Article by Frank O’Hara
Real estate investment has long been recognized as one of the surest paths to wealth and financial independence. And one of the most attractive ways to make money in real estate is to buy and to broker notes.
Sellers of real property often take back a note–an “IOU” for part of the purchase price.
Marketable commoditiesThis note is usually secured, depending on the state, by a trust deed or a mortgage. These privately held notes are marketable commodities and can be bought, sold, and traded at a discount.
Note buyers often make more income buying a note secured by real estate than they could by buying the actual real estate.
Owning only the note–rather than the real estate–allows investors to avoid property management, property maintenance, and rent collection.
Furthermore, notes can offer investors a high degree of risk control. Knowing the loan-to-value ratio on a property and the credit history of the payer, you can predict a transaction’s return very accurately.
The “THE TIME VALUE OF MONEY” – The time value of money is the reason that notes are sold at a discount. Due to inflation, a dollar today is worth more than a dollar tomorrow.
Therefore, if an investor is willing to give you cash today for promised future payments, he or she must discount the face value of these payments to account for inflation. In addition, the investor can determine the economic risk in receiving these payments and can request an additional discount.
The total discount is referred to as the investor’s yield. This yield is the return that an investor requires to assume the risk.
THE MARKET – Privately held real estate notes are created at an estimated rate of nearly 0 billion per year in face value. At any one time, there are approximately 260,000 notes that are available in the United States. And new notes are created at a rate of nearly 40,000 a year.
BROKER’S COMMISSION – When the holder of a note needs cash, he or she looks for an investor to buy all or a portion of the note.
A note broker earns his or her commission by bringing together both the note holder and the note investor.
Some of the many reasons a note holder may decide to sell all or a portion of his or her note could include:
•Other investment opportunities.
•Debt relief.
•Asset purchase–boat, car, RV, etc.
•Medical bills and emergencies.
•Children’s educations.
•Business expansion or inventory.
•Vacation, weddings, etc.
•Funeral or probate expenses.
•Getting involved
You can enter the note-buying business, which is often referred to as the “cash-flow industry,” in any one of the following three roles.
1. As a note investor: You can buy real-estate-secured deeds of trust or mortgages from brokers or note sellers.
2. As a finder: You can find note sellers and then refer them to brokers or investors who will buy the notes and then pay you a finder’s fee.
3. As a broker/investor: You can find and buy the notes for your own portfolio, then resell them to private investors, recast them for greater profits, keep part of a note and sell part, or use notes acquired at a discount at their full face value as a down payment when you buy other real estate.
PROS AND CONS – The first two participation options don’t involve paperwork, don’t require a license, and can provide a good way to get started. The third and most lucrative option does involve paperwork, some technical knowledge, and the ability to work with other professionals.
Note brokering is a service that people need. It provides investors and the customers they serve a great deal of satisfaction.
SOLID REPUTATION – By serving buyers and sellers well, note brokers/ investors are not only respected, but are sought-after professionals.
© 2011 O’Hara Publishing Enterprises. All Rights Reserved.
About the Author
Frank O’Hara is a freelance business writer, author, publisher, webmaster and CEO of O’Hara Publishing Enterprises. and offers additional real estate know how on how to make money with foreclosures, REO’s, probates, fixer-uppers, no money down deals, commercial and residential properties and much more at his web site: http://realestateknowhow.tripod.com.
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