9:02 AM
Greetings!
I received three questions via email the other day on this topic. So I'm reposting an article I wrote last year that is still relevant.
Enjoy.
Marc
The Truth About Cash Flow Notes
Question: Dear Marc, I heard your interview on Internet radio recently, (which was great by the way!). I missed the segment where you talked about how the little guy can make big money with cash flow notes. Can you explain it?
D.P. Anna Marie Island, FL
Dear DP:
Thanks for your question.
I’ll explain the little-known secret in a second.
I know three entrepreneurs making money with cash flow notes. So this is NOT a pie-in-the-sky theory.
Here’s some background on this opportunity so everyone can benefit.
The competition for “cash flow notes” is fierce. But that’s a good thing.
In my experience, any time you have heavy competitive the money is often lucrative.
Think about iPhone apps, SEO, security software, carpet cleaning, window washing, car rentals, and handyman repairs. These can be very lucrative even in a sluggish economy.
But there’s a right way and a “hard way” to do things.
The note market much larger today than it was five or six years.
This is partly due to the economy and the collapse of the real estate market. Cash flow notes thrive in this environment because people are forced to get money fast.
Cash Flow Notes Tutorial
Most of the time, people on the inside track always land the best notes.
These insiders are usually: 1. seasoned note investors 2. Bankers 3. Real estate lawyers (and judges)
I'll show you a short cut and how to find the best cash flow notes.
You’ll also need to find qualified buyers or sellers.
There are only a couple of things you need to know to be successful in this market.
What is a cash flow note?
Cash flow notes are IOUs. They are an agreement to pay someone a specific amount of money, with interest, over a specific period of time.
The most popular cash flow notes are commercial and residential “paper” (also known as a mortgage).
There are cash flow notes available in almost every conceivable real estate investment. Most (but not all) cash flow notes are secured with a title deed.
But the neat thing is you can find cash flow notes for everything from accounts payable, structured settlements, royalties, leases, pre-construction deals, and more.
I’ll focus on real estate cash flow notes in this week’s issue.
Here’s an example of a simple cash flow note…
The Johnsons sell their $250,000 home with owner financing.
The Johnsons ask for $25,000 down and finance the balance of $225,000 at 10 percent interest. The Johnsons receive monthly payments on this “note” until it’s paid off.
That’s where the “cash flow” part comes in.
An entrepreneur calls the Johnsons and offers them $220,000 for the note on their home. The Johnsons agree. The entrepreneur buys the note and resells it to another buyer who is willing to pay $225,000 for it.
The first entrepreneur keeps the $5,000 difference and the Johnsons get $220,000.
This process is contingent upon locating note sellers and brokering a deal for each note to willing buyers.
In the real world…which is how I look at business opportunities…. it takes a lot of time, energy, and money to build a network of qualified cash flow note sellers and buyers.
But entrepreneurs are making money in this business.
What’s more, there’s an established network of entrepreneurs already doing these deals… they’re called bankers, lawyers, judges and real estate investors!
A Little-Known Cash Flow Secret
One secret to “winning” in the cash flow business is target marketing.
Who would’ve guessed direct marketing is a key?
But it’s logical. You need to find and reach qualified cash note sellers.
Cash note sellers are typically home owners, business owners, and other real estate investors who have provided financing to buyers.
One of the best ways to reach a large targeted audience quickly (if you don’t have an established in-house list of contacts) is with TV.
That’s right - television.
Stay with me now… it’s not as expensive as you might think.
You see…the guys selling cash flow note business opportunities on late night TV are selling kits and packages. But the smart entrepreneurs are building online networks of buyers and sellers and taking a percentage of every deal.
This business is NOT dependent on TV advertising, or a huge advertising budget.
And you don’t have to build a huge network of buyers and sellers to make money.
I just wanted to show you how some smart entrepreneurs are making money in this business.
And believe it or not you can advertise on TV in a small geographic area for very little investment, and reach a nice audience.
Cable and satellite TV advertising is down big time. Therefore, cable and satellite TV channels are willing to make incredible deals on advertising.
For example, you can target more than 1 million late night viewers in New York City with a “spot ad” for under $2,000. This was unheard of five or six years ago.
Check out National Cable Communications – they specialize in “spot” commercials.
You can even setup spot TV commercials with Google TV Ads.
And don’t worry….you don’t have to pay actors or film crews to get your commercial done. There are companies offering pre-made spot TV commercial packages, such as Spot Runner, Inc.
I heard Spot Runner was having some trouble financially, so proper due diligence is in order. But you’ll others in this space...just Google “cable TV spot ads”.
Spot Runner offers TV advertising (and remnant packages) in hundreds of markets across the U.S. and Canada.
The benefit of pre-made commercials is cost savings. You can select from dozens of pre-made commercials and simply add your message, website, 800 number and bingo - instant exposure!
The most expensive part of any commercial is the production - that’s money you have to spend before you’ve made anything. SpotRunner enables you to eliminate a large portion of this expense.
But some marketers prefer making their own commercials.
It’s your choice.
The objective of any marketing is to attract qualified note buyers and sellers.
When you run TV spot ads commercials the objective is to attract note buyers, sellers or both.
You’ll need a list of qualified note sellers… and a list of qualified note buyers.
Then all you have to do is match them up!
Yes…. there is some legwork involved in this business.
What’s more, it’s not entirely free of red tape….(which always makes me nervous).
But the business is fairly simple when you have qualified buyers and sellers.
Your compensation is based on the difference between the seller’s price and the buyer’s price.
If running commercials or larger direct marketing campaigns is too much for you at this point, you can start out small by running promotions in your local paper or on popular local websites too.
Most local newspapers and web portals are desperate for cash and advertising too.
Negotiation is king!
Jerry L., a colleague, generated $45,000 to $65,000 per year the last three years on real estate notes and pre-foreclosure deals by simply running cheap classified ads in small regional newspapers and websites. Cheap meaning $20 to $50 per month!
Newspapers are great source of leads in this business too.
And if you haven’t noticed, newspapers are dropping like flies!
Like I said, newspapers desperately need your business in order to survive… and most of them will offer huge discounts on pricing. But you have to negotiate with decision makers.
Jerry uses a simple website which attracts note buyers or sellers.
If you Google the phrase “cash flow notes” and you’ll find hundreds of simple websites in this market.
Jerry preference is to have one website designed to attract note buyers and one website designed to attract not sellers. He keeps them separate because camps are very different.
Here’s what I’m talking about….
Note sellers need cash now!
Note buyers on other hand are a bit more patient and often have a longer-term objective.
Granted, note buyers usually want to unload notes as quickly as possible for a profit.
But generally speaking note sellers are desperate and need cash now.
When you’re marketing to note sellers you’ll be addressing their fear, uncertainty, desperation, and other survival instincts.
But when you’re marketing to note buyers you’ll be addressing different emotions, such as the excitement of seizing an opportunity.
Whatever marketing approach you use, you’ll want to capture your prospect’s information, such as an e-mail, address and phone number.
There are tons of ways to market this business and capture qualified leads.
But the objective remains the same:
Find viable, qualified sellers and MATCH THEM with qualified buyers.
There are also websites which enable you to find qualified cash flow note buyers and sellers too.
Here are two good cash flow note websites:
Creative Real Estate Online
Big Bidder
I also recommend Tyler “Ty” Hicks International Wealth Success too.
Ty publishes an e-Letter called International Wealth Success.
Believe me, Ty has the knowledge and contacts when it comes to making money with real estate notes and lending deals.
Tyler has written more than 30 books on real estate, business, funding ideas and more. I highly recommend his products.
Tyler Hicks understands the real estate notes better than anyone I know.
A couple of other sources for locating cash flow note buyers and sellers is CraigList, The Note Network and Yahoo! Real Estate.
A New Cash Flow Niche: Making Good Money from BAD Paper
Don’t kid yourself… most real estate businesses require at least some money… or quick access to it.
If you can get your hands on some money or quick access to it, I found a “niche” business opportunity which might provide a nice side business for you.
A good friend exposed this business to me over coffee… and I was amazed what I heard.
Here’s the lowdown …
Have you heard the term “bad paper” before?
It’s simple.
Bad paper is a broken promise to pay by another party.
The agreement or “paper” is usually secured by real estate (or some other asset).
The payor is in default when they fail to pay in accordance with the agreement – and that’s why it’s “bad”.
It’s obvious there’s no shortage of “bad paper” or “toxic assets” in the market today!
There’s another term which you’re probably familiar - it’s called a “mechanic lien”
or “contractor’s lien”.
A lien is filed at the local recorder’s office, the courthouse (or at a town office) whenever a contractor does work on a home and doesn’t get paid.
A lien of $3,000 (this is the average lien amount) on a $200,000 or $300,000 property is very bad.
As real estate values continue dropping to new lows, there’s a boatload of BAD paper.
Here’s how my friend makes money from bad paper…..
1. Grab a list of mechanics’ liens the local recorder’s office. Don’t worry - its public information. Recorder’s offices often make this information available online so you might not have to get up from your chair!
2. Make a list of contractors who have liens on properties. Make another list of the homeowners’ or business owners’ addresses. Let’s say you find a roofing contractor who has lien on a homeowner’s property for $1,500 (because of a failure to pay the balance for work performed)…write his name and the homeowner’s name down.
3. Now send the contractor an unsigned check for HALF of the amount of the lien. My friend uses a window envelope. Using my example in #2 the check would be for $750. You could a note with the words “I’ll send you this check today” or something to that effect. My friend said 90% of the contractors accept the offer! After all, half of the money right now is better than none of it ever!
4. Now, contact the homeowner and inform them of the seriousness of the lien. You could mention you are entitled by law to all of the collection costs. In most states, you are entitled to include “collection costs” of up to $1,500 to satisfy a mechanic’s lien.
In this example, you could charge $750 for collection costs. So, in this example the total amount owed by the homeowner is $2,250 (the $1,500 lien plus a $750 collection fee).
5. Finally, you present an offer to the homeowner to settle the lien for HALF of the amount due. In this example it would be $1,125. Your letter should be useful and accommodating – there’s no need to threaten a lawsuit.
My friend helps the homeowner or business owner understand a lawsuit will be filed if the lien is not satisfied. You can remind the homeowner or business owner most mechanics’ liens are satisfied in favor of the contractor or supplier.
In most cases, the homeowner will agree and write you a check for $1,125.
6. Lastly you write a check to the contractor for $750. You get to keep the difference of $375. ($1125 - $750) This is your profit.
Granted, this is a simplified example. Most contractors’ liens are considerably larger than $1,500.
The SECRET to Making Good Money on “Bad” Paper
If a contractor has not been paid for services rendered he or she can file a lien against a homeowner or business.
When someone has a lien on their property they are unable to sell it or make changes to it. The lien can also show up in credit reports and other publicly accessible documents.
A contractor simply wants to get paid. A homeowner or business owner wants the lien and problem (contractor) removed.
An entrepreneur like you can “fix” the problem by offering the contractor half of the value of the existing lien, and the homeowner or business owner with a way out at a reduced cost (and avoiding court action).
When the contractor accepts your offer for half the amount (paid immediately), he or she willingly removes the lien from the homeowner and business owner’s property.
For an entrepreneur in this business, there are only two forms / sales letters which need to be mailed, and maybe a phone call or two.
What's more, in larger cities and towns hundreds of liens are filed each and every month - and this is where the opportunity exists.
Obviously, there’s room to work your deals up or down.
Making money on bad paper is a unique side business - especially if you’re already doing real estate deals.
The downside is if the homeowner or business owner has a problem with the work that was done - or with the supplies that were delivered. But you can determine this before risking any time on the deal.
It is fairly simple to determine if a homeowner has a valid “counter-claim”.
A homeowner or business owner will be required to provide viable “proof” of shoddy workmanship, or proof work was never rendered.
Granted, homeowners or business owners often have complaints against contractors. Unfortunately the law often sides with the contractor or provider of services.
In most cases, 90 percent+ according to my friend, liens are settled quickly and easily without going to court.
Surprise Cash Flow Niche!
There’s a surprise niche in the cash flow business almost no one pursues.
It’s called mobile home paper.
I’m not kidding.
When you search this term on Google, you’ll find a ton of information on the topic.
Mobile Home Paper Cheat Sheet
Almost every real estate investor, speculator, and developer considers mobile homes the bottom of the barrel.
Whether this is true or not is irrelevant.
As an entrepreneur you can make money in this market.
What’s more, there’s more than enough “bad mobile home paper” to go around!
If someone is at risk of losing their mobile home to the bank because of a hardship or bankruptcy, you can offer to buy their note (at a discount of course).
Then you can rent the mobile home to the homeowner, refinance the deal, or do a combination of both.
One of the reasons I like this niche business is because mobile homes are relatively inexpensive.
In fact, I located more than a dozen mobile homes (in fairly good condition) in my neck of the woods for less than $50,000 each.
In some cases, the deals were contingent upon moving the mobile homes from a park or land. I think this is common problem in this market.
But the reality is mobile homes can easily moved and set up in a park or on land for $3,000 or less (and everything is negotiable).
Anyway, mobile home paper is a great niche in the cash flow note market.
I hope that helps!
Please send or post your feedback on my article today. We want to make Weekend Business Blueprint even better in 2012. Your thoughts and insight will help us do it.
Regards,
Marc Charles
Valuable Resources:
Cash Flow Note Websites
The Mortgage Network
Angel Capital Network
The Notes Shop
Boston Note Company
The Paper Source
Note Worthy
First National Acceptance Company (buys and sells cash flow notes)
The Note Investor (Buy, sell and learn)
Facebook stuff https://www.facebook.com/AskMarcCharles