Building Cash Flow Without Cash – Formula 5 “Flipping Paper”

You’ve heard of flipping houses, haven’t you? This has become well-known over the past years, mainly because of many Real Estate “Gurus” teaching seminars, writing books, selling tapes, etc. There’s even been some bad connotations from various forms of government; primarily because they don’t understand it, instead they believe & do whatever the Banking Industry tells them to do. I don’t mean to get off on a political soapbox; however, the kind of house flipping I know about and have written about is perfectly legal and if done right, benefits all parties.

So what about this “Flipping Paper” thing? Well, it’s a lot like flipping houses. It is also quite similar to being a Bird Dog for house-buyers, as I discussed with you in one of last week’s articles.

What I’m going to discuss with you now is exactly what I did when I first got in the paper business. I took a seminar taught by Mike Meeker, a well-known and excellent teacher, who I believe is now retired from teaching. I also believe he is living in Florida, or was when I last had contact with him.

Anyway, back to our story. This was back in the late 1980′s and I had no money available for investing. Here is the concept: You want to find Real Estate “paper” (Land Contracts, Trust Deeds, Mortgages, Notes) that is “For Sale” or will become for “For Sale”. To make it simple, let’s just call all these different types of paper, “Notes”. You are looking for Notes that were created in an Owner-Financed sale of Real Estate. Because of today’s market, these types of notes are plentiful; however, in any kind of market there will always be these “Private” Notes available because many buyers can’t qualify for Bank Financing and many properties won’t qualify for Bank Financing. To give you an idea of today’s market, just take a look at any major newspaper’s “Real Estate For Sale” section, and look for those ads that state “Owner Financing”, “No Bank Qualifying”, “Special Financing”, etc.

Trust me on this point; there will ALWAYS be Private Notes available and many of the owners of these notes would rather have a large chunk of cash Now rather than monthly payments over X number of years. Also, there are and always will be Private Investors (and sometimes big company investors) who buy these notes. Why? Because almost ALL Private Notes can be bought at a substantial discount. Why? Because of the greater risk involved in these non-qualifying buyers and/or properties. In fact, I have never seen or heard of anyone who would pay 100% on the dollar for a note.

So let’s start putting this together. Remember, you are going to function as a “Middle Man”, not-unlike the “Bird Dog” mentioned earlier. Here’s how we get started:

Find the Notes. There are numerous sources; such as Realtors, Title Companies, Real Estate Attorneys, etc. You can run a short ad in your local paper, such as – “I Buy Real Estate Notes” or “Top Dollar For Your Real Estate Note”. If you scan the ads you may see other people looking for notes. Don’t worry – There are enough to go around.

You could also look for ads offering “Owner Financing” in order to sell a property. Call the person, then ask them if they might want to sell their note after they close on the sale.

So let’s say you find a note for sale, what now? You need to have funds available to buy the note. Where do we get that? How do we know how much to pay for the note?

Just as we discovered how to find and buy Real Estate paper, which we will refer to as “Notes”, we will more or less use the same tactics to find someone whom we can flip these notes to, for a profit. Good sources are Realtors, Real Estate Attorneys, CPAs, Financial Planners, Stock Brokers, Loan Officers, etc. However, the best probable way is the old “Ad in the Newspaper” formula. You could advertise with words like “Real Estate Note For Sale” or “Investor Needed To Purchase Real Estate Notes”. Check the newspapers and Yellow Pages for ads like “We Buy Notes” and/or “Top Dollar For Your Notes”. In other words, look for the same ads we saw and used to find Notes to buy & flip.

When you find an Investor or Note Buyer, you need to determine the requirements and perimeters of the Note Buyer, such as:

What kinds of properties will they accept as security for the note? For example, Single Family houses, Land or Lots, Apartments, Commercial Property, or Mobile Homes with or without Land.

What kinds of minimum yields do they want from the notes they buy? This will vary based on many factors, such as security for the note.

Investors will want greater yields on higher risk notes. For example, a note secured by a Single Family, Owner-Occupied (with excellent pay history) would probably require the lowest yield, let’s say 12% return on the investment. On the other end of the scale might be Raw Land, wherein an investor may require 18% or 20%. In this article I’m not going to get into how to calculate yield. I will, however, recommend that anyone interested in these types of deals purchase a good financial calculator or software.

Examples of other things an investor may require are Title Insurance, Appraisals, Credit Reports, Casualty Insurance, etc. These things discussed above need to fit the investor which you may be dealing with.

OK, so now we have found a note to buy on a Single Family house. The face amount of the note is $80,000 with 10% interest payable monthly over 20 years. You know that the “Going” investor yield requirement for this type of note is 12%, which you could sell this note for $70,115. So for you to make a profit of, say $4,000, you offer and get accepted a bid of $66,115. You should actually get a written contract to buy the note from the owner, preferably an “Option To Purchase”. You have to keep in mind who is going to pay things like Title Insurance, Closing Costs, etc. If you are going to pay for these costs, you better subtract the amount of these costs from your offer to the owner of the note. Investors do not normally pay these costs.

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