Fred Rewey:
Hey everybody! Welcome to another episode of Note Investing 101. I'm Fred Rewey.
Tracy Z:
I'm Tracy Z.
Fred Rewey:
Tracy Z. And welcome. In this episode, what we're going to concentrate on is profiting from notes, AKA shows me the money.
Tracy Z:
That's the best part of the industry. You get to help people and make a profit at the same time. We've been doing this, as we mentioned in the last episode for a combined 50 years, I started in 1988. Fred, you started in the early nineties and we met along the way. We are business partners. We're also life partners. We're married. We have a daughter who also works for us. We're really excited to share with you some different strategies for profiting with notes.
Fred Rewey:
We're going to cover four deals. We're going to go over four, very common, I guess, deep dives into numbers.
Tracy Z:
Yeah. I love the numbers. And as you say you don't like Math, but you like money.
Fred Rewey:
Exactly.
Tracy Z:
We promise that we have something in here for everybody. We try to make it all very digestible because the note business can be as simple or as hard as you want to make it. We started out with the very basics. How do we profit with notes? Those four profit strategies that Fred mentioned: the first one is Flipping Notes.
Fred Rewey:
There are many ways you could flip a note. If you don't have your own money to buy the note. It's too big of a note, you're just starting out, or your funds are tied up. Maybe you're buying notes with your own money, like out of your retirement account, but it's a note that you don't want to personally hold, but it came across your desk. We might as well flip it on to somebody that is interested in it. And make some money on it.
Tracy Z:
That's flipping with notes, it's great for immediate income now. And then, we're going to talk about Purchasing Notes. So, flipping notes or wholesaling notes is great for making fees or immediate income, but purchasing notes is how you generate a portfolio for long-term passive income. That's how you get the interest income. That's how you get to step in the role of a bank. A Private bank. We'll talk about the benefits of purchasing notes and how that works.
Fred Rewey:
Next is Partial Participation. And if you've heard us talk about partials and our eyes kind of light up, it's like the coolest win-win for everybody. It's a way that you can minimize your risk. It's a way that you can get more money to the seller. It's a way that you can increase your returns. So we're going to do an example of that, and this is a really, really powerful strategy.
Tracy Z:
The last thing we're going to talk about is: Creating Notes. So you might want to use seller financing to buy property, to sell a property, sell the property and create a note. We'll have an example that combines a couple of different strategies for creating notes.
Fred Rewey:
The Notes Flipping strategy.
Tracy Z:
This is a property in Tampa, Florida, and it had sold for 237,640. It had a nice down payment of 98,640. The seller carried back a balance of 139,000, which’s called the original note amount. The original balance would have been the unpaid principal balance. The note balance at the time this note was created. And it was written at 6.5%. If I was writing a land note, I would have made it a higher interest rate.
Tracy Z:
When we were approached with this note, they'd already sold and already created it. This was what we were presented and the payments were $878.58 a month. It was only going five years. It had monthly payments, but those monthly payments wouldn't have paid it off in five years. There's something called a balloon. Not a lot of notes have balloons, but some notes do. If they do it just means there's going to be a big payment at the end. That the monthly payments don't pay it off. In a normal deal, monthly payments paid off the note.
Fred Rewey:
When we saw the note, it had a balance of 138,000 and only one payment had been made so far. We certainly could make an offer on this to keep for ourselves. It's a really good down payment. As Tracy said, I'd like to see a higher interest rate for us. Personally, a balloon doing five years on raw land is a pretty big size note to not have a single-family residence on. There is also no seasoning. Seasoning is that they've only lived in it or not lived in it, but they've only made one payment. This is one we're going to look at flipping.
Fred Rewey:
What we're going to get to see is, how much would an investor pay? If you remember the last episode we talked about how much our investor is willing to pay for this note. The investor said, ‘look, I will buy this note with the balance of 138,874. I will pay $120,141.27 for this note’. We have to subtract a fee for ourselves. We take off about $5,000 and we offer the seller 115,141.27 for their note.
Tracy Z:
We always do the quote to the penny. Do you want to talk a little bit about why that strategy is?
Fred Rewey:
I'm really big about not creating what I call newspaper negotiations. We know the investor is going to pay 120. I know I'm going to offer something less than that. If I offer the seller 115,000 for their note, they're likely to counter back with, well, you know, okay, I want 120, or if I say 116, then, they say 119 and we go back and forth like kind of like when you're negotiating and buying something out of a newspaper or a Craigslist Ad or something like that. I always find that the key thing I try to do when I'm making an offer note is established what is the fair market value is.
Fred Rewey:
This is what your note is worth. I have found by putting a penny on it, literally going all the way down to the penny. Making the seller an offer in this case of $115,141.27. It's when you looking at it as a seller and you know, you don't know the Math behind it or the calculation, but you're looking at it. You're thinking, wow! This is a very precise offer. There has to be Math involved behind the scenes. And there is, but it must be down to the penny. People aren't going to count on the goal. Well, what about 118,243.95? They don't typically come back. I will always make an offer down to the penny and you'd be surprised, how much it makes a difference.
Tracy Z:
You can tell Fred's offers because they ended 23 and mine usually end in 27. This is one that we received. We got the quote from the note funder, we took off the 5,000. We offered it to the seller. They accepted it. At closing, we received a $5,000 referral fee. That's Flipping A Note. Some people call it wholesaling a note, some people call it brokering a note. We tend to stay away from the brokering term because people get confused and think you're brokering something else. We usually call it Flipping or Wholesaling a Note.
Fred Rewey:
One thing I want to point out before we move on because we're going to get the partials here in a minute is and this came up in our last episode, too, where people talk about the discounts. The discount to sell the person that's selling $138,000 balance for 115,000, that is the note discount. If they could have sold it for all cashback, then they may have accepted that discount. They may have sold the property for a lower price. If someone was a cash buyer what typically has happened in a situation like this is the situation changed. This person needs 115,000 or a hundred thousand to go invest in another property and move on. That's why they're willing to take that discount. But hold on to that thought, because you're seeing 138,000 go down to 115,000, which that just depends on why they're selling because you're going to see a better way to handle this.
Tracy Z:
Exactly. All right. So this next example is going to be Purchasing A Note. We're still talking about a full purchase, you want to start us off on this one?
Fred Rewey:
This is a mobile home. It's a 1983, double-wide mobile home on a lot in Florida. The original sales price was only $20,000 with a down payment of 2000. The original balance of the note was $18,000. When they write up the note of the 18,000, they did an 8%, which is a pretty decent interest rate for five years. It's not very overly long-term and it's $364.98 per month.
Tracy Z:
Sometimes when we're doing these examples, we like to show some smaller deals. What works on a $100,000 note or a $20,000 note works on a $250,000 note or $500,000 note. But for a lot of people getting started, I think, especially if they're looking at purchasing a note for their own investment, sometimes I'd like to see the real numbers that are within their achievement. If you've got a larger investment portfolio, then you can just add a couple of zeros, right?
Fred Rewey:
This is a great example if you have a self-directed IRA where you can actually put your money into a Retirement Account. Then you can decide what to purchase in a lot of cases and notes being one of them. This would be if you have a smaller IRA,
Tracy Z:
This is what we did with this one. It came to us when 14 payments had already been made. It had a nice amount of seasoning as we call it 14 payments. Cause it was paying down quickly as Fred said. It was only a 16-month amortization, pay down to $14,417.63. There were 46 monthly payments left at 364.98, no balloon. It really paid off in that amount of time. In this situation, we offered to make a full purchase of all 46 payments for $8,650 because it's a lower older mobile home. The seller accepted and this went into our IRA. This was a yield to the IRA of about 39%. That's a great return. Remember yield is IRR, Internal Rate of Return, a little bit different than ROI. If you use a time value of money calculation as we do, which is the standard calculation, you don't have to be afraid of it. There's a nice software program that runs that. That's a great return on investment to your IRA.
Fred Rewey:
Just so everybody understands, we didn't change the interest rate of the person that's making the payments. What we're doing is we're buying an existing cashflow. In this case of 46 payments of 364.98. We're paying less than the current balance. For every dollar we pay less than the current balance, our yield, our return goes up. In this case, if we pay $8,650 for this, we get a 39% return.
Tracy Z:
The payer, the buyer, and the person buying and making those payments, still pay the 8%.Their terms never changed because those are set in stone by the promissory note. What we can do is pay less than the unpaid principal balance and by doing so, the yield goes up. Now, we get to talk about the fun one, right?
Fred Rewey:
Yeah. This is the partial.
Tracy Z:
We literally like this. The Partial Participation, one way to participate in partials is to buy all the payments and then sell some of the payments and keep something in the future. We call it a Buy Full and Sell Short. This is how it works. You've got a full purchase from the note seller. You buy all the remaining payments from the note seller. You sell some of the payments to an investor like an institutional investor. You can either buy it and sell it or you can do a double closing or the investor funds the seller. Then you, the note pro, get to retain the payments often into the future. After those first few payments are received by the investor.
Fred Rewey:
Let me do a weird analogy here, just so that everybody gets involved.
Fred Rewey:
This is the way I see it, Buy Full, Sell Short. If I buy a Snickers bar for a dollar and I break it in half. I sold Tracy half of it for a dollar, then she just paid for my Snickers bar and I got half a Snickers bar free. Right? I paid a dollar for a whole Snickers bar, broke it in half, gave her half of it, charged her a dollar.
Tracy Z:
You did give it to me. Didn't charge me a dollar.
Fred Rewey:
I charged you a dollar, now my half is free. That's what we're about to do with the note.
Tracy Z:
That's a very good analogy.
Fred Rewey:
I just made it up. Mostly, because I really wanted the Snickers bar.
Tracy Z:
That's what we're going to do with this deal.
Fred Rewey:
Yup. This property is a commercial and this is a church. This is not something we were necessarily wanting to own outright ourselves for a whole lot of reasons.
Tracy Z:
Who wants to foreclose on a church someday? Not that you thought you'd have to, but you wouldn't want to.
Fred Rewey:
The sale price was $135,000. You wanna start this one-off?
Tracy Z:
Sure. It's $135,000. It was actually like a retail building that was being used as a church. They put a $10,000 down payment. The seller finance balance was $125,000. The buyer was paying on the note, a 10% interest rate payable in 360 payments. It was written for 30 years. What do you more traditionally see? Right? At $1,096.96. Every month, the buyer sent $1,096.96 to the seller. They're going to do that for 30 years. When we were approached with the payments or to buy this note, it looked like this.
Fred Rewey:
There are 54 months that have already been made. The remaining balance was $121,000. You can see at 10% interest, it doesn't go down very fast. They've been making payments for 54 months and it only went from $125,000 down to $121,000. So, there were 306 months remaining.
Tracy Z:
This is how it looked when it came to us. There were 306 payments, that's the whole Snickers bar in Fred's analogy. The whole Snickers bar is 306 payments. This is what we negotiated. The seller sold all 306 payments for $92,804. That's what we negotiated for them to receive. We had an investor that was willing to buy just 186 payments. Half the Snickers bar for the purchase price of $95,046. They actually paid more for the 186 payments. Then we negotiated to buy all 364.
Fred Rewey:
The reason being by the way is that due to time value those payments way out there aren't worth as much. That's partly because it's not dollar for dollar. It doesn't stay equal. As the payments get farther and farther away, they become worthless than today's dollars. That's why we're able to sell the next 186 for $95,000 and all 306 for less than that.
Tracy Z:
What we did was we made a fee at closing. We have a certain amount of costs and overheads. We made a fee of $2,242 at closing, less than expenses. Cause we did have to pay for BPO and a title on this one for this particular investor. We made the difference between the two at closing, but what did we do? This is the really cool, special part. This is the reveal. Not only did we make some money at closing. We kept 120 payments, 10 years of payments of $1,096.96. We bought a full, we sold a partial. We made some money on that and we retained them future rights to pay 10 years of payments down the road. That investor got the first 186 payments approximately 15 and a half years. And then we got the last 10 years of payments.
Tracy Z:
I mean, that's the beauty of partials. It can be split up in different numbers. There's no limitation to that. It really just depends on the note and the term and what the investor will invest. This is the beauty of buying the whole Snickers bar and selling off part of it for the same amount of money and keeping some on the end. When you buy full and you sell short, this is how the documents look. You've got the note holder. The seller that sells it to the note pro with an assignment, a note endorsement, and a full purchase agreement.
Fred Rewey:
This is where we sell the note professionally. We sell to the investor with a partial. We're buying a full with the full purchase agreement, what we're selling is a partial with a partial person agreement.
Tracy Z:
The investor on those partials will want a full assignment and endorsement typically because they don't want to split up the note ownership. They want to have control. You're right to the future payments is in the future. When that investor made whole on their partial, then they will assign it back over and endorse it back over. This is about what people say, but what about if it quits paying or what if it pays off early? Those are great questions. Sometimes they just pay along exactly the way they are supposed to. Sometimes they stop making payments. In that situation, that will be dictated by that purchase agreement. It normally says that the investor bought those first 186 payments. In this example, they're kind of like a first lien holder.
Tracy Z:
They have the first right to go in and collect what they're due. Then if there's something left over in the event of foreclosure, then we on the end would receive that. Because of that, you don't want to stake a whole bunch of dollars invested on the tail end of a partial. You really want to turn some of your profit into that in our opinion. That's normally how we like to structure those. The partial agreement outlines that. The other thing that happens hopefully more often, and usually than our experience is that, it pays off early. The buyer decides to sell it and they pay it off or they're able to refinance and pay it off. That's what happened on this deal.
Fred Rewey:
In this particular case, it wasn't really payoff. They paid for a period of time and then they actually paid off early. The numbers on this is that basically 12 years went by on the church note. They were making the payments according to plan. Then they decided to pay off the note. At the time when they went to pay off the note, the full balance they owed was $96,915. But remember, we broke apart that Snickers bar. There's a percentage of that is owed to the person that bought the first set of payments. There's a percentage of that Snickers bar that we left on the table that we were going to get in the future, but it does have a value. The partial balance paid off for $39,346.18. That was how much was left on their Snickers bar.
Tracy Z:
That's how much the investor received. There's three balances going on here at any time, right? There's full balance at the buyers. There's the partial balance that the investors receive and then what's left over is on the end. That's what we receive.
Fred Rewey:
Basically, we're getting the today's value of what the back end of those payments would be, which is the remainder. We were the remainder. We were the tail end of that note. We got a check for $57,569.28.
Tracy Z:
This came through a third party service. When that buyer wanted their payoff statement, that servicer sent him the payoff statement for $96,915.46. That buyer sent in the payment to the servicing agent and they collected it. They knew we had a partial tail end. They got a payoff statement for the partial, from the investor for $39,346.18, and sent them their check. Then they send us the difference
Fred Rewey:
Without doing the path. Somebody sent in the question. They want to know what's the return for their investor on their investment? Do you know what their return was on the very beginning? Not counting the payoff.
Tracy Z:
Not counting the payoff. I believe they wanted an 11% yield. We could back it up. And if I remember right, it was 11% yield. Now, whenever it pays off early, either for that investor or for us on the tail end. We actually, our yields all go up because we based our calculations on it. Going much further out into the future. Like Fred mentioned payments now worth more money. When it pays off early and you bought at a discount, your yield actually goes up both for the investor and for us.
Fred Rewey:
A lot of people ask, what's our yield? Well, here's where it gets a little strange. In order to have a return on your money. You had to put in money. If I invest this, here's how much I'm getting back. Here's my return. Well, think about this deal. We got just over $2,000 upfront and we got back at holding the back in the notes of which we ended up getting 57,000. There was no investment. It's an error five and a lot of calculators because we actually, all we invested was our time.
Tracy Z:
That's very true. And marketing dollars. I guess you could count that as an investment.
Fred Rewey:
That's really high.
Tracy Z:
Absolutely. Sometimes people say, Whoa! I want to do this in my self-directed retirement account. Normally with the self-directed retirement account, they do suggest that you actually take the title and invest the money, then sell the partial. This one we did outside of a self-directed retirement account. We did it through our company.
Fred Rewey:
I think it's cool. Yeah. We can run it or you can email us what we can run it for sure.
Tracy Z:
For example, we have a blog on our www.NoteInvestor.com/101 website that goes over the exact numbers. We have spreadsheets that show how the amortizations work. If you went to www.NoteInvestor.com/101 and you clicked on our blog or articles in each search church note, you would find that or partial early payoff. I love the number part. I really love understanding how compounding interest works. That's why this works is because of compounding interest
Fred Rewey:
Which reminds me before I forget, if you want to see more of these videos or be notified of these videos, go to www.NoteInvestor.com/101. Put your name and email in and then you'll get notified when we do. Like, we're doing a set of these videos, we're doing a series of videos on different subjects. We will actually be doing one, which reminded me of it, is we're going to do a future one on retirement self-directed requirements.Things that we do out of there. But we have one more of these to go through before we sign off.
Tracy Z:
This is a strategy of Creating Notes. Iit depends on the environment of the real estate market, whether this works then I'll and I see it working in different real estate markets. It usually works when you're dealing with land, mobile home and land or properties that are under a hundred to $150,000.On my opinion, there's always opportunity to do this when you're in a rock and real estate market and interest rates are 2 or 3%. There's not an incentive for the buyer to have owner financing. Things don't always work. Not every deal is a seller financing deal. People ask me that all the time. I said, well, if every deal is a seller financing deal, there wouldn't only be about 6% on average or seller financing, right? This doesn't work for all deals, but when it does, it's a beautiful thing.
Tracy Z:
This combines a couple of strategies. We don't teach tax deed investing. Over the years we've liked all kinds of different strategies. This was a property that our IRA picked up through a tax deed sale. I believe it was in Arkansas. Some states are tax lien, some are tax deeds. We actually were able to pick this little house up for $710 at the county for a tax deed. How do you take a little $710 property and turn it into a bigger profit? Well, you can only sell it for so much. In this kind of a price market the way, to that, would be tough to get any kind of bank financing on this property. What we did was, we advertised it for sale for 60 months. The owner will finance easy terms for $254.96.
Fred Rewey:
We're basically creating a note.
Tracy Z:
We're going to create a note because the IRA owned it. It could have been you personally. It could have been your company but you own this piece of property. Now you're going to maximize your profits by offering easy terms. This is what it sold for, $14,000. The down payment was $2,000. Automatically we already have covered our $710 purchase price plus some costs. Then we carried back 12,000 and the interest rate was 10%. A typical small dollar deal, but the typical owner finance deal. Guess what that return was? If you put into your calculator $710 and then you get back 2000 and then you also get 60 months at two $254.96. It's like a whopping 430% return. Now, are all deals like that? No, as a reminder of the disclaimer, results vary, there's always a risk and investment. We're not attorneys or legal advisors. We always encourage you to do that. We're not offering to sell you a note or security. But these are on occasion. The kinds of deals you see. On average the return we see is 7 to 10%. Not every deal is a home run but there are deals that come along that you can have those kinds of home runs. T
This is the portion that we do a little Q and A.
Fred Rewey:
So we're gonna get out of here. I have a couple of questions that I can see that popped over to us. One of the questions from Purnell is. The 2K that you put in, where did you get that to use on this deal? Well, we actually didn't put in 2K I'm trying to think, unless he's talking about a different deal.
Tracy Z:
Purnell, which deal are you talking about, the church none or that Arkansas tax deed? Let's see.
Fred Rewey:
It came in before that, it has to be the church note. That was how much we actually made upfront. We took a look. We sold, you know, we bought a full, sold a partial. We were able to sell the partial for a couple thousand more than we had to pay the seller. That actually money went into our pocket on that.
Tracy Z:
If you did need to put money in the deal, we didn't need to on that deal. We have done other deals where we have put money in the deal. If you're doing it in your IRA, the money would come out of your IRA. If you were doing it in your company, the money would come out of your company. If you were doing it personally, the money would come out of your checking account. We do recommend not giving legal advice, but we do recommend that you form some kind of business entity because there's definitely some tax advantages to having an LLC or an S Corp or something like that.Or doing it in a tax deferred or tax-free retirement account. We do deals in our company. We do them in our IRA. We partner with other companies. We actually made $2,000 at closing. We didn't have to put that in and we made those payments on the back end as well.
Fred Rewey:
Someone asked, is it a good idea to price a note only on the (UPB) unpaid balance? We're going to have to do an episode on that because that gets a little confusing for everybody. Yes, generally, you know, you don't want to base it on anything. It's usually whatever's lowest either the balance or the value. If you're doing percentages of LTV's and ITV's based on that, you're going to go lower. But yes, it's price only on the unpaid balance. Just sort everybody else follows along is that you've got the unpaid balance then there's also the legal balance.
Tracy Z:
Which is a non-performing note.
Fred Rewey:
Non-performing, which we'll talk about in a different one. But yes, you would definitely go off that.
Tracy Z:
When we run our numbers for what we pay, we have this waterfall of what we do. We say, what is the amount we're investing compared to the property's value? That's the investment to value? What is the amount we're paying compared to the unpaid principal balance? That's the cents on the dollar? What is our yield for that cash flow as what pays, according to the note. What is our return? Then we also look at what's our dollar discount. As Fred talked about in the first episode, get a 10% note and you want a 10%, you could theoretically pay a hundred cents of the UPB or the Unpaid Principal Balance. We want to discount because we have time and energy and overhead costs. That's kind of the main thing that we look at when we decide what to pay on a note. That would be a great feature episode as well. “How to place notes”.
Fred Rewey:
Sarah asks a question, how do you determine the discount pricing? It's a great question. It varies typically. Like we mentioned, I think another episode you're talking somewhere between three and 5% or three and 6%, the discount.
Fred Rewey:
That is the fee. That was the fee. Discounts all over the board, I'll tell you this in a nutshell: the discount really is the difference between what they wrote the note at and what I want to get as a return. If they wrote the note at eight and I want a 10% return, then there's a certain discount in there. If I want an 11% return, the discount gets greater. If I want a 12% return, the discount gets greater. There are other factors that have to do with that. The discount could be due to how much equity is in the property or some other parameters, but the discount is largely determined by the calculator on there would you say.
Tracy Z:
The risk usually sets the investment to value and the yield requirement. When you apply that yield requirement, to the cash flow, like Fred is talking about that, determines what the discount is. There's kind of a one, two, three, four step in pricing that comes up with that final number. When you take the balance minus the pay price, that is the dollar discount. We try not to focus on the discount so much, especially with sellers. Well, and even with your pricing a note, sometimes people say, Oh, I like this big discount, but of course we do, but there's a lot. You don't want to get drunk on yield or drunk on discount. There's lots of good bread and butter deals that we've done where the discount might've only been $1,500. We're getting a 9 or 10% return on a really low loan to value. Maybe there is a 40% loan to value. That's a great little note for retirement account,
Fred Rewey:
I know that was good on the fly. Where are the best places to find buyers and sellers of notes?
Tracy Z:
That's a great question, because that is going to be the topic of our next video is “Marketing For Notes”.
Fred Rewey:
Oka!. We're going to do that.
Tracy Z:
We're going to talk about marketing for notes. We're going to take our five top preferences.
Fred Rewey:
We're going to take the five, most common marketing methods. We're going to grade them. We're going to tell you what they are. We're going to tell you what we think about them and we're going to give them an old school, like grade school, grade of ABC.
Tracy Z:
We're going to get back the whiteboard,
Fred Rewey:
Again if you want to see more of these videos.. We don't have an exact number, but we basically wanted to take on a different subject on each of them.
Thank you for your feedback. Thank you for your ideas.
Tracy Z:
I would like to do a deep dive on the partials as well. I think working with funders would be a fun one to do, How to use your retirement account. We've got a few in the Note Investing 101 series. If you want to know where, and when the next video is going to appear.Next one is going to be coming up. We will send you an email. All you have to do is go to www.NoteInvestor.com/101. Put in your name and your email. It'll put you into the notification of when the next live session is. It will also give you a free download. The Five Ways To Cash In and Cash Flow notes where we detail these deals that we had here. You can see those in the eBook format. We also have 21 Tips for Note Investing. If you're looking to buy and sell notes yourself, those are some really great tips that we've learned over the years. I think these are best for people that are getting started out. The things they definitely must have.
Go to www.NoteInvestor.com/101, you'll get those things. We really appreciate you spending some time here with us today. We love talking about the note business and we hope you love it as much as we do.
Tracy Z and Fred Rewey:
Happy Note Investing!
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