by John D. Behle
(The following article is an excerpt from Mr. Behle's
book - Creative Paper
There are two primary sources of funding for purchasing
notes to keep for your own portfolio. The first would be
institutional sources. Many are quite successful working
with institutions and we will talk more about them in a
later issue. The second source is "private"
investors. This ranges from individuals to small
companies and pension funds. There are several nice
aspects of using private investors and some caveats we'll
talk about also.
Here's what's good:
Properly trained and cultivated private investors with
liquid funds (I insist this is the case) can write a
check on the spot. This means you can have the ability
like a frog in the pond with a big tongue to snap out and
capture a good note before it flies away. Quick funding
can give you the keenest edge and advantage over your
competition. Some of my very best notes come in this
Private investors can weigh individual situations and
deviate from set standards and procedures when it makes
sense. For example, what if you have a note where you
need to move quick but getting an appraisal would take
too long. Yet, it is simple to run some "comps"
and know that it is a safe note. A private investor may
look at this, fund the note and wait for the appraisal to
come in after the purchase. Some of my investors like
creative deals where they would love to get the
collateral back or where a problem or delinquent note
needs to be straightened out.
Private investors tend to look at the collateral for
their decision to loan against a note. An institution may
want to personally qualify you to pay back the note if
the payor didn't pay you. A private investor is more
likely to look at the payor and the ultimate recourse -
Few things are as frustrating as establishing a
relationship with someone at an institution and having
them transferred to another branch or position where the
relationship does you no good. Private investors don't
change their policies as readily as institutions.
Institutions will seldom give you referrals, but private
investors that you treat right can be your greatest fund
WORKING WITH PRIVATE INVESTORS
First I'm going to talk about how to work with private
investors properly, because some of this information has
a bearing on how to find the investors. We'll discuss
finding them next.
Here are the important points:
- Share the
A friend told me one time how he had a "stable"
of over a hundred investors but wasn't getting any notes
placed. In my view, he didn't have investors, he had a
mailing list. Potential investors, "wanna be's"
and "looky loo's" waste time and frustrate many
note buyers. Take it one step further and qualify the
note buyer. Verify their funds, parameters, speed and
desire. I ask investors the following questions:
- Have you
purchased or loaned against notes before?
education or experience have you had related to
real estate or mortgage loans?
- How much
money do you have to invest?
- Where are
these funds and how long would it take you to get
- If I
presented you with a note funding opportunity
today, how long would it take you to make a
anyone else need to be involved in the decision
- What would
you consider to be a good "safe rate"
rate of return for your money?
- What types
of notes would you be comfortable owning or
- What types
of notes would you not buy or lend against?
Those are a sample of the type of questions that you
would ask an investor. Even after blunt questions, you
may only know the seriousness of an investor when you put
a deal in his or her hands. I use a technique that helps
me do this.
THE "UNAVAILABLE AVAILABLE NOTE".
Even if I believe I have a firm funding commitment from
another investor, I may run a note past investors that I
am trying to qualify. I'll preface it with "I have
other investors interested in the note, so you'll have to
move quick if you want this one."
One of several scenarios take place. They may squirm,
make excuses or admit that their funds are not liquid or
are coming from a banker, etc. They step up to the pump
and give you a back up offer if your other funding
doesn't pan out. When an investor misses a note, they
become more anxious. They know the deal was good, because
the demand was strong.
I have investors that I even tease gently about this with
statements like "you snooze, you loose" or
"you don't steal in slow motion." They know
they must move quicker next time or get closer to the
front of the line by lowering their cost of funds.
There are some other things involved in the qualification
HE WHO NAMES A NUMBER FIRST LOSES
The last thing you want to do is to violate an investors
"too good to be true theory". They may believe
a risk versus rate of return theory that says a lower
rate of return is safer. You could scare them with 18%
when they would be thrilled with 14% on the very same
investment. You should also be much happier with paying
the lower rate. So, ask the investor what they feel a
good rate of return would be and negotiate from there.
I'll give the investor as much education as they want
about the safety, terms, discounting or qualification of
notes. I draw the line when it comes to teaching them how
to find notes or any other abilities that could cause me
I give them a special edition of my newsletter titled
"Wake Up World" that talks about the basics of
paper. I'll also give my book "Discounting as Easy
as 1,2,3" to investors that want to learn more about
the time value of money and calculate their own yields.
My focus is on educating the investor to the point where
they are very comfortable telling good notes from bad
notes and making qualified decisions. In this sense, I am
always working to make them more independent of me.
Document your calls, conversations, meetings, agreements,
notes presented for their review, etc. Investors are
human and forget agreements, how hard you've worked, what
you've told them, etc.
Notes of meetings kept in your daily planner are now even
being admitted into court cases as evidence.
My concern isn't winning in the rare case of a severe mis-understanding
with an investor, but more along the lines of preventing
a misunderstanding from ever happening. I had a case
where an investor saw me making a $2,000 commission on a
small note. The look they had was like "what did you
do to earn that much?" and I wish at that time, I
had documentation of the dozen or so other notes they had
turned down and the meetings, time and cost that went
PROTECTION FOR THEM
Be "hyper-vigilant" in protecting your investor.
Don't sell an unsophisticated investor a note you
wouldn't buy. They will appreciate the protection and
your long term reputation and image will be rewarded far
more than a quick commission on a questionable note.
Make sure every detail is handled - even if they are the
ones who should be doing it. We had a case where an
investor seemed to know what he was doing and his bank
drafted the paper work for the purchase. As I signed the
papers the bank prepared, I noticed they had not drafted
an "Assignment of Trust Deed". I was in a
little shock since my entire office had fried in a fire a
few days earlier and didn't pay much attention to it.
I didn't even
have a computer to draft the document and was in a daze
from the fire anyway. I assumed they would contact us
later. Well, later came - almost a year. By that time the
note buyer was feeling frustrated and mis-treated over
one simple document that his bank escrow officer should
have prepared. Yet supposedly he knew what he was doing.
If something isn't done quickly, properly or at all,
you'll take the heat for it, even if it was real clear
that someone else was supposed to do it, so make sure it
is done right - always! Even if you lost tens of
thousands of dollars and a large piece of your life in a
fire a few days before.
PROTECTION FOR YOU
In light of what I've just said above, make sure you
always protect yourself with documentation, agreements,
disclosure and careful examination of the work and
efforts of others. Have a signed statement as to the
details of the transaction with the note buyer. Detail
out any potential risks, quirks of the particular note,
responsibilities, guarantees (or the lack), etc. Put some
time into drafting a disclosure statement that covers
that particular note and general risks of all notes.
With each note and each investor, I go through a Ben
Franklin "T - Form" that shows the pros and
cons of a transaction. For example, maybe they are
looking at a higher than normal LTV ratio (con) in
exchange for an attractive yield (pro). In another case,
maybe the buyer has questionable credit (con) and a slow
payment history (con) but the LTV ratio is real low (pro).
There are trade-offs some times.
We had one case where we backed out of a transaction and
left a potential $20,000 commission on the table rather
than be involved with a note that we learned could be a
problem for the investor. We just told the investor our
concerns and backed out of the transaction leaving him to
close if he wanted.
SHARE THE WEALTH
When things go well, we like to bonus the investor. Cash
or some kind of "spiff" like a trip to Hawaii
can go a long way. The little things can make a big
SELLING TO PRIVATE INVESTORS
Up to this point, I have made little distinction between
selling to private investors and borrowing from them. It
is vital that you read this section that I would consider
the most important of the entire article.
I do not like to sell to private investors. There is a
liability any time you are dealing with an
unsophisticated investor. Notes can have problems that a
beginner investor may not deal with properly. For
example, a note may go delinquent and the investor is
timid, slow or inexperienced in solving the problem. The
problem gets bigger and what may have been a great note
turns into a lemon.
An institution probably would not let this happen and
wouldn't turn to blame you if it did. Unsophisticated
private investors can turn to you when they don't do
their job properly and even experienced orsophisticated
investors may claim you took some unfair advantage.
I prefer to borrow against the notes, be in control,
collect the payments, guarantee the cash flow and make
sure the note is treated professionally. What I don't
like is "liability without control", so if
there is any
liability, I want the control to minimize it.
I prefer to borrow for many other reasons too. It is the
most profitable approach to note investing. You'll love
it when you see it and won't want to do it any other way.
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