Notes

49 Replies

I am curious about how an investor can profit from finding notes available for sale and essentially wholesaling them. Anyone have experience with this kind of scenario?

I'd be happy to speak with you about it.

Let's create some important distinctions amongst words. Often times when the word "wholesale" is used in the BP world it refers to a party who does not plan to risk any capital and yet profit from an arbitrage on an asset. By definition, if you are not risking any capital, you are not "investing". 


So that we fully understanding what we are talking about, what do you envision here?

Also, Darren Eady, when someone posts in the forums they tend to want to have a public discussion with feedback from many members.  Under that idea, it seems counter-intuitive to take the conversation off line.  Suggesting such all makes it look like staging for a sales pitch by the one trying to go off line.  

The benefit of public discussion is the posts are subject to scrutiny by anyone who wishes to participate.   This creates better answers and helps the readers with better understanding.

I invest in performing notes, then sell a partial. For example if I buy a note with 250 payments, I can sell 200 of those payments to a third party investor. That investor is paid all their capital and interest/return through monthly payments serviced by a third party, and we get paid on the back end with the remaining payments. I like the lack of risk, and ability to scale. Let me know if you want to chat more about this model. 

Kevin Moen

Hi Kevin, how can I contact or chat with you about this note investing, I am very much interested in this subject...

Dennis, 

Scott Carson is a great resource, look him up. I follow him and watch his webinars which are free...

I am not affiliated with him, he just has amazing info on this. Also look up Invest in Debt by  Jimmy Napier. That book will send you down the path..

Scott is a good start and I also would check out Keyhole Academy, they offer courses in both 1st and 2nd non performing note investing. Sherman Arnowitz is the principal and has over 17 years of note investing experience. 

Originally posted by @Joshua M. :

I am curious about how an investor can profit from finding notes available for sale and essentially wholesaling them. Anyone have experience with this kind of scenario?

 Yes, lots of experience, in fact, lots and lots and lots!

Look up mortgage brokering. You do not wholesale notes in consumer loans, may not be able to in commercial, depending on state laws. 

You can bet when people jump in with call me, it's not going to be something they are willing to share in public.....hmmmm, now why would that be?

But hey, who cares about financial laws anyway, it's just $100,000 in fines and/or up to ten years in a federal hotel, per screw up, no big deal! 

Now, if you'll read posts (especially by Ken R., Dion and myself) in the note forums you should get a good idea of the business. :)   

Originally posted by @Kevin Moen :

I invest in performing notes, then sell a partial. For example if I buy a note with 250 payments, I can sell 200 of those payments to a third party investor. That investor is paid all their capital and interest/return through monthly payments serviced by a third party, and we get paid on the back end with the remaining payments. I like the lack of risk, and ability to scale. Let me know if you want to chat more about this model. 

Kevin Moen

 Not exactly true, selling part of your note, you're still the holder, you're guaranteeing the front end too, your risk in it isn't reduced, get some screwball investor in collections and your risk just went up too. 

You can get others to pay for your note, you end up with your profits, that's not a bad way to go. It's better to retain servicing or control over servicing. Good luck guys :)

Originally posted by @Bill Gulley :
Originally posted by @Kevin Moen:

I invest in performing notes, then sell a partial. For example if I buy a note with 250 payments, I can sell 200 of those payments to a third party investor. That investor is paid all their capital and interest/return through monthly payments serviced by a third party, and we get paid on the back end with the remaining payments. I like the lack of risk, and ability to scale. Let me know if you want to chat more about this model. 

Kevin Moen

 Not exactly true, selling part of your note, you're still the holder, you're guaranteeing the front end too, your risk in it isn't reduced, get some screwball investor in collections and your risk just went up too. 

You can get others to pay for your note, you end up with your profits, that's not a bad way to go. It's better to retain servicing or control over servicing. Good luck guys :)

 Billy, we do not guarantee anything. We cover the potential risk with our partial buyer, but are not liable for payments due from the borrower. However, our best practices are to ensure our investor receives their payment, and if we are in a default situation we may choose to foreclose on the borrower so that our investor gets their capital and anticipated return, and we still effectively monetize the back end of the note. 

We do not service our notes, so we would be retaining control over servicing. We do get our capital back when selling the partial, and being invested in the back end also makes us invested in the deal till the end. 

Kevin

Then Kevy,

You sell part for what you paid for the whole, retain the back end, don't guarantee payments, not required to foreclose but you can if you think you can get the back end, otherwise the "investor" is out in the cold. And you have no risks. ;))

@Dennis Marcelo no problem. Do you own any notes?

Hi @Jay Raught No I am reading a lot of articles about Note investing hear in BP and listening to Youtube and Google. Any good idea how can i learn more and quickly about this business? Please let me know. Thank you and we keep in touch.

Originally posted by @Bill Gulley :

Then Kevy,

You sell part for what you paid for the whole, retain the back end, don't guarantee payments, not required to foreclose but you can if you think you can get the back end, otherwise the "investor" is out in the cold. And you have no risks. ;))

 Not sure why so cynical, Billy. The investor has the right to initiate foreclosure. That is their safety net, and they invest with equity in the deal for their protection. Our agreement makes it clear they have all the rights we have during the period they are receiving payments, until received in full. It makes no sense for me to screw an investor, or create a situation where they are not profitable, or in a position to mitigate risk. This is too small an industry, and reputation is highly valuable.

Originally posted by @Kevin Moen :
Originally posted by @Bill Gulley:

Then Kevy,

You sell part for what you paid for the whole, retain the back end, don't guarantee payments, not required to foreclose but you can if you think you can get the back end, otherwise the "investor" is out in the cold. And you have no risks. ;))

 Not sure why so cynical, Billy. The investor has the right to initiate foreclosure. That is their safety net, and they invest with equity in the deal for their protection. Our agreement makes it clear they have all the rights we have during the period they are receiving payments, until received in full. It makes no sense for me to screw an investor, or create a situation where they are not profitable, or in a position to mitigate risk. This is too small an industry, and reputation is highly valuable.

You talking to me Kevy? 

I just see a recap of what you do, your reply doesn't change that. I never said the "investor" could not foreclose, but that you can, at your option. 

Cynical? You must mean having a great deal of experience and education in financial compliance, notes and business. Not saying you don't have good intentions. You're right, it makes no sense to intentionally mess over your investor, but it is through the nature of mortgage investors and small brokers not having the depth of knowledge that unintentional things happen or a lack of risk management. 

I practically invented the brokerage game as brokerages hit the streets. I've also spent a lot of time staying current with rules, regulations laws and methods. It doesn't take many words out of a broker/investor's mouth for me to identify what they are doing.

In reality, small brokerage operations generally can't afford a full time compliance department, most all wing it. And, using other people's money means reserves, brokers don't have much of a reserve requirement and if reserves come from other investors, churning investors, that becomes a ponzi scheme.

I've also found that brokers really don't go into details pointing out risks to investors, that a bit counterproductive to their marketing, even if they really do understand risks. 

But, let's not shoot the horse we have to ride. Good luck and just do your best! :)   

@Bill Gulley thanks for the clarification. I must have misinterpreted your tone; I felt you were suggesting we were just looking to push all liability to our investors leaving them with no safety net in the case of default, unless we saw fit to foreclose. 

I also don't broker notes, I sell partials from notes I hold, and utilize my own funds for most all my investments, having recently opened up to outside investors for acquisition. 

Since it sounds like you have a lot of experience in the area, what are the most common mistakes you see note brokers or professionals making? We created our own risk mitigation table to anticipate and mitigate as much risk as possible for ourselves and our investors.

Originally posted by @Kevin Moen :

@Bill Gulley thanks for the clarification. I must have misinterpreted your tone; I felt you were suggesting we were just looking to push all liability to our investors leaving them with no safety net in the case of default, unless we saw fit to foreclose. 

I also don't broker notes, I sell partials from notes I hold, and utilize my own funds for most all my investments, having recently opened up to outside investors for acquisition. 

Since it sounds like you have a lot of experience in the area, what are the most common mistakes you see note brokers or professionals making? We created our own risk mitigation table to anticipate and mitigate as much risk as possible for ourselves and our investors.

Generally, "investors" who are in the business of dealing in notes, buying, selling in whole or in part, generating profits from transactions is a brokerage activity, period. Doing so as a business entity is not investing unless your entity generates most of its income from other business activities, if the entity generates most of its profits from mortgage dealings, you're in a brokerage position and business.

That fact that you have an entity dealing in mortgages is the first step of crossing the line as a mortgage business unless the income can be proven to be investment related and not the main source of revenue. Note investors are individuals, not businesses that exclusively deal in mortgages.

The, "my own money" aspect, does that include money you make from the note activities? It's technically not your money, it's the entity's  money. 

If it is money borrowed or from others, it's not your money and it's another brokerage activity. 

Another brokerage activity is taking an interest, in whole or in part, from mortgage acquisitions financed by others, you're brokering!

These are the main areas of non-compliance I see "note investors" get themselves into. Sometimes they claim or may have seen some arrogant opinionated attorney who really doesn't know financing laws told them it was okay. Well, those attorneys are dead wrong.

Another aspect of screwing up I see is "investors" modifying a note, especially in NPNs, as any such modification is considered a new extension of credit, it's a new loan, so you better be compliant in making new loans as well.

Now, all this is assuming you have consumer mortgage and you're not dealing only with commercial loans as, you can still have such compliance issues but they are not as severe as consumer loans. 

Often, the SEC likes to get involved with "investor" deals, from soliciting money to carving up partials to assigning securities, they just love unregistered mortgage brokers.

These are the general areas where note "investors" mess up, just takes a foreclosure, a law suit, a complaint by an investor or borrower to unravel such systems, I've known these types of brokers going to jail to. 

Your loss mitigation system might be impressive, but it looks to me like it failed from the beginning, unless you are holding the proper licenses and you are regulated.

I suggest now that you have some money, you go to a really good finance attorney who specializes in banking an finance, obtain the proper licensing, establish the required reserves and some detailed finance education. Just having money doesn't put you in the mortgage business.  Good luck :) 

Originally posted by @Dennis M. :

Hi @Jay Raught No I am reading a lot of articles about Note investing hear in BP and listening to Youtube and Google. Any good idea how can i learn more and quickly about this business? Please let me know. Thank you and we keep in touch.

 Dennis, 

There is nothing quick. I am still learning via here, podcasts, meetups, Scott Carson, check out is weekly webinars. I own 3 notes so I am a noob as well. Ask questions here, you will get plenty of feedback. Research both 1st and 2nds and see where you want to attack. Just keep at it and you will be surprised at how much you will learn and how willing people are to share knowledge. Donna Bauer is a Note master too.  I am in no way selling anything these name I have mentioned. I am just offering the names for you to research!!

Hi @Jay Raught thats a very good comments. I will researched Donna Bauer as well and I should try Scott Carson Note school. I have read a lot of comments about him. Thanks for the info Jay. Regards.

@Bill Gulley @Kevin Moen as you describe the note business and if Kevin is indeed working with OO notes.. and its clear most likely if he chooses to bring new investors into his scheme.. would he then need to be NMLS licensed and report this activity on his quarterly mortgage call report ? I understand the origination requirements fuzzy on this note buying selling hypothecating ( partials) business

Originally posted by @Jay Hinrichs :

@Bill Gulley@Kevin Moen as you describe the note business and if Kevin is indeed working with OO notes.. and its clear most likely if he chooses to bring new investors into his scheme.. would he then need to be NMLS licensed and report this activity on his quarterly mortgage call report ? I understand the origination requirements fuzzy on this note buying selling hypothecating ( partials) business

 Yes, Jay, the SAFE Act (consolidated under the Dodd-Frank Act) requires licensing of originators, lenders and brokers conducting brokerage activities. Each of those areas have a different requirements to be met. 

Hypothecation of a mortgage, using it as collateral for a loan isn't necessarily a brokerage activity, simply pledging the asset as collateral. 

State laws vary as to what constitutes a "brokerage activity" however, Dodd-Frank is broad in its definitions of activities and parts of our SEC regulations cover unregulated, a mortgage is a bond. All states have mortgage brokerage requirements and they usually "kick in" when the buying, selling trading, pooling of interests, or the securitization of mortgage occurs.        

I like the phrase of the "golden rule" he who has the money makes the rules, approach to investing. That's an oversimplification, but it seems to apply.

Meaning too, that if you have your own money you can invest in a mortgage note. "Your own money" is usually defined as well, certain assets are excluded from asset requirements for brokers, what regulators want to see is liquid assets. 

Your own money is not borrowed money, it is not money arising from a transaction where you net a profit by or through an interest in a note, that is brokering. 

The note gurus are still spinning the brokerage ideas from the 80's. 

That golden rule pretty much applies to those investors who are really doing nothing more than facilitating transactions, using other peoples money in a short period of time from the time an asset is acquired to disposing of interests that fund the transaction. That and, the no touch operators who act as a conduit passing a note from a seller, to them, to another buyer (wholesaling notes) which is a brokerage activity. 

Timing of financial transactions is another issue, when an originator provides a loan, cash or equity based, and the holder of that note sells it at or even within 30 days of settlement to a buyer, that buyer is viewed as a lender, not an investor, this is called "funding at the table".  When an "investor" buys a note and "churns" that asset in a short period of time they are engaging in funding at the table activities. This is a brokerage activity.

The timing between note transactions can take a note holder from "investing" to brokering, by churning accounts, buying and selling as they might as a day trader in stocks. Mortgages are not stocks! 

Pooling resources, this is a very sticky area, I'd say most know that an "investment club" you know 12 little old ladies or phat cigar smokers have to register with the SEC to buy securities, putting "investors" together to buy mortgages has the same requirements and if you're in a management position, welcome to the brokerage business. 

Investing in mortgages is a passive income matter, if one becomes actively engaged, that's all they do, that is how they make their money, their living, they step away from the investing arena into the brokerage business arena. Stock and bond trading is much different as you do not have the consumer-borrower relationship as you do with mortgages. A clear exception to timing issues is when a borrower pays off the loan, if an investor receives a payoff a week after they buy it, lucky, lucky them!

Commercial loan activities are not exempt from these brokerage concepts or SEC regulations, commercial loans are much easier to deal in, but they aren't totally out of the woods.    

Not many know that the CFPB has an education division, seems this is still getting off the ground but they are to educate the public, lenders, brokers, investors and servicers. No government agency gives legal advice to an individual or in a specific circumstance, they can provide general guidance. Obviously the note gurus or note schools don't check out the compliance side of their schemes. 

That's enough! :)

    

 http://files.consumerfinance.gov/f/201203_cfpb_upd...

@Bill Gulley I only pray that your website developes further and begins to share the depth and quality of your knowledge in the note, broker, and compliance field. This is what I'm waiting to see. I've considered pooling investors. At least now I better look at tacking an NMLS membership and whatever ungodly fees come with that onto my regular real estate expenses! 

Originally posted by @Jason Eyerly :

@Bill Gulley I only pray that your website developes further and begins to share the depth and quality of your knowledge in the note, broker, and compliance field. This is what I'm waiting to see. I've considered pooling investors. At least now I better look at tacking an NMLS membership and whatever ungodly fees come with that onto my regular real estate expenses! 

 Thank you Jason!  Short answer, yes we will have note investing. The RMLO and getting the NMLS number will cost about what a Realtor's license would. 

My site is really still under construction, it will evolve. It also has to change from the original ideas but it will remain educational. Finance isn't difficult, notes aren't hard to understand, showing the pitfalls of investors or what to watch out for becomes more detailed and going into compliance is complex. Hopefully I'll have courses for brokers as well. 

For now, just realize the note waters are full of sharks, look to their agenda rather than what might be preached or "taught" as there are no note gurus truly teaching but rather devising a business plan and that plan isn't really for you or the "students". Having ideas in finance can be plain dangerous. 

I'll get there, thanks. :)    

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