Notes and Real Estate a perfect marriage

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Posted by John Behle on September 18, 2007 at 13:51:26:

In Reply to: Best Cashflow Rentals or Notes/Paper??? posted by Mark H on September 16, 2007 at 18:44:54:

I posted below about the advantages of paper if you were in some way choosing between real estate investment and paper investment. But, a choice between the two isn't needed. I couldn't imagine a choice. It's like choosing between steak and lobster when you can have both.

One of the things I've watched over the years that is a crying shame is that the division between the two forms of investment is growing instead of shrinking. It's the second law of thermodynamics at it's worst. Reverse evolution - or the real kind.

Years ago paper investors usually were real estate investors that like Jonathon Livingston Seagull had seen a better world. Like him, they had learned to soar, but that doesn't mean he doesn't eat like the other gulls.

I would never want to be without either form of investment. Especially, I would NEVER want to be without my knowledge of both. A real estate investor that does not learn about notes is one of the most short sighted of all people. A note investor that does not learn about real estate is truly sad.

So, like others pointed out, it's a game of buy real estate, turn it into notes, buy notes, turn it into real estate, to turn into notes, to turn into real estate, etc. It goes on and on, profit all the way.

Someone remarked their enjoyment of created notes, but a concern that leverage doesn't apply to notes. It does, notes are as easy to finance and easier than real estate. Its just a matter of different sources, different methods and different knowledge.

I entered into real estate investing in 1976 and note investing in 1977. At that time there was NO ONE that bought notes nationwide. There was no such thing as being a bird dog and brokering notes for pitiful commissions. I am SO GLAD about that. I don't think I would have been sucked into the bird dog world. I don't like to work like a dog for a bone and a pat on the head. Bird dogging for notes is so appropriately named as far as I am concerned. Ruff, Ruff.

I had to learn to work with private local investors. At first I only learned that notes were nice, but I liked real estate better. I learned to close more real estate deals by using notes. It became my most important tool. But, in 1980, my eyes were opened in a remarkable way to never close again. Ya, it feels like I haven't slept since then.

I was just chatting by email with a friend a few days ago and reflecting on how I got into this, so instead of repeating it, I am going to just do a cut and paste here. Here's my beginning.

Yes, it's been interesting watching the change of the makeup of the industry. When I got into it note buyers were very experienced agents (usually exchangors), financial planners, attorneys and few others. Even the attorneys and CPA's usually had their license and a good real estate background. These days the average note broker is incredibly un-trained regarding real estate or investment. I couldn't imagine doing the industry without my real estate background or doing real estate without my paper background. But here we are. When I began, there really wasn't such a thing as a note broker, just buyers. No commissions, referral fees, nothing. You just sold to one of the 4 or 5 people that bought in the local area. Marketing was almost non-existent. We had one of our buyers, Marshall #@@# (can't remember anymore) that was rude, mean, cursed at you and violated every possible rule in the Carnegie book. Yet, if he was your best or only offer, you HAD to deal with him. When I began buying, I bought so much paper from people that were glad to deal with anyone buy him. I loved it. Always wanted to thank him. But, back then, you would deal for years without even meeting many of the handful of other people.

I was dabbling in it from 1977-1980, but couldn't see the point. Paper was only a tool. Something to sell to make a real estate transaction come together or to get cash. 24% yield - baloney. No way I would invest for that little. I thought note buyers just didn't know enough about real estate (unlike today where they really don't). One of my top buyers - Lamont - kind of drove me nuts though. He was at every exchange meeting or educational event I went to, so he violated my theory. I don't recall telling him I thought he was nuts to buy paper, but somehow he knew I felt that way. I went to the Creative Real Estate Expo 80 in Vegas with over 1500 other exchangors. I attended a 40 minute presentation by John Berven that talked about ways to make money with paper and particular how to buy at a discount and trade at face for property. I literally had a brain overload. It would have been a great video. I kind of stumbled out of the room and literally bumped into Lamont. He looked at the look on my face and laughed and said "Now you see why I buy paper".

I had been buying millions in property, but it was hard work. All of a sudden to see I could buy at 60-80% of value for nothing down stunned me. And, in those days as much as 40-50% discount on notes was not unheard of. I came back and within weeks put together several hundred thousand in a note portfolio and started trading for property. As you probably know, it works if you know what you are doing and how to find the deals, negotiate, etc. Not the Joe Land baloney, the real deal. Land of course simplified, puffed, stretched and glamorized the concept to the point where it didn't translate "from the podium to the pavement".

But, once I put together the portfolio, learned how to find the properties, how to negotiate the deals - I set my agents loose. At first we'd go through a whole listing book to get a hundred or so leads. That led to ten offers and one closed. The average though was about a 40K profit and in 1980, that was enough to jump start my greed glands, though it took a month or more of hard work. But, I always refine and improve. Analyze and adjust. I got it to the point where it took about 9 leads to get three offers and three offers netted one deal. I had ten agents out writing offers all day long and my TRS-80 was flying along analyzing offers and burning up that 300 baud modem on the board's new MLS computer.

Just the "Paper Trade" concept was enough to occupy me for the rest of my life, but I ran across Max Hollis and Carlos Royal's book "Basic Steps of Private Money Financing and Discounted Mortgages" (or something close to that) and had a few more of what Wayne Palmer and I call "M.O.'s" (mental orgasms). He comes to mind because he gets such a kick out of the term and I love to bat his brain around from time to time and put him in overload with fun ideas. He bought his franchise from me in 1992 and I trained him in the business.

I read some of their concepts about playing with the terms of the note to increase the yield like "cut the rate in half and double the payment" to double your yield. That was the first time I had to look at my calculator and say "I trust you", though it made no sense. That and some other ideas and John Berven's two day seminar changed my brain forever.

End of the cut and paste.

So, I started with real estate, but kind of got sucked into note investing because it was a better and easier way to do real estate. Then over time, I just learned more and more about WHY to invest in paper and how to get incredible returns with none of my own money invested. I learned to work with private investors and small institutions for financing of 100% and more of my notes with a positive cash flow after.

Some bargains are real estate deals and some are note deals. You can turn management intensive real estate into simple cash flow notes. You can also use notes to get better real estate deals. David mentioned the "Paper Trade" scenario. That is one area where the real estate and note portfolio just grows and grows and grows. Each trade doubles the amount of notes. Each note trade ends up in a portfolio that can be improved over and over and over for continual profits. You could do ten of fifteen deals and retire off of the continually increasing cash flow.


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