Note brokers and investors who succeed do so by developing niche markets. They develop an expertise in an area where there is no competition. If you are only going to broker first position notes on owner-occupied, single family residential homes, you will face stiff competition in finding them and then in getting the best price. A good niche market note broker will be working with note
sellers who are not shopping the note and in a market where there is no competition.
One niche market that has not been fully exploited is land notes. There are profits to be earned. Historically, however, it has been difficult to find buyers for land notes.
The secret in buying and brokering land notes is to locate safe ones that are profitable for you and attractive to an investor.
Safety
First, buy notes only on developed land, not dirt. Developed land means the roads, telephone, water and electricity are in, but there is no building.
Second, buy land notes with recourse back to the note seller. This means the seller of the note is personally liable if the payor defaults on his or her payments.
Third, have a realistic appraisal on the land value. "Realistic" because developers can distort the value by selling a parcel to a colleague at an inflated price. New buyers and some appraisers will use this phony sale price to give an inflated appraisal.
Fourth, run a credit check on the payor. You should try to broker land notes with good payors who have "A" or "B" credit.
Fifth, verify that the payor made a cash down payment of at least 20% on the property. This verification can come from the closing statement or from talking to the payor directly.
Sixth, call the payor to verify that he is happy with his purchase and that he is not unrealistic about making profits on his new property. Many land developers will "oversell" a developed lot, leaving the buyer with dreams of riches in a few years. When the buyer's dream bursts you do not want to be stuck with a disgruntled payor.
Finally, keep your loan-to-value at or below 50%, especially if you want to broker the note to an investor. You do this by agreeing to buy only part of the payment stream. For example, if you
and your investor are comfortable with a $30,000 value for a lot in a residential area, you would multiply .50 times $30,000 to get the maximum investment for your note buyer. In this case, an investor would invest $15,000 in this note. If there was a $22,500 note to be sold, you would offer to buy only part of the payment stream. (continued below)
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(Land Notes continued)
Calculations
There is an existing note on the property that the developer wants to sell. The note looks like this on your calculator:
N I PMT PV
120 10 297.34 22,500
Suppose the highest quote you get from an investor is $15,000. Enter that figure in the Present Value (PV) of your calculator. You also learn that your investor buy land notes of five acres or less at a 13.74% yield. You put this figure in the Interest (I) column. You know that the payment is
$297.34 a month, which goes into the Payment (PMT) column. Calculate the number of payments you expect your investor to buy:
N I PMT PV
76 13.74 297.34 15,000
This means your investor could buy 76 payments of $287.34 for $15,000 to get a 13.75 yield. You might offer $13,000 to the note seller to allow yourself a $2,000 commission.
Convincing the Seller
Land developers and lot salesmen usually need cash. In the above transaction you can show your note seller that he is receiving $13,000 cash today, and when he gets the note back in 76 months it will still have a balance due of $10,914!
Your goal is to find a good supply of lots and a hungry developer. Advertising that you buy land notes is one effective way to locate them. Other brokers have been successful working with real estate brokers, others contact developers by phone, offering to finance some of their sales. Your marketing creativity can be rewarded with three or four of these deals a month.
Richard Koehler is a veteran note investor.
ONCE YOU'VE FOUND A NOTE, WHERE DO YOU SELL IT?
HOW DO YOU KNOW THE "INVESTOR" ISN'T JUST ANOTHER BROKER?
Did you like this article? You can get many more each month, plus the latest news of the note/cashflow business, new note investors, new laws, court decisions, etc. affecting the business,interviews with the experts and much more every month in THE PAPER SOURCE JOURNAL.
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