Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital
Your favorite Master Note Buyer – Straightforward, Honest, Fair…
One of the most common tasks that any new note broker should learn to do is how to “qualify” a potential transaction before presenting it to a note investor for pricing. The word “qualify” is in quotations because there is no actual qualifying for a note purchase that needs to take place as compared to qualifying for a loan to purchase a property. By “qualifying” a transaction from the beginning it will save everyone involved any wasted time on a transaction that will never happen.
The definition of “qualifying” is to declare competent, eligible or capable and to certify. In thinking about it further, that is exactly what every note broker should be trying to do every time a note holder contacts them. When a note holder initially contacts a note broker for the first time the note broker needs to determine as quickly as possible whether it is worth the effort for them and for the note buyers to continue the conversation by looking at some key factors. Three of these factors, among others, include – building a rapport, compiling all of the necessary information on the worksheet and determining if the note holder has a real need for cash. All of that may seem like a lot to do on one phone call but what’s the hurry. Each one of those factors will help the note broker “qualify” the lead to determine whether the note broker will be able to assist that person, whether it will be a waste of the note broker’s time, whether it will be a waste of the note buyers time and if the note broker will be spinning his or her wheels on something that no one can help them with. Let’s take a look at these three factors separately and see how each helps us “qualify” the lead.
When that note holder first contacts a note broker from the various marketing efforts they have chosen, the note broker has one chance to make a first impression, build that rapport and start a relationship. One of the things that successful note brokers do is to try to get those note holders to talk to them about something other than their note. They might ask them questions about where they live, the weather, sports, pets, family or whatever until they hit on something that they might have in common. Maybe they like going fishing like some note broker’s do, maybe they just had a hurricane blow through the area and the note broker saw it on TV, maybe a sports team in their area just won a championship or maybe they have the same type of pet or number of children as the note broker. Whatever it is the note broker tries to find that one thing they have in common with them and then build on that to develop that rapport and relationship. When the note broker is able to do that the conversation between the note broker and the note holder is much more relaxed and friendly. The note broker will find that they are able to get straight and honest answers to the questions on the worksheet and the note holder starts to open up and feel comfortable in talking with them about what may be the largest asset they own. If this part of the “qualifying” process is not done it will not matter how well you do any of the other qualifying factors.
The next factor in the “qualifying” process for the private mortgage note niche would be to compile the information on the worksheet as completely and accurately as possibly. Generally a note broker will have note buyers that will give them an offer on any existing first position note that is secured by real estate. Does it make a difference if the note broker only has some of the information on the worksheet and not all of it? Absolutely! With a complete and accurate worksheet a note buyer will be better able to determine exactly what their interest in the note would be. The first thing a note buyer usually looks at is the Loan to Value (LTV) ratio. A note broker should have learned this in their beginning training but it deserves to be repeated. Loan to Value is one measuring stick to measure risk. It is just one thing the note buyers look at that helps them determine how collectable the note will be and to determine their yield requirement for that particular note and at what maximum investment level they want to be at. Would a note broker think the note buyers would pay more for a note where the buyer put down a 20% down payment or a 0% down payment? If the note broker said 20% down is more valuable you were right! This is something that a note broker will be able to determine right up front. So if a note holder is expecting a high price for their 0% down payment note the note broker will know right away that they are unrealistic in their expectations and the note broker can make sure they know that before they waste their time and the time of the note buyers.
The note buyers are then going to look at the type of property. Please don’t just put down commercial, residential or land. Tell the note buyer exactly what kind of property it is such as a single family home, mobile home with land, duplex, condo, a ten unit apartment building, single unit retail building, strip mall, dog kennel, or 2.34 acres of land, etc. If it is a mobile home with land, find out what year the mobile home is and whether it is a singlewide, doublewide or triplewide. If it is a commercial property try to find out what kind of a commercial building it is (a restaurant, office building, strip mall, etc.) and if the buyer is using it for his or her own purposes or if it is income producing. If it is land try to find out if there are any improvements on it such as fencing, a well, septic tank, sewer system, utilities to the lot line or a crop on it. All of these things will help the note broker “qualify” the potential transaction; for example if the note is secured by a 1969 SW mobile home and the sales price did not include the land the note broker would no that this note is not very saleable at all and would be able to inform the note holder that this is not something we can usually help with. A complete and accurate worksheet will help the note buyer see the entire picture and allow them to better give the note broker an accurate price and options that the note broker can present to the note holder.
Note Brokers need to know a few details concerning “qualifying” second position notes. Notes that are in second position are very risky for note buyers and are normally not worth much at all. Generally, a second position note on anything other than a single family owner occupied home is not a saleable note. So note brokers should not waste their time or note buyer’s time with them. More in depth, if the second is on a single family owner occupied home and there is at least a 10% cash down payment at the time the property was purchased then there might be a slight possibility that a note buyer would be interested. The final criterion to determine if a note buyer would be interested in a second position note is that (generally) the size of first mortgage should be no larger than two times the size of the second mortgage (a 2:1 first to second ratio). For example, if a note holder calls you with a $10,000 second the first should be no larger than $20,000. If the second does not meet that criteria then it basically has no value to our funding sources and you should not waste your time and definitely do not waste the funding sources time. Note Brokers have seen very few second position notes over the last several years that have actually met those criteria. Don’t spin your wheels on second position notes.
Now we are down to a third factor in the “qualifying” process. At this point a note broker has built up rapport and compiled the necessary information on the worksheet which has helped in determining if it is a saleable note and which note buyer would be interested in the note if any at all. Now the note broker needs to determine whether or not this note holder has a real need for cash. The note broker filled out the worksheet and is down to the motivation section. Should the note broker ask “…what’s your motivation?” Or “…do you need any cash now?” Most wouldn’t. Let me give you the copyrighted number one question to ask to determine if the note holder has a need (and this will work for just about any income stream). Here it is…”Gee, that’s a great note! Why would you want to sell that?” If this is said with conviction and in a friendly tone the note broker will get one of two answers. The first answer might be “…oh, I don’t really need to sell now…I was just kind of curious…your letter said to call so I did…” That person does not have a need to sell. The second answer you might get will be “…my wife has cancer and I need money for medical bills…I want to pay off my credit cards…I want to take a vacation…buy a car…pay for my sons college tuition…buy 50 cows…” Those people have some kind of a need or want. They may or may not give you a figure of exactly how much they need but at least the note broker will now know that the motivation is there. If the note broker properly built up the rapport, developed a relationship, compiled all of the necessary information and determined the motivation; then the note broker is now in prime position to meet their needs and get them to accept one of the options.
Now the basics of how to “qualify” a private mortgage note lead have been defined. With this information a note broker will now be able to better determine if a lead is worth pursuing or not. The note broker will now know if the note holder is realistic and has a need to sell and if the transaction warrants spending more time on it and deserves to be sent to a note buyer for pricing.
Remember, success demands action! Keep on marketing and qualifying those leads, it’s going to work! TWITA! (That’s What I’m Talking About!)