Fueling Your Passion With Note Portfolios
Seller-financed notes turn a business into a portfolio.
Counties and municipalities depend on money from property taxes to meet their budget. When property owners don’t pay their taxes, the local taxing district of some states will sell the taxes to an investor in an auction. At these auctions, the investors bid for the right to pay the taxes on the property and place a lien on the property.
Why would an investor want to do this? Two reasons.
First, they receive a high interest on their investment (much higher than they could get in the bank or a money market account).
Second, the tax lien that is created on the property is a super lien. That means it must be paid off before all other liens, except for government liens. This makes a tax lien a very secure investment.
How Stable Is Your Business?
Even with a business built on seller-financed notes, it doesn’t necessarily mean all your problems are over. If you make the mistake of building your business by creating low-quality notes with high maintenance customers, you must constantly work and rework your customers to catch up on their payments—or even deal with defaults and foreclosures. Low-quality notes keep you on a short leash. You have to spend lots more hours than you expected. Eventually you realize you own a business you never intended to own. It takes time and energy away from the important “why” passions you want to pursue.
This is why I encourage people to consider becoming a portfolio owner instead. How can a business owner make the transition to portfolio ownership? By being more discriminating in the type of seller-financed notes you create. Portfolio owners have the time and financial freedom to take a month off here and there to pursue other passions. As a portfolio owner, you can also live wherever you want.
If you can imagine owning a whole portfolio of notes that each brings money reliably to your mailbox for 15 to 30 years, then you can see the exceptional wealth-building potential of being a portfolio owner. With predictable checks coming securely every month, you can take the time off to pursue other fulfilling interests.
The Time Is Right for Seller-Financed Notes
Today’s market conditions are ideal for entrepreneur-minded investors to build a portfolio of high-quality seller-financed notes. Conventional financing for home mortgages through normal banks is not an option for a huge number of homebuyers. Banks aren’t motivated to pursue mortgages under $100,000. This is not an issue in every single market, but in 20 or more states, it’s an inherent problem.
Banks and finance companies were initially forced out of this price band by regulations like Dodd-Frank, which capped the percentage of fees and points that can be charged on mortgage loans. Capped fees mean the banks had to do as much work for a $75,000 loan as they do for a $300,000 loan and only make a fourth of the income. For their own efficiency, they decided not to fool with the small loans. This is your opportunity to step in and fill this underserved niche.
By offering seller financing for this price band, you won’t be a customer’s last resort. You’ll be their only resort. Banks are normally your biggest competition, but in this price band, you’ll have almost no competition. In the high price range mortgages, banks compete against each other to get customers. But, in this lower price range, customers compete against each other to get a note from you.
You have the freedom to keep the notes you create to receive income for years to come, or you might decide to cash out at any time and sell them to funding companies. When you’ve got paper that performs, its good stuff. A good note for you is a good note if you decide to sell it. Either way, your profit potential is huge.
Finding Great Customers
By owning notes, you’re basically becoming a bank. Naturally, you must pay close attention to the kind of customers you want your bank to have. Since you have the freedom to choose your customers wisely, you can create loans with higher value and more long-term profit potential. If you’re not selective, or if you target customers with habitual bad credit, then don’t hold your breath that you’ll still be making money from your notes 20 years from now.
I’ve seen lots of people who weren’t discerning when selecting customers. They ran ads with headlines like, “Bad Credit? No Credit? No Problem!” If a customer can’t make a good down payment, there’s a good chance they can’t make the other payments either. You’ll end up with problematic, high-maintenance notes. When you put out a message like that, people with good credit won’t show up because they’ll figure you’re offering pawn shop interest rates. You don’t want to scare away the very customers you’re trying to reach.
I was shocked when I heard that only 10 percent of people who qualified for mortgages through Freddie Mac or Fannie Mae have a credit score of 700 or below. The 90 percent who got approved have a 700-plus credit rating. This shows how high the bar is for people to qualify. There are plenty of honest, hardworking folks with a proven history of paying their bills who are getting left behind.
With a gap this big in the marketplace, you’re sure to find qualified customers the banks have turned down.
To build a portfolio of high quality, trouble-free notes, you’ll need a good filtering process to find people who can make a good down payment and have a history of paying their bills. Remember, just because a person can pay their bills doesn’t mean they will. There are lots of chronically bad payers, and you don’t want them as your customer.
One big segment to pursue is homebuyers who are in America legally but aren’t yet citizens. They didn’t sneak in, and they’re not bad people. They’ve come to America to make money and pay their income taxes, but they have a much tougher time getting approved with conventional financing. Another big segment to pursue is self-employed people. They have a harder time getting approved even though they’re hard working and have a good income.
One more segment to pursue is people with self-directed individual retirement account money who want to use the IRA as a down payment to buy a rental property. They pay a big down payment, and seller financiers do the rest (although they can’t legally use their IRA money to buy the house where they live or a vacation home).
You’re looking for great people who have simply been left behind by the big banks. Your ideal customer is a trouble-free borrower with no irritations. They can make the payments on their house, along with enough for taxes and escrow. The longer they pay, the more future income you’ll get from this single transaction. This caliber of customer is out there, and this is how you build a high-quality note portfolio. By filling the gaps wherever there is an underserved market, you’ll have the opportunity to provide home ownership to lots of people who deserve it, and you’ll make money in the process. That’s a huge win/win. If your “why” is helping people, seller-financed notes are for you.
If you find your “how” this way, you’ll fulfill your “why.” Money doesn’t solve all problems, but with a focused goal and smart strategies, you can build phenomenal wealth with a predictable business model.
Eddie Speed
Eddie Speed knows how to architect a deal like the back of his hand. For almost 40 years, he has purchased more than 40,000 notes, and the NoteSchool executive team has bought $3.5 billion in notes. As an esteemed teacher of all aspects of real estate notes, Eddie’s innovative methods have earned him multiple industry awards and inaugural induction into the Small Balance Real Estate Hall of Fame. In 2003, he founded NoteSchool, a real estate coaching program that teaches students to buy and sell performing and non-performing notes, as well as other alternative purchasing strategies like seller financing. Over the past decade, he has helped countless investors expand their portfolios by the millions using his out-of-the-box techniques.
