The Note Game.....How-to?

6 Replies

Recently I purchased 2 of Mark Walters courses on the note business in which only educated me on strategies I can execute without providing any forms or actual instructions on "how-to" flip notes. That being said, I'm seeking instructions on how to flip a note as if I was a wholesaler that was flipping a house. 

I already have a list of note sellers/sources as well as buyers but do not have any documents/agreements or "know-how" to go from 1)getting the seller to sign whatever contract I'm supposed to use in order to do a flip, 2)getting the buyer to sign whatever contract required for me to flip the note to them and 3)knowing who I'm supposed to take all the signed docs to for closing(I'm assuming a RE attorney or title company).

A good place to start would be Papersource...they offer a series of document models within their files to get you going. Likely that few would hold water on their own, but it would give your lawyer an idea of what you're trying to accomplish. 

Another path would be to purchase a note yourself from an exchange like FCI and document every step of the way. This will give you an idea of collateral required by the investor, bidding process, NDA, etc. the more you think like the end investor, the more successful your flipping will be.

I agree with both of Ian's ideas. The Papersource materials are good basic documents at a very price and I always encourage a "learn by doing' method to learn. 


Here comes the rain!

Guess you got ripped on the note course if they implied you could jump into this "game" after the course.

Notes are NOT real estate, your plan of "wholesaling" a note is a brokerage activity, exactly what brokers do and unlike real estate where wholesaling is often considered illegal, brokering notes without a license is very much an illegal activity, depending on the type of note involved (saying you might get by on a commercial note). 

Violations of finance laws can get serious, up to 10 years in a federal prison and/or a $100,000 fine, that's per occurrence !!!!

Would you think it would be okay to trade, buy and sell bonds without using your money as a buyer, doubt it, you'd be a bond broker. A Promissory Note is  a bond. A mortgage is a bond that is mostly exempt from the SEC regulations because they are regulated as special instruments under other federal and state finance regulations. If you want to broker mortgages, get a license. 

A note investor uses their own money, not other people's money, using other people's money puts you back in the brokerage seat. Now, you can form a 506 investment pool, but that doesn't give a license to broker mortgages or originate loans, that simply gives you the opportunity to raise capital for investing. 

Buying a note, from the paper standpoint is pretty simple. You will want representations made by the seller that the note is in compliance, as to proper accounting and servicing requirements and to its origination when it was created. If a note is found to be out of compliance, errors or negligence of any previous note holder, the note may not be a valid debt or collectible and you'll be wanting that seller to buy it back. This is a Repurchase Agreement. 

Is there a Lender's Title Policy in force, part of your due diligence, if not, you may well consider that as a title matter can effect the perfection of the security, making the proper lien to secure the note, otherwise you can have an unsecured debt.

Tax requirements by the IRS will require you to have a proper accounting of the transaction, similar to a HUD-1 in real estate. You will need to identify the Note, the security, the original amount of the obligation, it current balance, the purchase price and costs of the transaction (title insurance, attorney fees, release fees, escrows, taxes and insurance paid, broker fees, etc.) as you must document your costs of acquiring the Note. There is no special form required unless mandated by your state, there are industry standard forms used by brokerages, but the accounting can simply be outlined by an accountant or title company if they are willing to close the transaction. You will have 1099s required for the buyer and seller.

Escrow and Servicing Agreements, again, a proper accounting of escrow and payment history. "Service`Released" Changes of servicing require notice to a borrower for residential loans (commercial loans require notice as well, but different requirements). During that servicing change, say 90 days, who receives those payments? The seller may retain those and you'd consider that in your price or they could advance them, more common for payments to be in the price. So, notices are required before you can have a borrower start sending payments to a new holder.

Escrows may or may not be advanced to a buyer, if they are not, and escrows are required, you'll need to credit that account funding the amounts required. Another consideration in your pricing.  

"Servicing Retained" means the seller retains servicing rights, a Note mat be serviced by a third party and you can simply keep servicing in place and the servicer will send you the payments, much easier, but notice in the change of the holder is still required.

Assignment of Mortgage or Note and Deed of Trust is made by endorsement on the Note and Security Agreement, the Note can be endorsed just like a check, "pay to the order of...." 

A purchase contract can begin by a commitment letter, a bid price subject to your due diligence and acceptance. This is an offer, legally binding, you mess around with a seller or broker without having available funds at that bid amount and you can get nailed. A seller should be requiring proof of funds before the purchase contract. 

A purchase contract simply outlines the terms of the transaction, settlement date, how funds will be transferred, title coverage, escrows, insurance on the collateral, taxes due and/or current, servicing requirements and the description of the obligation, it's price and amounts remaining due. You'll want to address late fees and notices required as well. 

Usually, buying from brokerages, the contracts will be provided by them, they will be slanted to their advantage. They will most likely have a hold harmless and indemnification clause or agreement, read them carefully and understand them. Don't let their agreement cloud the repurchase agreement, they are still responsible for compliance during their ownership and back to the origination of the loan. Most likely, they will try to wash their hands of previous matters, so your due diligence is critical. 

BTW, since Dodd-Frank, ensure that any Note made applicable to that Act has a seal and RMLO number or lender number identified on the Note and security agreement. Any Note subject to compliance missing this may have been illegally originated and worthless.

I have no idea what kind of flim flam stuff is being taught by note gurus, it's too bad that they prey on no money folks, because it takes some money to invest in this game! I doubt court appointed attorneys take civil actions against these gurus for telling people to jump off a bridge! 

Lastly, forming any business entity to deal in Notes is a LENDER/BROKERAGE subject to registrations and licensing. A business is NOT an investor. Now, a business can invest in Notes, but if their activities make more or even a significant amount of income compared to their other business operations, they can become a brokerage operation! This aspect needs the attention of a finance attorney trying to form an LLC or corporate structure. Investing through your retirement account or Trust is fine.

Now, for the other guys you need to listen to; @Dion DePaoli @Ken Rishel  :)


I guess it is that time of year again when everyone gets the idea of wholesaling.  As @Bill Gulley covered a ton I just want to add a couple other ideas outside of all the compliance.  

Generally wholesalers who have no idea what they are doing, as sort of in this case, the process of trying to sell a note to the end investor is essentially throwing stuff against the wall to see if it sticks.  Wholesalers, since they have no intention of owning the loan and typically have never owned a loan lack the skills to price loans out properly and to understand what makes a good loan to buy or a bad loan to buy.  They rely solely on the end buyer to assess all of that for them.  

The next monster of a barrier is you are not going to find a seller who let's you lock up their loan when you don't have any money to buy said loan.  Further a Buyer is going to see you don't own the loans as well and just walk away.  You can't fool anyone and you can't create an exclusivity period.  So most folks who say they are wholesaling loans are just lying.  

From a personal integrity standpoint once you pass around junk once or twice you probably won't have much dialog with that buyer again.  What happens a lot of the time is the wholesaler gets hoodwinked by another wholesaler.  As a matter of a fact, this can end up creating a who chain of folks who neither own the loans nor have intentions to buy said loans.  

I have seen this crap in the marketplace over the years.  More recently I have seen it so bad that the loans are not even loans any longer.  Voided, settled, forfeited for a variety of reasons.  If you want to make enemies, cause someone to waste money on a loan or due diligence to find there is no actual loan which clearly means you didn't own it.

This wholesalers game in the note space is widely a waste of time and energy.  Nobody that knows loans is going to teach you or mentor you for this purpose.  That's why these guru's make these courses and the courses lack real substance in the business.   The industry and business is hard enough without this idea muddying up the waters.

@Dion DePaoli

  who was the guru in Denver that finally got criminally indicted for selling his system of note brokering..  I would get contacted repeatedly by these folks who bought the cheap course and would pound Craig's list to try to wholesale or broker notes they did not own.. I called a few a couple of times .. and it was very evident they were reading from scrip's had no clue as to what they were doing did not understand 1 Iota of the business.. just a colossal cluster %^&$... these folks wanting to jump into the Note game really need to get a reality check. It takes a certain amount of years of experience and back ground to even remotely be successful in the note business... To buy some course or come on BP and think your going to learn how to be in the note business by reading other BP posts that is the height of ridiculous.. at least in my mind...

Then of course you have the folks posting they have big portfolios and they are direct to the mandate and you just need to sign this NON circ agreement.. those generally are all time wasters and daisy chains as well.. not saying there could not be deals there but it usually ends up being 5 different people trying to get in on a deal and nothing ever happens.. I think in reality the true more institutional note buyers Know there buyer and do repeat business.

I am not sure who that was @Jay Hinrichs .  

As an aside, I do often find humor in the websites of these materials.  Almost as much as me using the word "hoodwinked" in a post.  Anyway, just an observation, none of the testimonies talk about actually buying a loan or making an investment.  They all talk about how good the material is.  I think you have to pause and take that in.  None of them seem to mention anything about putting it to use.  Further, it is not clear if any are properly suited to evaluate the material and concepts in the first place.  Certainly not a peer review.  

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