“Profits in Pretty Paper” by Bob Leonetti

I just got off the phone with Ron, and in a way that only Ron can do, he asked me, “So, Leonetti (he never uses my first name!), let me get this straight.  You mean to tell me that all folks have to do is fill out a form, send it in, and you’ll send them money?”  And this is on something that they’ll come across all the time?

That’s Ron-the master of simplicity!  And yes, he’s absolutely correct, although there is a tad more to flipping Pretty Paper, also known as performing notes.

Pretty Paper Explained

Sometimes when properties sell, the owner has to offer seller-financing because the buyer couldn’t qualify at a lending institution.  This gives the seller a note (receivable), which is an asset, because someone owes him money.  And just like any other note holder (bank or lending institution), he hangs on to the I.O.U. and records the accompanying mortgage at the county recorder’s office.

Here’s the cool part:  he can sell that asset, getting cash in turn for assigning the cash flow to someone else.  All you need to do is find these note holders through public records, gather some information about the note and the transaction, and sell that note to an institutional investor, who may be found online.

They pay one price: you offer a lower price to the seller, and you keep the spread.

That said, let’s cut to the chase and let me show you how you can make lots of money in this little-known field.  And, let’s start by answering some burning questions that I’m sure you’re asking:

Where Do I Find These Notes?

Think about it for a minute.  Of all the houses you find that are for sale, most of them will have a note on them.  And, many of them will have a private note on them!!  The great thing about the note business is that it ties-in so well with the real estate business – when you are looking for properties, you’ll literally stumble over lots of buyable notes!

Keep in mind, too, that all mortgages and trust deeds are recorded at the County Recorder’s Office in the county where they originated.  This means that you can go to the County Recorder’s Office and look up all of the private mortgagees.  In other words, you’ll be looking for private people (not banks) who are receiving payments on a mortgage.   And frankly, after one day of doing this tedious research, my guess is that you’ll be ready to run down the street screaming and pulling your hair out.  There is an easier way:

Across the country, there are places where you can buy mailing lists of note holders.  Leverage your time, buy the list at approx. 15 cents a name, and get a mailing house to send out letters for you!  Remember Ron’s saying, “The less I do, the more I make.”

What’s on the Form?

When someone responds with a mortgage they want to sell, you’ll need to get some information about the mortgage, the property, and the deal itself.  When was the property sold? For how much? What are the terms of the note?  Have the payers made all of their due payments and if so, can the note holder prove it?

Once you have this information, send it off to any institutional note buyer.  All of them need the same information, so be sure and fill out the form completely, accurately, and legibly!

How Much Can I Expect to Make?

Once the note investor gives you a price they’re willing to pay for the note, your job is to go back to the note seller and negotiate a lower price, knowing that you can keep the spread.  Most performing note deals will bear fees that are between 3-5% of the outstanding note balance.  So, on a $100K note, you’ll make somewhere around $5K.  Granted, you’ll make a LOT more with non–performing notes, but that’s an upcoming article.

Who Buys Them and What Will They Pay?

There are institutional buyers across the country, and in many cases, you can also use private buyers.  The purchase price of a note is based on “yield” meaning that the investor is going to require a certain yield, or return, on their money.  Pricing is also risk-based, the higher the risk with either the note or the property, the less the investor will pay, and they’ll want a higher yield, too!  We’ll go over this in depth in the October workshop.

How Do I Get Paid?

Finally, once your seller agrees to sell the note, your note investor will perform all of their due diligence, in effect, making sure that the seller is telling the truth! They’ll verify the note information, property value, liens, etc.  And when it’s all said and done, they’ll wire the agreed-upon price to the title company who will release funding when the seller surrenders the original note.  They’ll pay you outside of closing, so that the seller has no idea how much money you’re making on the deal.

In our next installment, we’ll talk about UGLY Paper, and all of the cool ways you can control real estate with it!  And you’re gonna’ love the profits, too!

Bob Leonetti has been buying notes for 20 years, and in that time, has been involved in more than 7000 note transactions.  Starting in the spare bedroom of his home in 2003, he took his company public in 2000, trading on the Pink Sheets as Success Financial Services Group.  He got out of the public markets in 2005, and today, spends his time writing and doing deals.  (Oh, and he loves to cook and make wine, too!)

If you want to find out more about the paper business, make sure to check out Ron’s Paper Power event!