Cash flow generation without cash – Formula 5 "Flip paper"
You’ve heard of moving houses, right? This has become well known in recent years, mainly due to many seminars teaching real estate “gurus”, book writing, selling tapes, and so on. There have even been some negative connotations from various forms of government; Mainly because they don’t understand it, but rather they believe and do what the banking industry tells them to do. I do not mean to go down in a political tribune; However, the type of house exchange that I know and have written about is perfectly legal and, if done right, benefits all parties.
So what about this “Flipping Paper” thing? Well, it’s a lot like moving house. It’s also quite similar to being a bird dog for home buyers, as I discussed with you in one of last week’s articles.
What I am going to discuss with you now is exactly what I did when I first entered the paper business. I attended a seminar given by Mike Meeker, a well-known and excellent teacher, who I believe is now retired from teaching. I also think he lives in Florida, or was the last time I had contact with him.
Anyway, let’s go back to our story. This was in the late 1980s and he had no money available to invest. Here’s the concept: You want to find real estate “paper” (land contracts, deeds of trust, mortgages, promissory notes) that is “for sale” or that will become “for sale.” To keep it simple, let’s call all of these different types of paper “Notes.” You are looking for notes that were created in an owner-financed real estate sale. Due to the current market, these types of banknotes are abundant; however, in any type of market these “private” notes will always be available because many buyers cannot qualify for bank financing and many properties do not qualify for bank financing. To give you an idea of the current market, just take a look at the “Real Estate For Sale” section of any major newspaper and look for the ads that say “Owner Financing”, “No Qualified Bank”, “Special Financing” and so on.
Trust me at this point; Private notes will ALWAYS be available and many of these note owners would rather have a large amount of cash now rather than monthly payments for X years. Furthermore, there are and always will be private investors (and sometimes large corporate investors) who buy these notes. Why? Because almost ALL private notes can be purchased at a substantial discount. Why? Due to the increased risk involved in these non-qualifying buyers and / or properties. In fact, I’ve never seen or heard of anyone paying 100% of the dollar for a ticket.
So let’s start putting this together. Remember, you are going to function as a “middle man”, not unlike the “bird dog” mentioned above. This is how we start:
Find the notes. There are numerous sources; such as Real Estate Agents, Title Companies, Real Estate Attorneys, etc. You can run a short ad in your local newspaper, such as “I buy real estate notes” or “Best price for your real estate note.” If you scan the ads, you may see other people looking for notes. Don’t worry, there are enough for everyone.
You can also look for ads that offer “Owner Financing” to sell a property. Call the person and ask if they might want to sell their note after the sale is closed.
So, let’s say you find a note for sale, now what? You need to have funds available to buy the ticket. Where do we get that from? How do we know how much to pay for the ticket?
Just as we figured out how to find and buy real estate paper, which we will refer to as “Notes,” we will use more or less the same tactics to find someone we can flip these notes to, for profit. Good sources are real estate agents, real estate attorneys, public accountants, financial planners, stock brokers, loan officers, etc. However, the best way is probably the old “newspaper ad” formula. You can advertise with words like “Real Estate Note for Sale” or “Investor Needed to Buy Real Estate Notes.” Check the newspapers and yellow pages for advertisements such as “We buy notes” and / or “Best price for your notes.” In other words, look for the same ads that we saw and used to find Buy and Flip Notes.
When you find an Investor or Buyer of Notes, you should determine the requirements and perimeters of the Buyer of Notes, such as:
What types of properties will they accept as collateral for the promissory note? For example, single-family homes, land or lots, apartments, commercial properties, or mobile homes with or without land.
What types of minimum returns do you want from the notes you buy? This will vary based on many factors, such as the security of the ticket.
Investors will want higher returns on riskier notes. For example, a note secured by a single-family, owner-occupied home (with an excellent payment history) would likely require the lowest return, say 12% return on investment. At the other end of the scale could be Raw Land, where an investor can demand 18% or 20%. In this article I am not going to go into how to calculate performance. However, I will recommend to anyone interested in these types of offers to buy a good calculator or financial software.
Examples of other things an investor may require are title insurance, appraisals, credit reports, accident insurance, etc. These things discussed above should be tailored to the investor you may be dealing with.
Okay, now we have found a note to buy on a single family home. The face value of the note is $ 80,000 with 10% interest payable monthly for 20 years. You know that the “on-the-go” investor return requirement for this type of note is 12%, so you could sell it for $ 70,115. So in order for you to make a profit of, say $ 4,000, you bid and get an offer of $ 66,115 accepted. You actually need to get a written contract to buy the landlord’s note, preferably a “Call Option”. You need to consider who will pay for things like title insurance, closing costs, etc. If you are going to pay these costs, you’d better subtract the amount of these costs from your offer to the owner of the promissory note. Investors normally do not pay these costs.
What you are going to do is have a “Double” or almost simultaneous closing in which you will close first with the owner of the note. Then, a few minutes later, you close with your investor that you are buying the note. The seller (s) will then disburse the funds; $ 4,000 to you and $ 66,115 (less title insurance fees and closing costs) to the seller of the note. Actually, I found that it works better if I paid these costs and bought the ticket at a lower price, say $ 64,500. Sometimes when people go to a closing they feel unhappy when they realize that they are receiving less money than they thought they were going to receive.
I know I’ve covered a lot here that seems complicated, and it’s – a little bit; however, once you’ve made a few deals, it will become routine. I remember when I started testing this. I got discouraged and took a few months to close my first deal; however, since then, I would estimate that I have bought and sold over 6,000 tickets, most of them one at a time. Of course, once my volume increased, I hired people to help me.
The ticket business is a great and very interesting career; Something new or different all the time. One thing I want to emphasize is that it is very important to have that double closing so that you are truly the owner of the note, even if only for a few minutes, before selling it to your investor.
I will publish a book in the future, showing in detail how to prosper in this great business. I will sell the book for a nominal price, which I have not determined at this time. It will depend on how much time you spend on it; however, I want it to be as complete as possible. I will tell you this, if a person enthusiastically enters this business, the business will always be there with excellent financial returns.
These publications are the opinion of the author who is not engaged in providing legal, accounting or investment advice. If such advice is required or desired, the services of competent professionals should be sought.