An Exclusive Interview!

Joel Cassway on Paper

Interviewed by William Mencarow, Jr.

Joel Cassway is a nationally-recognized mortgage, real estate and financial consultant, investor, educator and Financial Planner. His accomplishments over the years are far too numerous to mention here; with over 20 years of successful experience, Joel's expertise is in constant demand from real estate boards and some of the largest real estate firms in the country. His innovative course, "Creative Investment Techniques," is among Temple University's most popular. Joel has the unique ability to impart his personal successes in a highly motivating, easy to understand manner.

Joel, on behalf of PAPER SOURCE subscribers, I want to thank you for taking your time to share your knowledge and many years of experience with us today. How did you get started in paper?

Well, it's very simple, Bill. I'm a seminar junkie! When I was first learning creative real estate, one of the essential courses was discounted mortgages. Since I was already a real estate investor and a broker, I already knew something about them and in fact invested in paper from time to time. That was the pattern everyone taught: get your real estate portfolio first, and then buy paper. Actually, if I had it to do all over again, I would have skipped my real estate "buying frenzy."

The conventional wisdom seems to be, buy real estate first and only then buy mortgages. You disagree?

Everyone has to make their own decision, but paper stands by itself, and if you so choose, you can concentrate exclusively on paper. Real estate is a great investment, but it's also very time-consuming, and the cash flow isn't that great. The internal rate of return for both investments can be the same.

If you know what you're doing, you can take a good real estate transaction and a good mortgage transaction and end up with the same amount of money at the end; but with paper, you spend much less time and have less risk and fewer legal expenses. No one ever tripped and fell on a mortgage!

In your courses you stress repeatedly the one thing people don't want to hear: don't rush out and buy paper.

Buying paper on your own before you know what you're doing is an almost certain way to get into trouble. That was brought home to me just the other night. I was at a real estate investor's meeting and someone got up to report on this paper deal he was involved in. He bought the mortgage at a substantial discount - it was obvious to me why it was so cheap, but not to him - using credit card advances for cash, and he was going to restructure the note, create a higher yield and then sell the note to private investors.

"Buying paper on your own before you know what you're doing is an almost certain way to get into trouble."

What struck me was how very risky the whole thing was and how he didn't even know it. Even if somehow he lucks out with this one, he made so many mistakes - using credit cards, buying a high risk note, involving other people who probably know even less than he does, maybe violating federal securities laws - that eventually he and other people are going to get burned, maybe badly. I see that happening time after time, and it's only because people jump in too fast.

Clearly, if you know what you're doing, one of the wonderful things about paper is that you can get a much higher yield than average with a risk that is not commensurate with the rate of return. There are two fundamental criteria in buying loans: yield and safety. If you can't get a higher than average yield, don't buy it. If it's not safe, don't buy it. You want both, and when you get both you have increased your reward and reduced your risk - what most people would call a very "unreasonable" investment philosophy. I suggest people become unreasonable investors (once they know how to do it).

You teach four steps to success in paper. Would you summarize them?

If you want to be successful in paper, there are four things you have to accomplish:

One, generate leads. You have to find people who have loans to sell. That's fairly simple to accomplish; you can have your phone ringing if you do what's necessary.

"... You can take a good real estate transaction
and a good mortgage transaction and end up with the same amount of money at the end."

Two, qualify the leads that come in. 7 out of 10 times the deal that comes in is simply out of the question. It's not salable. What you need to do is to be able to tell in the first three minutes if what that seller has is something you can make money on. It takes awhile to develop that talent.

Three, negotiate the transaction. If the person does have something worthwhile, you have to be able to negotiate it successfully. There's a lot more to buying loans than to make somebody an offer less than face. One of the keys is to find out why they're selling the note to begin with; if you can help them achieve their goals, to solve their problem, you can also profit.

Four, fund the transaction. You need to have outside commercial or professional buyers; people whose business it is to buy loans. This is especially important if you really don't know what you're doing. It's ultra-important if you're just starting out. This provides two things: You can flip your deals to someone who knows what they're doing and watch what they do; now you've earned money and learned at the same time. Once you know what you're doing, have flipped a bunch of notes to professional buyers, then you can buy a note for yourself once in a while. After you've done that, the next step is to bring in private investors as partners or just to sell outright to.

The point is that you need to know what you're doing. There are a lot of pitfalls. You can get into securities law violations. You can buy a risky loan thinking it's good and lose a lot of money. Worse, you can bring in other people; if it goes bad, you may find yourself both broke and in court. Look at the man who spoke at the investor's meeting. He had never bought a note before, and here he was selling it to private investors who knew even less than he did. If something goes wrong, he's going to be in big trouble, financially and possibly legally.

This is a great business if you know what you're doing. Like everything else, there are traps.

Joel, you buy and sell notes, but you buy and hold some. How do you decide which notes to sell and which to keep?

I only buy the very best for my own portfolio. 99 percent of what comes across my desk, I flip to someone else. I'm looking for that gold nugget. 

There are many more criteria than this, but I always look for a lot of equity; a LOT of equity. For example, I recently bought a $102,000 note for $72,000. It's a first, and the property had a sale price of half a million dollars. I can sleep at night with that. That loan is just not going into default. If it does, two things will happen; either I will be bought out at the sheriff's sale, which is more likely, and I'll make $30,000 very quickly, or I'll end up with the property and over $400,000 in equity.

Neither of those is what I want to happen. What I want is to collect my payment each month. I no longer want excitement in my investment life, I just want to see those checks in my mailbox each month.

So your goal in note investing isn't to eventually get the property and make a bundle?

No. There's nothing fundamentally wrong with that. But that's not investing, it's speculating. Someone once said "an investment is long and boring, a speculation is short and exciting." I like having heavy positive cash flow from day one - not having to wait for appreciation, or rehabbing, or for the neighborhood to change, which is what you have in real estate. When you understand the real meaning of the present value of dollars, you understand the importance of high cash flow today. That's why you can favorably compare a real estate deal to a paper deal in all respects.

"I only buy the very best for my own portfolio.
99 percent of what comes across my desk, I flip
to someone else. I'm looking for that gold nugget."

I'm also always trying to improve my own portfolio, to increase my yield, even a little bit. If you invest $1,000 a year at 24 percent for 25 years in a retirement plan, you end up with just under $900,000. If you restructure the deal just a little, which you can in paper, and bump that rate to 28 percent, you end up with $1.7 million - that's a significant difference. I always teach my paper students techniques to increase their yields whenever possible. Just a small increase makes a big difference.

I just can't emphasize enough that every time you raise your yield just a little bit, your profit goes up a great deal.

Any final words of advice to our readers ?

Paper, like anything else worthwhile, requires persistence. We talked about the 4 steps before. Most people want to make a lot of money fast. That's probably not going to happen. I've seen people make big money in 3 or 4 weeks, but that's pure luck. Paper is a get-rich-slow process for those who work at it.

Most people get stuck in that second step. Most people can generate leads but don't know how to qualify them. I find people running around investigating, appraising, getting papers on deals that are absolutely not going to work. The people who are successful in paper - my Network people, as an example - are those who can get through the frustrating process of that 2nd step. Learn to recognize the difference between a good note and a bad one so you don't waste your time on the bad stuff.

Joel Cassway is a discount mortgage investor, broker, teacher and master marketer with over 30 years of experience. Joel is the author of a series of instructional programs that include workbooks and tapes. His programs entitled, "SUPEREARNINGS", "Power Negotiating," "The Numbers Game," and "The Paper Game," are used by investors all over the country.

He is also the author of the best selling cash flow marketing program "HOW TO TURN 90% OF THE PEOPLE WHO WON'T SELL YOU THEIR NOTES INTO BIG TIME CASH PROFITS".

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