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The Truth about the Note Business

1999 by Jon Richards

I wanted to write an article where I name names and expose the dark underbelly of the cash flow industry. However, the lawsuits and apologies might be more than I could tolerate. Nonetheless, there is a major problem for brokers.

You probably already know this, but it seems I have to relearn it every day: There are very few institutional buyers of cash flows. Most notes, especially real estate notes, end up in the portfolios of perhaps six or seven companies. From there, many are sold in "pools" as securities to widows and orphans by Wall Street companies. We probably never know where the payor's final note payments go. 

If there are only six or seven direct note buyers in the country, why are there over 126 institutional note buyers listed on the Direct Connect software? Go to if you don't have the software. It is a data base of corporate note buyers. Clearly the answer is most of the companies calling themselves "end" buyers are merely reselling the notes, perhaps in portfolios. Is this good or bad? Well, it can be good; or it can be very detrimental to the note broker. 

Many corporate note buyers act as "master brokers." They work with new brokers to help them negotiate, package and close transactions. They teach others to do the business and add value to their note buying service. If used correctly, these "added value" master brokers can be an asset to an industry that is flooded with poorly trained note brokers.

Other brokers, who are neither "end buyers" nor master brokers, have negotiated excellent buy rates from the larger companies such as Metropolitan Mortgage, The Associates and others. They can purchase cash flows at better rates than most brokers. They therefore can be competitive with the very companies they are selling the notes to. Many of these experienced companies give excellent service and can help the average broker "clean up" a hard-to-sell cash flow. 

Many brokers are now developing very large warehouse lines of credit and are able to buy cash flows and accumulate them in a portfolio. They then broker the better notes, retain some for their own portfolios and sell some individually. They are not "end" buyers, but are creating a market for more marginal notes, that could be brokered elsewhere. 

More courageous brokers are staking out niche markets, such as business notes without land, defaulted notes, mobile home notes, 80-10-10 notes and even more risky cash flows. These notes are then "seasoned" and the better ones are brokered to the end buyers. We are glad these innovators are pushing the boundaries of the industry.

Many, many note buyers are offering terrific service and give great help in closing "tough" transactions.

Some brokers say they are end buyers, but are not. If you naively send them a cash flow, you may find it brokered to every other name on your buyer list. Very embarrassing! 

As some of our readers know, we have a $16.5 million cemetery note under contract. We offered the note to a buyer who said he specialized in buying very large commercial notes. Within a day it appeared on one of the note bulletin boards and when we presented it to a new note buyer he said, "I have seen this note twenty times!" It had been ruined for us. In fact, I got an email from a note broker who knew we had a cemetery note for sale and wanted some advice, because he too had found a cemetery note he wanted to sell. As you can guess, he was trying to sell us the very note we were selling. A horrible and humiliating situation for all of us.

A more common problem with corporate note buyers who are not "end buyers" is the delay they can cause. We sent a large note to a buyer, who said his underwriters were looking at it. I don't think it is a good policy to "shop" a note, so we waited three weeks. Finally, the buyer said he could not purchase the note. We then went to another buyer who said he had already seen the note. The note had been "shopped" by the buyer we were hoping to sell to. Another humiliating experience. 

Finally, a few note buyers have become adept at promising great service, good prices and a fast close. The reality is they get your package and then shop the note, tie it up, delay the eventual sale, but above all they alienate the note seller. On large commercial notes this becomes an enormous problem. We had one large note tied up for over six months. The note buyer said he was close to closing it. It was like being strung out on dope. "Just a few more days," he says. Or, "We just need this one more document." Or, "My buyer has your package in his briefcase. He is getting back to me next week." These delaying tactics signify a transaction that will never close and a note buyer who is less competent than Monica Lewinsky's dry cleaner. 

So, yes I am angry that some note buyers play games with note brokers. But there is something we can do about it. We can share our brokering experiences and reward the great corporate note buyers and weed out the poor ones. We do this by communicating with each other. Conventions, email, classes and web sites all facilitate the exchange of information in our small industry. If you visit the Direct Connect web site at you will find the beginning of a dialogue on the quality of the service we get from corporate note buyers. Most comments are very positive and enthusiastic. Some are quite negative.

Don't forget, it's important that we brokers also conduct our businesses professionally. We must learn the rules for submitting cash flows to buyers, we must learn the appropriate buyers for each kind of cash flows and we have to know how to negotiate, package and close the transactions. In return we should expect professional support and service from the corporate note buyers. Please submit your comments to me. I have posted the names of the companies I dealt with above on the site.

About the Author . . . 

Jon Richards is a licensed real estate broker, long time real estate investor and an expert in finding, appraising, buying and brokering discounted notes and mortgages. He is also the President of NoteWorthy Investments, Inc, a fifteen year old California Corporation. His company buys 7 to 10 real estate notes each month and has a portfolio of several million dollars in real estate mortgages and other cash flows. 

Jon is also the author of several excellent home study books and courses, including: 

Profits in Discounted Notes

How to Start a Profitable Note Business

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