Posted by John Behle on May 03, 2008 at 13:33:56:
In Reply to: Personal note investing posted by Bob on May 03, 2008 at 10:20:56:
1. Neither. The problem with brokers is trust and competence. It is bad policy to trust them and very risky. There are many scammers out there and there are some very incompetent brokers also. So, they may know a note is risky and hide it from you or not be competent enough to properly assess the risks. Some are only competent as con men and have pulled off some elaborate scams in the past.
Most competent note brokers are also very leery of selling notes to private individuals. They know the risks from their side are very large and therefore avoid it. This isn’t contrary to my teaching people how to work with private investors, because I do not advocate selling to them, but borrowing from carefully screened and prepared investors in a legal, safe and professional manner. So, to trust brokers is risky. California also has laws that scare good brokers away from selling to private individuals.
Even if you did work with a broker, you would have to do a great deal of work to verify all the details and do your own due-diligence to make sure you are safe and secure in a note investment. With the fee or profit the note broker takes and his and now your costs on doing due-diligence, there might not be a whole lot of profit left to make it worth while.
If you are putting your own funds or any you are responsible for into a note investment, you need to be absolutely certain as to the safety of the investment. You can not trust brokers as a rule and must verify all details yourself. That kind of negates the whole purpose of the broker and the fees they take. Plus, the fees a broker takes will cut most of the profit out of the notes. People generally use brokers because they do not know how to do the “due-diligence” themselves or they do not want to.
As to “direct mail”, most people have very little success with mailing out to note holders. Some have sustained very severe losses or wasted massive amounts of time and money researching names at the county recorders office or buying worthless mailing lists. A few - very few people have had good success with mailing out to note holders, but most find it useless. One reason is it is one of the worst sources of finding notes. Another is that usually the mailers are poorly designed and the potential note buyer or broker has little or no knowledge of marketing and advertising. The mailers are poorly designed and worded.
Most importantly is the whole philosophy behind direct mail. You are targeting all owners of notes and doing so with a lot of costs to reach each individual note holder. BUT........ and this is huge.... these aren’t note sellers, they are just note owners. If you could target a list to just note owners that want to sell, that would be better odds, but most of them would run when it comes to the discount. The size of discount required to make a note investment rewardable is usually NOT acceptable to the average note holder. If they wanted cash, they might have discounted their property. In some ways they have taken back a note specifically because they are unwilling to discount a property and because they DO NOT understand the time value of money.
If you wanted to buy real estate - even at the current market value - it would be a waste of time to just start knocking on doors of properties or to mail out to ALL owners of properties. Now, if that included wanting to buy the properties at 20-40% discount from market value, most would slam the door in your face or file your mailer in the round file. Doing direct mail to buy notes is little more productive.
Most of those that advocate direct mail to buy notes do so because of a couple reasons. One is that they truly do not know better ways to find notes. That is usually because they have little education and experience in the note market. Sometimes they have had one very expensive seminar by a slick promoter. Some of the high priced seminars have been taught and put on by people who have had no true experience in the note market. Interestingly enough, in this business the best education and educators seem to be at reasonable prices.
Some that advocate direct mail do so because it sounds good. But in reality it doesn’t translate “From the podium to the pavement”. Newbies paying thousands to learn the business hear it and think it sounds easy and they are told that. Then most fail.
There are so many better ways to find notes. If you spend some time reading this forum and the articles, you will learn dozens of ways to find notes that are real and productive. I’ve shared over a hundred different ways to find notes here over the years and gone into great detail with the most effective ways. If you type “Finding notes Behle” into the archives, these lengthy posts will be available for your reading that would take many, many hours to replicate here today and I have kids wanting to go bowling and to play video games and miniature golf. I just took a break to answer your post while catching some lunch.
Just a couple weeks ago there were a couple discussions on how to find notes and I researched and post some links to some excellent posts by myself and the other hosts.
2. Usury laws do not apply to discounted mortgages under most conditions. If I discount a note to achieve a 12% yield that is different than making a loan at 12%. Usury and lending rate caps and laws have to do with the rate a borrower pays, not the rate a lender receives if a note is bought at a discount with a few exceptions. I haven’t heard of the book you mention, but it sounds like he might be talking more about lending money than buying discounted notes. There are some very important differences between the two in both risks and legal matters. Here is an article I wrote that details the differences between the two including the answer to the interest rate and usury differences at the heart of your question here. The article is at: http://www.papergame.com/article006.htm
3. If you are lending money in California, you need to comply with licensing and laws related to mortgage lending and private money lending. That is different than buying notes and one reason you might want to avoid private lending. If you are brokering notes in California, under most conditions according to their law, you do need a real estate brokers license or a broker needs to be involved in the transaction. If you are just buying notes for your own account, you usually do NOT need to be licensed. But, would it be helpful. Yes, according to my style of doing things. I do a great deal of business with real estate agents and use the MLS quite a bit. In some ways it is difficult to be an agent and work with agents. They are leery of you trying to get their commissions or listings. You can overcome this and I do so successfully so that having the brokers license is more helpful. But, I use the MLS to find notes and network a lot with agents. Exchange meetings are an incredible resource for finding notes. I also buy properties with notes and buy properties to re-sell and turn into notes, so my strategies pretty much require a license.
Getting back to question one. The best sources of finding notes mostly revolve around real estate agents. Sometimes those who are not licensed have no idea what they are missing out on. Basically I can’t imaging doing the note business without a license. To me it would be like trying to cross the US on a unicycle. Possible I suppose - but useless. Sadly many of those teaching people about notes these days have way, way too little knowledge about real estate. To learn about or teach about notes without an extensive knowledge of real estate is foolish. In note investing, one of my most important tools is my real estate investment knowledge and experience. In real estate investing, I can’t imagine doing so without my most important tool of my knowledge of note investing. The thought of going back to the world of investing without these tools would be going back to the stone age.
Even if I was ONLY investing in notes or only investing in real estate, I would never want to do so without my knowledge of both fields. But, just as important is I would never want to invest in just one. They go together too well. I invest in property and notes and would never want to have just one. If I did, it would be notes though.
4. There are many courses about note brokering, but very, very few about note investing. I don’t have much knowledge of other people’s courses, but I do get a great deal of feedback from students. The only courses I know of that do teach investing are those of each of the forum hosts here as well as Terry Vaughan’s course. I would recommend each of them highly.
5. I’d worry more about competence actually. Go with someone who has dealt with note investors. I very highly recommend American Pension Services out of Sandy, Utah. Curtis has been a friend for about 32 years and myself and clients have worked with him for over 25 years. I usually have him teach a session about IRA’s and pension funds during each of my 5 day bootcamps. Many students and others I have worked with have used him without a negative comment or experience of any kind. There are a couple others that come highly recommended that are mentioned from time to time in this forum. Dick Desich is the one that comes to mind.
6. I would NOT advise investing with a broker on a fractional trust deed at all.
7. Your closest thing to someone assisting you would be one of the coaching or advisory services. I do not know of any I would recommend. Most are sold as if you will be receiving instruction and help from the guru themselves, but most of the time you end up with a much lesser trained “Coach”. Not many people feel like they have gotten their moneys worth. Bottom line is you are unlikely to find someone well versed in the note business spending their time on the phone with students. Start out with the resource of this forum as myself, David and Michael go to great lengths answering questions and guiding and coaching students. I from time to time offer coaching to select students like those who attend my bootcamp. The next one is in July. I haven’t done any in 8 years because of my health, but am going to do this one this year. It might be my last.
8. Being scammed is a very real concern. If you invest in a scenario where you are relying on brokers or others, you are almost certain to be scammed at some point. If you invest without extensive training on how to know a good note from a bad note and professionally assess your risk then you are vulnerable also.
New note investors can be scammed by con artists out there who can go as far as creating phoney notes or selling worthless notes. It’s actually somewhat easy to protect yourself, but few courses adequately educate people as they need. First off, read the articles by Lorelei Stevens at: http://www.eskimo.com/~lorelei/lorelei's_library.htm Then pick up her book titled “Lorelei’s Legal Lessons” and you will see some of the risks and how to avoid them. Those articles will help to see the seriousness of some of the risks and some of the remedies. I wish there were a more in-depth course covering these areas, but few courses spend much time on them. Throughout my five day course, I cover the subject in depth, but it is throughout the course and not just in one module that is sold or taught specifically. Michael Meeker and David Butler the co-hosts of the forum are two of the best in the business and their courses touch on some of these areas well. Too many other courses gloss over or ignore these areas. One reason is that their focus is just on brokering notes and the assumption is that you do not need to know much about “due-diligence”. The problem is that you do. Even a broker does because they can end up with risks and lawsuits over what they should have known or steps they should have taken.
Need to go now. I’ll gladly answer any further questions later.
Have a great day, John Behle
creonline@papergame.com