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Know and Grow Your Note Biz

Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital

Your favorite Master Note Buyer – Straightforward, Honest, Fair…

Those who consistently make money in the seller financed note business know the note market. They know the interest rates and how they affect the value of a note. They know the location and the history or story behind the note. They know what investors are buying and what they are not. They know the cause and effect that demography, crime and unemployment reports have on a notes value. They know everything about each area where they invest. They have to know it all. Staying ahead of the competition in the seller financed note business means doing your homework. If you are new to the business, it can be daunting, but in this article I will share with you a few tips that the old pros use to get ahead of the trends instead of chasing them. You may not have thought about some of these and others may surprise you.

Study Property Values – The first things to study are the current property value trends in and even down to the value trends in some specific areas where you get notes from. For example, when considering a note for purchase a potential note investor should look to see if the value of properties is accelerating faster in one area than in others. Next, check to see if the average property value is more than in other neighboring towns. This will provide an idea of where the biggest demand is and where the safest (or less risky) notes may be. Another reason to study these trends is that, over time, you will start to develop a sense for which values are “fair” for certain properties and which are overpriced. Having this knowledge will help you understand better which areas are less risky than others to invest your own dollars in notes. It will also help you understand why note investors price notes in certain ways in certain areas when you are brokering the notes.  For individuals looking to buy seller financed notes at the most reasonable prices, this knowledge can be invaluable. Some have said that note investors know property values across the nation better than any other types of real estate investors. To collect this kind of data realtors, real estate agents and even other note buyers are a terrific source for this information given their access to the Multiple Listing Service (or MLS). The local newspaper, the internet and the town hall may have a record of recent property values and sale prices as well.

Look for a Catalyst – One sign that an investment in a particular seller financed note may be less risky for note investors is the development of new infrastructure, if an area is up-and-coming and that it will be desirable in the future that may make the notes secured by the properties in that area more valuable. When you see new roads and schools being built, it’s a sign that the community is set for a growth spurt. Investing in a growing community can be very profitable. In addition, certain types of development, like new shopping centers in an area, may be extremely attractive to some note investors.  Spotting new developments can be as easy as looking out your car window as you drive by but most note buyers purchase notes across the country and we need a few other ways to spot these areas. Telltale signs of land clearing, surveying or the beginnings of construction in and around major roadways are pretty big tip-offs. Also, look for widening of traffic lanes, the installation of turnaround lanes and the erection of new traffic light can all suggest the possibility of increased traffic flow to support new growth.  Online you can visit town hall websites at the municipality or the county level, and speak with the road and the building departments. They should be aware of any major projects slated to begin in the area, and they may even be able to provide you with a connection at the state level so you can find out if any state-owned roads or properties are slated for development as well. The pros in the note business know how to recognize these things when doing their due diligence before purchasing a seller financed note.

Watch the Outskirts – If the properties in a major city or town have become overpriced, the areas on the outer fringes most likely will soon be in demand. Areas in close proximity to major bus and rail transportation are even more desirable. Nearly any area that is about to install a major train stop or a new major bus route will see its proverbial stock go up in value. What does this mean to people in the note business?  Well, if you have ever read some of my other articles especially about marketing you would find out that a good majority of seller financed notes that are purchased and brokered every year are in those outlying areas around major cities!  Some ways to learn more about the outskirts and to find out what’s planned for the future, you can check with the local railroad or bus company to see if they will be expanding service in the area, yes really. The local town hall or planning department may also have this kind of information.

Know your Note Investors – Whether you are brokering seller financed notes or buying them for yourself you need to know what other note investors in the business are doing and why.  What areas are they buying notes in, what areas are they avoiding, what is their maximum possible pay price for a AAA note, what are their yield requirements, what are their risk tolerances, do they have a minimum discount and if so how much and why, are they buying fulls, partials or splits, what is their minimum and maximum investment into a single note?, etc. This knowledge alone will help you become much more efficient in pricing notes for your own investment purposes and if you are brokering notes it will absolutely give you a leg up on the competition by knowing exactly where to send what types of notes for the quickest response and pricing options.

Think longer-term – Now, I already know a few successful note professionals who think this way, but they approach it mainly from the angle of trying to get everyone they work with to refer them to family members and friends they know that are holding notes. Then when those note holders are in need of cash they will more likely go to someone whose friend or relative referred them to sell all or part of their note. What I’m talking about is looking at your seller financed note business in the way that USAA approaches the insurance business. They don’t look at each insurance buyer –at least not in their advertising. They look at the entire family. They’ve made it desirable to hand down their insurance from parent to child and set restrictions on who can buy their products.  What would happen to your note business if your response to someone who wanted to sell their note to you was, “Well, let’s see, who do you know?” What if you set a requirement that to find the note pricing options for them, you have to have been the note buyer/broker who helped one of their parents or friends?  Okay, that’s probably taking it too far, but that’s how you get to the best ideas.  Being the official note buyer for a family, a community or a town doesn’t mean you have to work with every single note holder within it, but it does mean you have to accept the connections between people in that group and treat them all like potential note sellers, even when the only transaction is a new lead.  Making yourself seem more valuable by implying that there are limitations to those you will serve could put you in higher demand. Acting like you are dedicated to serving every member of a given group, just because they are members of that group, will make it easier for you to attract business from them. Try it, think longer term and build those relationships for future referral business.  It will work – until the first time you turn your back on a member of the group because they won’t sell you their note right now.

The bottom line is that growing your note business means knowing your note business.  It pays to do your homework and to tap into whatever resources you can to determine which areas are good for note investing now and, more importantly, which ones will be good in the future. Much of the information I’ve mentioned above is out there and free for the taking. You just have to be willing to do the leg work.  Remember, success demands action! Keep on marketing (and building that referral business), it’s going to work! TWITA! (That’s What I’m Talking About!) J

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