Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital
Your favorite Master Note Buyer – Straightforward, Honest, Fair…
Recently, I had a conversation with Neal Polshuk of Millennium Funding. As you may know Millennium Funding is a factoring funding source and you may be asking yourself why would a seasoned private mortgage note guy be talking with a factor? Well, the more connected you are in this small cash flow industry, the more you can learn and the more you can do. Neal was explaining to me that when a consultant first contacts his company and wants to concentrate on the factoring niche they try to assist them by teaching them the proper way to “scrub” leads for them. I didn’t exactly understand what that was so Neal explained to me that they teach the consultants what they look for as far as who they like to buy invoices from, what size of invoices they prefer, what industries are better than others, what kinds of companies are better than others and even where to start looking for them. Oh, I thought to myself, I have been “scrubbing” leads for years in the private mortgage niche and didn’t even know there was a term for it!
The definition of “scrubbing” is to scour, wash, clean, polish, brush and cleanse. In thinking about it further, that is exactly what we should be trying to do every time a note holder contacts us. When a note holder initially contacts me for the first time I want to determine as quickly as possible whether it is worth the effort for me and for the funding sources to continue the conversation by looking at three key factors. I do this by building a rapport, compiling the necessary information on the worksheet and by determining if he/she 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 items will help you “scrub” the lead to determine whether you will be able to assist that person, whether it will be a waste of your time, whether it will be a waste of the funding sources time and if you will be spinning your wheels on something that you can’t help them with. Let’s take a look at each factor separately and see how each helps us “scrub” the lead.
When that note holder first contacts you from your various marketing efforts you have one chance to make a first impression, build that rapport and start a relationship. One of the things that I do is to try to get those note holders to talk to me about something other than their note. I’ll ask them W.O.R.M.S. questions (yes because I am a bass fisherman). I ask about the Weather, their Occupation, what they like to do for Recreation, what their Motivation might be and their favorite Sports or whatever until I hit on something that we might have in common. Maybe they like going fishing like I do, maybe they just had a hurricane blow through the area and I saw it on TV, maybe a sports team in their area just won a championship or maybe they have two daughters like I do. Whatever it is I try to find that one thing I have in common with them and then build on that to develop that rapport and relationship. When I am able to do that the conversation between myself and the note holder is much more relaxed and friendly. I am able to get straight and honest answers to the questions on my worksheet and the note holder starts to open up and feel comfortable in talking with me about what may be the largest asset they own. If this part of the “scrubbing” process is not done it will not matter how well you do the other two parts of the process.
The next step in the “scrubbing” process for the private mortgage note niche is to compile the information on the worksheet as completely and accurately as possibly. Generally we have funding sources that will give you an offer on any existing first position note that is secured by real estate Does it make a difference if we only have some of the information and not all of it? Absolutely! With a complete and accurate worksheet a funding source will be able to determine exactly what their interest in the note will be. The first thing they look at is the Loan to Value (LTV) ratio. You should have learned this in your training but I will repeat it again for you here. Loan to Value is one measuring stick to measure risk. It is just one thing the funding sources look at to determine their yield requirement for that particular note and at what maximum investment level they want to be at. Do you think they would pay more for a note where the buyer put down a 20% down payment or a 0% down payment? If you said 20% down is more valuable you were right! This is something that you know up front. So if a note holder is expecting a high price for their 0% down payment note you will know right away that they are unrealistic in their expectations and you can make sure they know that before you waste your time and the time of the funding sources.
The funding sources are then going to look at the type of property. Please don’t just put down commercial, residential or land. Tell the funding source 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 acres of land, etc. If it is a mobile home with the 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 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 can help the funding source see the entire picture and give you an accurate price and options that you can present to the note holder.
Let me also tell you a few pieces of information concerning “scrubbing” second position notes. Notes that are in second position are very risky for the funding source 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 don’t waste your time or the funding sources 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 we could find a funding source. The final criteria to determine if a funding source will 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 (generally, there may be a few sources that will look at up to a 4:1 first to second ratio). 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. I have seen very few second position notes over the last several years that have actually met those criteria.
Now we are down to the last step in the “scrubbing” process. At this point you have built up the rapport and compiled the necessary information on the worksheet which has helped you in determining if it is a saleable note and which funding source would be interested in the note if any at all. Now you need to know whether or not this note holder has a real need for cash. You filled out the worksheet and you are down to the motivational section. Are you going to ask “…what’s your motivation?” Or “…do you need any cash now?” I wouldn’t. Let me give you my copyrighted number one question to ask to determine if your 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 you say it with conviction and a friendly tone you 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 you will now know that the motivation is there. If you have built up the rapport, developed a relationship and gotten all of the necessary information you are now in prime position to meet their needs and get them to accept one of your options.
So now you know how to “scrub” a private mortgage note lead. With this information you will now be able to better determine if a lead is worth pursuing or not. You will now know if the note holder is realistic or not. You will now know if the note holder has a need or not. Keep up your marketing efforts and “scrub” those leads.