There are two first funding sources for buying notes to keep for your own portfolio. The 1st would be institutional sources. Many are quite successful working with establishments and we will talk more about them in a later issue. The second source is’hard money’ speculators. This ranges from individuals to small corporations and allowance funds. There are a few nice sides of using hard money investors and some caveats we will chat about also.

Here’s what’s good:

• Quick funding
• Flexibility
• Collateral qualification
• Stability
• Referrals

QUICK FUNDING

Correctly trained and cultivated personal speculators with liquid funds can write a check on the spot. This implies you can have the capability like a frog in the pond with a big tongue to snap out and capture a good note before it flies away. Quick funding can give you the keenest edge and edge over your competitors. Some of my absolute best notes come in this manner.

FLEXIBILITY

Hard money investors can weigh individual situations and wander from set standards and procedures when it makes sense. As an example, what if you have a note where you want to move quick but getting an assessment would take too long. Yet, it is simple to run some ‘comps’ and know that it is a safe note. A hard money investor may look at this, fund the note and wait for the appraisal to come in after the purchase. Some of my financiers like creative deals where they might love to get the collateral back or where a problem or delinquent note needs to be straightened out.

COLLATERAL QUALIFICATION

Hard Money investors incline to take a look at the collateral for their call to loan against a note. An establishment may need to personally qualify you to pay back the note if the payor didn’t pay you. A personal financier is much more likely to take a look at the payor and the final recourse – the collateral.

STABILITY

Few things are as frustrating as creating a relationship with someone at an establishment and having them moved to another branch or position where the relationship does you no good. Non-public investors don’t change their policies as immediately as institutions.

REFERRALS

Institutions will seldom give you referrals, but hard money investors that you treat right can be your greatest fund raisers.

WORKING WITH HARD MONEY INVESTORS

First I’m going to talk about how to work with hard money investors properly, because some of this information has a bearing on how to find the investors. We’ll discuss finding them next.

Here are the important points:

• Qualification
• Education
• Documentation
• Protection for them
• Protection for you
• Full disclosure
• Share the wealth

QUALIFICATION

A friend told me one time how he had a’stable’ of over a hundred financiers but was not getting any notes placed. In my perspective, he did not have speculators, he had a mail list. Potential investors,’wanna be’s’ and’looky loo’s’ spend time and frustrate many note buyers. Take it one step further and qualify the note purchaser. Determine their funds, parameters, speed and desire. I ask investors the following questions :

• Have you purchased or loaned against notes before?
• What education or experience have you had related to real estate or mortgage loans?
• How much money do you have got to invest?
• Where are these funds and how long would it take you to get at them?
• If I presented you with a note funding opportunity today, how long would it take you to make a decision?
• Would anyone else have to be involved in the choice making process?
• What would you think of as a good’safe rate’ rate of return for your money?
• What kinds of notes would you be comfortable owning or lending against?
• What types of notes would you not buy or lend against?

Those are a sample of the type of questions that you would ask an investor. Even after blunt questions, you may only know the seriousness of an investor when you put a deal in his or her hands.

THE “UNAVAILABLE AVAILABLE NOTE”.

Even if I believe I have got a firm funding commitment from another investor, I may run a note past investors that I’m trying to qualify. I may preface it with ‘I have other investors interested in the note, so you will need to move quick if you would like this one.’
One of a few scenarios take place.

They may squirm, come up with excuses or admit that their funds are not liquid or are coming from a banker, etc . They step up to the pump and give you a back up offer if your other funding doesn’t pan out. When a speculator misses a note, they become more anxious. They know the deal was good, because the demand was strong.

I have speculators that I even provoke softly about this with statements like ‘you sleep, you loose’ or ‘you don’t steal in slow motion.’ They know they must move faster next time or get nearer to the front of the line by lowering their cost of funds.

HE WHO NAMES A NUMBER FIRST LOSES

The last thing you wish to do is to violate an investors ‘too good to be true theory’. They may believe a risk vs rate of return idea that says a lower rate of return is more safe. You might scare them with 18% when they might be excited with 14% on the very same investment. You should also be much more cheerful with paying the lower rate. So, ask the financier what they feel a good rate of return would be and negotiate from there.

EDUCATION

I can give the financier as much education as they desire about the safety, terms, refunding or qualification of notes. I put the cutoff point when it comes to teaching them the simplest way to find notes or any other abilities that would cause me a ‘commission-dectomy’.

DOCUMENTATION

Document your calls, chats, conferences, agreements, notes presented for their review, and so on. Speculators are human and forget agreements, how hard you’ve worked, what you’ve told them, and so on.
Notes of meetings kept in your daily planner are now even being admitted into court cases as proof.
My concern isn’t winning in the rare case of a grim mis-understanding with a backer, but more along the lines of preventing an argument from ever taking place. I had a case where a speculator saw me making a $2,000 commission on a little note. The look they’d was like’what did you do to earn that much?’ and I wish at that time, I had documentation of the dozen or so other notes they’d turned down and the conferences, time and cost that went into them.

PROTECTION FOR THEM

Be ‘hyper-vigilant’ in defending your financier. Don’t sell a unsophisticated investor a note you wouldn’t buy. They’ll appreciate the protection and your long-term reputation and image will receive rewards much more than a fast commission on a dubious note.
confirm every detail is handled – even if they are the ones who should be doing it.

We had a case where an investor appeared to know what he was doing and his bank drafted the paper work for the purchase. As I signed the papers the bank prepared, I spotted they had not drafted an ‘Assignment of Trust Deed’. I was in a little shock since my entire office had fried in a fire a couple of days earlier and didn’t pay much attention to it.
I did not even have a PC to draft the document and was in a daze from the fire anyway. I assumed they would contact us later. Well, later came – almost a year. By that time the note consumer was feeling exasperated and mis-treated over one straightforward document that his bank escrow officer should have prepared. Yet presumably he knew what he was doing.
If something isn’t done quickly, properly or at all, you will take the heat for it, even if it was real clear that somebody else was meant to do it, so take care it is done right – always! Even if you lost many thousands of bucks and a massive piece of your life in a fire a few days before.

PROTECTION FOR YOU

In light of what I’ve just related above, make sure you always protect yourself with paperwork, agreements, declaration and careful investigation into the work and efforts of others. Have a signed statement as to the main points of the exchange with the note consumer. Detail out any potential dangers, quirks of the particular note, responsibilities, guarantees ( or the lack ), for example. Put a little time into drafting a disclosure statement that covers that note and general risks of all notes.

FULL DISCLOSURE

With each note and each investor, I go through a Ben Franklin’T – Form’ that shows the benefits and disadvantages of a transaction. For example, maybe they’re having a look at a higher than standard LTV proportion ( con ) in return for a tasty yield ( pro ). In another case, maybe the buyer has dubious credit ( con ) and a slow payment history ( con ) but the LTV proportion is real low ( pro ). There are trade-offs some times.

SHARE THE WEALTH

When things go well, we like to bonus the investor. Money or some sort of’spiff’ like a visit to Hawaii can go a good distance. The little things can make a gigantic difference occasionally.

SELLING TO HARD MONEY INVESTORS

Up to this point, I have made small distinction between selling to hard money investors and borrowing from them. It is vital that you read this section that I would consider the most important of the whole article.
I do not like to sell to hard money backers. There is a liability any time you are dealing with a unsophisticated financier. Notes can have issues that a new-b financier may not deal with correctly. For example, a note may go delinquent and the investor is shy, slow or inexperienced in solving the problem. The difficulty gets bigger and what might have been a great note turns into a lemon.
An institution likely would not permit this to happen and wouldn’t turn to blame you if it probably did. Unsophisticated hard money financiers can turn to you when they don’t do their job correctly and even experienced or sophisticated stockholders may claim you took some unfair advantage.
I prefer to run up debt against the notes, be in control, collect the payments, guarantee the money flow and make sure the note is treated professionally. What I don’t like is ‘liability without control’, so if there is any liability, I need the control to minimize it.
I prefer to borrow for many other reasons too. It is the most lucrative approach to note investing. You may like it when you see it and will not want to do it any alternative way