Building Cash Flow Without Cash – Formula 5 "Flipping Paper"
You’ve heard of flipping houses, haven’t you? This has become well-known over the past years, mainly because of many Real Estate “Gurus” teaching seminars, writing books, selling tapes, etc. There’s already been some bad connotations from various forms of government; chiefly because they don’t understand it, instead they believe & do at any rate the Banking Industry tells them to do. I don’t average to get off on a political soapbox; however, the kind of house flipping I know about 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 flipping houses. It is also quite similar to being a Bird Dog for house-buyers, as I discussed with you in one of last week’s articles.
What I’m going to discuss with you now is exactly what I did when I first got in the paper business. I took a seminar taught by Mike Meeker, a well-known and excellent teacher, who I believe is now retired from teaching. I also believe he is living in Florida, or was when I last had contact with him.
Anyway, back to our story. This was back in the late 1980′s and I had no money obtainable for investing. Here is the concept: You want to find Real Estate “paper” (Land Contracts, Trust Deeds, Mortgages, Notes) that is “For Sale” or will become for “For Sale”. To make it simple, let’s just call all these different types of paper, “Notes”. You are looking for Notes that were produced in an Owner-Financed sale of Real Estate. Because of today’s market, these types of notes are abundant; however, in any kind of market there will always be these “Private” Notes obtainable because many buyers can’t qualify for Bank Financing and many similarities won’t qualify for Bank Financing. To give you an idea of today’s market, just take a look at any major newspaper’s “Real Estate For Sale” section, and look for those ads that state “Owner Financing”, “No Bank Qualifying”, “Special Financing”, etc.
Trust me on this point; there will ALWAYS be Private Notes obtainable and many of the owners of these notes would rather have a large chunk of cash Now instead of monthly payments over X number of years. Also, there are and always will be Private Investors (and sometimes big company investors) who buy these notes. Why? Because almost ALL Private Notes can be bought at a substantial discount. Why? Because of the greater risk involved in these non-qualifying buyers and/or similarities. In fact, I have never seen or heard of anyone who would pay 100% on the dollar for a observe.
So let’s start putting this together. Remember, you are going to function as a “Middle Man”, not-unlike the “Bird Dog” mentioned earlier. Here’s how we get started:
Find the Notes. There are numerous supplies; such as Realtors, Title Companies, Real Estate Attorneys, etc. You can run a short ad in your local paper, such as – “I Buy Real Estate Notes” or “Top Dollar For Your Real Estate observe”. If you examine the ads you may see other people looking for notes. Don’t worry – There are enough to go around.
You could also look for ads offering “Owner Financing” in order to sell a character. Call the person, then ask them if they might want to sell their observe after they close on the sale.
So let’s say you find a observe for sale, what now? You need to have funds obtainable to buy the observe. Where do we get that? How do we know how much to pay for the observe?
Just as we discovered how to find and buy Real Estate paper, which we will refer to as “Notes”, we will more or less use the same tactics to find someone whom we can flip these notes to, for a profit. Good supplies are Realtors, Real Estate Attorneys, CPAs, Financial Planners, Stock Brokers, Loan Officers, etc. However, the best probable way is the old “Ad in the Newspaper” formula. You could advertise with words like “Real Estate observe For Sale” or “Investor Needed To buy Real Estate Notes”. Check the newspapers and Yellow Pages for ads like “We Buy Notes” and/or “Top Dollar For Your Notes”. In other words, look for the same ads we saw and used to find Notes to buy & flip.
When you find an Investor or observe Buyer, you need to determine the requirements and perimeters of the observe Buyer, such as:
What kinds of similarities will they accept as security for the observe? For example, Single Family houses, Land or Lots, Apartments, Commercial character, or Mobile Homes with or without Land.
What kinds of minimum yields do they want from the notes they buy? This will vary based on many factors, such as security for the observe.
Investors will want greater yields on higher risk notes. For example, a observe secured by a Single Family, Owner-Occupied (with excellent pay history) would probably require the lowest provide, let’s say 12% return on the investment. On the other end of the extent might be Raw Land, wherein an investor may require 18% or 20%. In this article I’m not going to get into how to calculate provide. I will, however, recommend that anyone interested in these types of deals buy a good financial calculator or software.
Examples of other things an investor may require are Title Insurance, Appraisals, Credit Reports, Casualty Insurance, etc. These things discussed above need to fit the investor which you may be dealing with.
OK, so now we have found a observe to buy on a Single Family house. The confront amount of the observe is $80,000 with 10% interest payable monthly over 20 years. You know that the “Going” investor provide requirement for this kind of observe is 12%, which you could sell this observe for $70,115. So for you to make a profit of, say $4,000, you offer and get accepted a bid of $66,115. You should truly get a written contract to buy the observe from the owner, preferably an “Option To buy”. You have to keep in mind who is going to pay things like Title Insurance, Closing Costs, etc. If you are going to pay for these costs, you better subtract the amount of these costs from your offer to the owner of the observe. Investors do not typically pay these costs.
What you are going to do is have a “Double” or almost at the same time closing wherein you will close with the owner of the observe first. Then a few minutes later you close with your investor who is buying the observe. The closer(s) will then disburse the funds; $4,000 to you, and $66,115 (less Title Insurance fees & Closing costs) to the observe seller. truly, I found it works better if I paid these costs and bought the observe at a lesser price, say $64,500. Sometimes when people go to a closing they become unhappy when they realize they’re receiving less money that they thought they were going to.
I know I’ve covered a lot here that seems complicated, and it is – a little; however, once you’ve done a few deals it becomes routine. I remember when I first started trying this. I became discouraged and it took me a few months to close my first deal; however, since that time I would calculate that I’ve bought and sold over 6,000 notes – And most of those, one at a time. Of course once my quantity increased I hired people to help me.
The observe business is a great and very interesting career; Something new or different all the time. One thing I want to stress is that it is very important to have that double closing so that you truly own the observe, already if only for a few minutes, before you sell it to your investor.
I will be publishing a book in the future, showing in detail how to thrive in this great business. I will be selling the book for a moderate price, which at this time I haven’t determined. It will depend on how much time I put into it; however, I want it to be as complete as I can make it. I’ll tell you this, if a person enthusiastically gets into this business, the business will always be there with excellent financial returns.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the sets of competent specialized persons should be sought.