that's why it goes to a market to investors like us and why we buy at a discount. And in reality, if someone would have walked up to Sam at the time and said, Hey, you know what, you know, we take, we sell this for 110,720 cash. He would have taken it. So as long as the discount makes sense in everybody's world, he's going to get $90,000 cash now, as opposed to waiting over 30 years to collect his money. So, there's a lot of different means. And we'll talk about that in another episode, why the discounts are and how they show up.


Tracy Z:

yeah. And we also are going to talk about in an upcoming episode. In fact, the next episode, something called The Partial Purchase.


Tracy Z:

And the reason we talk about The Partial Purchases, we can give them full face value without them taking a discount. If they're willing to take some money now and some money in the future, and that's how we structure a partial purchase. So that's a great setup.


Fred Rewey:

The coolest thing about this industry.


Tracy Z:

Honestly, we love partials. We're partial to partials. They're one of our favorite things. And so, we are so appreciative that you joined us in this session. And we want to remind you that if you go to www.NoteInvestor.com/101 , right? So, www.NoteInvestor.com/101 that you will one get. Oh, this is how you know it's live.


Tracy Z:

So, if you go to www.NoteInvestor.com/101 , You will put in your email and we'll give you a free copy of Our Five Ways to Cash in on CashFlow notes. And we'll give you a free eBook on 21 Tips for Note Investing. And then we will also send you the link to the next session. So, our next session will be coming up.


Fred Rewey:

And replay. If you missed any of the sections,


Tracy Z:

And our next one, we're going to talk four, we're gonna go through, four or five different deals of how you make money on them. And we are also going to talk about those partials.


Fred Rewey:

That's it? So, hit follow, like whatever the little buttons are. Share. I don't know what any of the things are on there, but thank you for joining us. Oh, there we go.


Fred Rewey:

Wait, put it back up there. Like share and subscribe, hit the bell. See, I didn't even know that. I'd say things like we have a producer. We have somebody that knows what's going on here.


Tracy Z:

So, we appreciate you being here. The Note Investing world has been good to us and we enjoy sharing it with others. And as you saw, there's 23.9 billion a year. So, there's lots of, to go around. And it's just a way for private investors to be able to make the money like the banks do.


Fred Rewey:

And we'll see you on the next video.


Tracy Z:

Happy Note Investing!

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