What Is Paper?

Throughout the nation, the term paper is generally defined as any kind of debt instrument where one party is obligated to pay another. Paper comes in may forms, many of which we won't deal with in this course such as, structured annuities, lottery winnings, viatacals, company receivables, etc. For our purposes, paper is defined as any debt instrument secured by real estate and may also be referred to as a note in some cases. All of the following terms are applicable, including some not mentioned here: • • • • • • • • Mortgage Deed Of Trust (AITD) Land Contract Land Installment Contract Contract For Deed Agreement For Deed Real Estate Contract Bond For Deed

• Wraparound Mortgage • Lien • Judgment

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What Is Discounted Paper?
Almost anyone who buys an income stream will pay less then the face value at the time of purchase. This practice is called discounting. By discounting the present value of a note, a buyer can raise the yield or return on an investment to match their requirement. On the other hand, if the note buyer were to pay the full face value of the note, the return is equal only to the interest rate stated within the note. From the seller's point of view, it comes down to receiving their money over time as they agreed upon the creation of the note or converting it into cash now. (Think of winning the lottery…) The tradeoff for the note holder getting cash now is they must usually accept less than the face value (or remaining balance) on the note. Sometimes the discount is very small and other times it is large. The determining factors are the terms of the note, the quality of the collateral, the requirements of the buyer and what the seller is willing to accept.

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Seven Steps of Note Buying
1. 2. 3. 4. 5. 6. 7. Find the Note (Marketing) Collect Facts (Information Gathering) Analyze Deal (Deal Analysis) Option the Note from Seller (Negotiation) Do the Homework (Due Diligence) Get the Money at Closing (Closing) Invest the Money in High-Yielding Paper

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The Process Of Flipping An Existing Note
1. Find a note and find out what the seller needs. Never name a price until you find out what they will take. If it sounds reasonable based on what you've learned or, if the seller wants a quote and won't name the price, fill out a work sheet and submit to note buyer. The work sheet I’ve included is accepted by all note buyers. 2. You will receive a price and a list of items you'll need to close as well as a time frame for closing. YOU MUST OFFER your note seller LESS than your note investor is paying you. The difference is your profit. The note investor couldn't care less about what you make (within reason) and will protect your interest. How much less is on a case-by-case basis. There are no rules. That's why you should work hard to never name the price first. Example: Note seller has a $100,000 note but won't name asking price. You do your due diligence and quote $85,000 because your note buyer quoted you $90,000 so you can make $5,000. You will never know his bottom line. What if the same seller would have been thrilled to get $75,000? That's an expensive seminar. 3. Once you've agreed on a price, you must get a written agreement signed by the note seller. This Option to Purchase Agreement is often provided by the Note Investor. This should be done as soon as you reach an agreement, even before you get a quote if you're sure you'll do well. 4. Complete the documentation check-list to submit to the note investor and simply do as you're instructed from that point. Once they have the documents and are doing their homework (due diligence), your job is to communicate with the note seller until closing. Make certain the note investor knows your quote to the seller so he/she can cut you a separate check for your profit. Your seller should never know what you make.

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Existing Note Documentation Checklist For Due Diligence Before Purchase
• Social Security number and address of buyer in order to pull credit. • Name and address of the person selling the note with a contact phone number. • Contract between you and seller of note. (Option To Purchase Agreement – will be provided by your Note Investor) • Copy of the mortgage, trust deed or land contract you're buying. • Copy of the original Title Insurance Policy, if available. • Copy of the Hazard Insurance Policy (or evidence of hazard insurance). • Payment history. • Copy of appraisal, if available. If it isn't, you must get "comps" to determine the current market value. • Address of property owner, if non-owner occupied. • Copy of closing statement between previous owner of the property (note seller) and current owner. • Photos of property if available. • Any leases or rental agreements if occupied, if available. • First mortgage information if you're buying a second. The list contains those items you can request from the note seller. DO NOT confuse it with the closing checklist. Some of the above items are mandatory to close but not to make your decision to buy. See documentation checklist for closing.

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Documentation Checklist for Closing Pretty Paper
These items must be present at closing and will be required by any note buyer. They should be required if you're buying for yourself • • • • • • Original Note and Mortgage, Trust Deed or Land Contract. If the original is lost, ask your attorney or your note buyer what you need instead. Information on property owner making the payment. Title insurance update to note investor (prepared by closing agent). Hazard Insurance naming note investor as mortgagee. Appraisal acceptable to note investor. First mortgage status letter if you're buying a second. Payoff letter on underlying loans if you're buying a wrap. (Closing agent will acquire upon request or you can). Tenant information if rented. Estoppel letter from note seller. (Prepared by closing agent or note buyer). Properly executed assignment of mortgage, trust deed or land contract. (Prepared by closing agent or note buyer). Deed from note seller to you if you're buying a land contract. (Prepared by closing agent). Some note buyers will require additional documents but all will want the above items.

• • • •

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Letter to People Who Own Notes
Mr. & Mrs. Note Holder 123 Smith Street Anytown, State, ZIP

Monday, 9:30 AM Dear (Use Name), I have some very important information for you regarding the real estate note you currently own. In fact, I thought it important enough to send it Priority Mail to ensure you receive it. I'm sure you've received dozens of letters from people wanting to pay you cash for your note. You may have investigated some of these buyers only to find they had to shop around and play games with your time. Well, I'm not one of them. Do I buy notes? You bet. Lots of them. Am I interested in wasting everyone's time or playing games? Absolutely not! Listen, let me be very brief and to the point and then perhaps you will be kind enough to give me a call and I'll know in a couple of minutes if we could work together. Here's what I can do for you: I pay cash for real estate notes or land contracts anywhere in America. I pay top dollar and sometimes 100 cents on the dollar. I move fast and do all the work. I buy notes that are current and also those that are in default. Yes, that means even if your borrower isn't paying and hasn't for months, I'm still very interested in buying the note. 5. I can buy your entire note and write you a check or buy part of it giving you a lump sum and monthly income. Our conversation will be held in the strictest confidence. I'm usually in the office from 9 to 5 but my cell telephone number is: 610-3333 incase I'm not in. Let's talk. Warmly, YOUR NAME P.S. I grew up right here in Anytown. My kids probably attend the same schools as yours, listen to the same music and we probably dine at the same restaurants. I run a very simple business and I treasure my reputation. At the very least, your call will get us acquainted. Who knows where that could lead? 1. 2. 3. 4.

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Sample Investment Criteria — Residential
PROPERTY TYPES: 1-4 family, condos, townhouses and manufactured homes (no mobile homes). MARKET AREA: Nationwide CREDIT QUALITY: Credit of B plus (600) or better. All others are considered on a case-bycase basis. SEASONING: No seasoning required. We will purchase notes that are newly created at the closing of the sale of real estate. Pricing, however, favors the seasoned note! OCCUPANCY: We purchase both owner occupied and non-owner occupied residential real estate secured notes. INVESTMENT TO VALUE: INVESTMENT MAXIMUMS - 1-4 family, owner occupied 75%; Condo/townhouse, owner occupied - 75%; Non-owner occupied - less 5% POSITION OF NOTE: We purchase first position notes and wraparound notes (also known as All Inclusive Trust Deeds or AITD's). On wraparounds, the underlying mortgage balance must be paid prior to or at closing. PURCHASE TERMS: We will purchase up to a 360-month term depending on the deal. We purchase whole or partial notes. CLOSING COSTS: On existing notes, SMI Funding will pay for a title policy update and a drive-by appraisal. TITLE COMPANIES / APPRAISAL: Any nationwide title company is acceptable. Appraisals must be from a state certified appraiser with a copy of his resume and license. COMMITMENT TIME: We can usually provide preliminary pricing within 24-48 hours if sufficient information and details are submitted. ORIGINAL NOTE: Please be certain that the "original note" is available to be conveyed at closing. PROPERTY VALUES: Minimum property value - $50,000.00. MINIMUM / MAXIMUM NOTE FUNDING: $30,000 to $1,000,000. Anything under $30,000 and over $1,000,000 is considered on a case-by case basis. REQUIRED DOCUMENTATION: See Documentation Checklist. ALL PURCHASE PRICING SUBJECT TO CREDIT AND DOCUMENTATION http://RealEstateProfitCoach.com  Page 9 

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UNDERWRITING

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Buying Names of People Who Hold Notes
Names run about 50 to 65 cents per name depending how many you buy at a time. When you buy a list, follow the same steps you would had you gotten the names from the courthouse yourself. Don’t mail more than 10 or 15 pieces at a time or you will not be able to follow up with them in a timely manner. You should mail 1000 letters only if you can follow-up on all of them within a week.

If you want to buy a list, use the following criteria to order your names: • First lien deeds of trust or mortgages • Private Mortgagee • The property should be single family residential only • The deed or mortgage should be over 12 months old • The original balance should be over $50,000

The following is a list of companies that provide list services. They are familiar with seller-financed notes and are very reputable. _ DataQuick _ DMG _ InfoUSA.com _ AccurateLeads.com 888-604-3282 888-282-2122 800-321-0869 800-685-4787

Be sure and check the terms of the list company and abide by them. Some companies will only allow you to mail to that list once. They put in dummy names to make sure you do not violate the terms of the agreement. However, they provide

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the telephone numbers with the list and you can call the note holders as much as you want. Personal contact is what is going to get the sale for you!
SAMPLE LETTER TO ATTORNEY / MAY BE AMENDED FOR OTHER VENDORS

<Contact> <Company> <Address_1> <Address_2> <City>, <State> <ZIP> Dear <Salutation>: Providing your clients with the highest quality legal services is your purpose. Our purpose is to professionally assist you in offering another valuable service to your new and existing clientele.

<YOUR COMPANY> pays your client cash for their real estate secured notes. If you have a client that receives payments over time on a note, but has need for cash today ... CALL US! We will determine the present value of the note and offer to purchase all or a part of the note. And, we have programs available that can offer 100% of the note balance to your clients.
The benefit is clear. There is a fast infusion of cash into your client's account. There is now money to pay outstanding legal fees, court costs, personal and business obligations, etc. We fund quickly and the price we give you is the amount your client actually receives. Additionally, we pay all costs of escrow, appraisal, title insurance update and processing. Think of your clients and potential clients who have: Sold a property and carried a note but want cash today. Divorced and received a note for their share of the home equity. Filed bankruptcy and must sell a note to liquidate their assets. An estate in probate and need to convert a note to cash. A home for sale by owner and the buyer cannot qualify for a conventional mortgage. A home for sale and the seller needs cash at closing. Let us custom tailor a note purchase-plan that will give your client the greatest benefits available for their real estate secured note. A brief meeting with you on the phone, or in your office, is all it takes to share this simple, but powerful program. I will call you to set an appointment to further discuss ways to enhance your client services. Sincerely,

[Your Name] Mortgage Investor

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SAMPLE LETTER TO BUILDER / MAY BE AMENDED FOR OTHER VENDORS

Value Home Builders, Inc. XXXX Azalea Lane Pflugerville, TX 78660 Dear Mr. (or Mrs.) Builder: Just a few days ago, I had the chance to drive by the remaining homes in your [NAME OF DEVELOPMENT] development. Undeniably, its design, architectural excellence and livability will be appreciated by everyone who is fortunate to be able to choose a new home there. Throughout this last year, I have been aware of the excellent marketing that you employed to announce your project. The billboards, large newspaper ads, and your sales staff operating 7 days a week was no doubt a worthwhile expense to launch this subdivision. Now that there are only several homes remaining, the marketing effort to find new families for these models can be expensive. While most developers will choose to lower prices to quickly sell their remaining homes (and keep marketing costs low), it would seem a shame to do so in your development. Reduced selling prices at the end of a project lower the property values of the most recent sales, and definitely reduce the goodwill of your recent purchasers. I am in the business of helping builders provide attractive seller financing, which we buy at closing! This puts the cash you need in your pocket, and: 1. The homes are quickly sold at full market value. 2. Not going through a traditional loan process eliminates the need for qualifying ratios and proof of income - this increases the number of prospective buyers that qualify. 3. Many of the costs associated with a conventional loan are eliminated - the buyer gets in for less cash and you still get the money you need. Let us show you how you can sell those last units quickly, allowing you to focus your attentions on your next project. Since each project has its own unique requirements, I will be glad to develop a no-obligation scenario in which you can offer attractive terms to your prospective buyers. I will be contacting you next week, and look forward to a mutually beneficial relationship.

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Sincerely,

[Your Name]

SAMPLE LETTER TO NOTE INVESTOR
Used on both seasoned and un-seasoned note packages; should correspond with the items requested on the Documentation Checklist.

Mr. Joe Note Investor 5001 West Avenue Austin, TX 76301 Dear Mr. Investor, It is a pleasure doing business with you again! I am forwarding the enclosed information on the property at 1110 East Elm Street, Post, Texas. The package includes: 1) Color Photographs of the property 2) Amortization Schedule on the Note 3) Closing Statement on the Sale 4) Warranty Deed with Vendor’s Lien 5) Certificate of Hazard Insurance 6) Copy of Recorded Deed of Trust 7) Copy of Real Estate Lien Note 8) Copies of Receipts for Payments (except October payment) 9) Location Map 10) Abstract of Title 11) Credit Report on Payor 12) Telephone Number for Payor As soon as I receive wiring instructions for your funds from the title company, I will let you know. The amount of the purchase to you will be $46,352 as per our agreement . If you need any other information, please let me know. Sincerely,

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[Your Name]

SCRIPTS:

Answering Machine: (Make sure that you sound professional – don’t have your children make this message or a television in the background!) “You’ve reached ABC Investments, specializing in the purchase of privately-held mortgages and trust deeds. Please leave your name and number at the sound of the tone, and one of our contract buyers will return your call promptly! And thanks for calling –we look forward to doing business with you.”

Outbound Answering Machine: (This is the type of message that you should leave if you’re calling a business) “Mr. X, this is [YOUR NAME] with [YOUR COMPANY]. I’m just following-up on the letter that we sent you last week regarding helping your clients free-up some of their cash. If you would, please call me at [YOUR NUMBER] or better yet, I’ll give you a call tomorrow. Thanks for your time – I look forward to speaking with you.

Outbound Call to Professional: (This is a sample of how a call might go when you’re calling a professional who may refer business to you) Mr. X, this is [YOUR NAME]. I appreciate you taking my call; this will just take a minute: I’m following up on the letter that I sent you last week regarding us purchasing seller-financed notes. Have you had a chance to review the letter? (At this point, it doesn’t matter whether they have or haven’t…you can still proceed.) You and I can both make some money by helping your clients liquidate their sellerfinanced note. They get cash, my company gets the cash-flow, and all three of us benefit. In fact, we have a lot of ways to purchase these notes, some with little-to-no discount! (Wait for response and answer appropriately! At this point, if they are NOT interested, be sure and ask them if you may send them more information. If they ARE interested, CONGRATULATIONS! Make a face-to-face appointment, and line out ACTION steps for each of you. For instance, will they send out letters to their DB for you? Will they hand out literature provided by you to their customers? Will they refer their customers to your Website? And at this point – you should also negotiate how you plan on compensating them.)

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ADVERTISEMENT WORDING

Newspaper Advertising should be limited to small outlying newspapers because people usually read them cover-to-cover. When placing the ad, keep a couple of things in mind: 1. Ad copy should do nothing but support a headline. a. Example: WHY TAKE A DISCOUNT? Local Investor buys mortgages and trust deeds. Call Bill at xxx-xxxx. b. Example: CASH IN A FLASH! Local investor buys mortgages and trust deeds. Call Bill at xxx-xxxx. c. Example: STOPPED RECEIVING PAYMENTS? Local Investor buys nonperforming mortgages and trust deeds. Call Bill at xxx-xxxx. 2. When you put the ad in the paper, buy an extra line above and below the ad. Leave it blank – this will draw the reader’s attention because it will stand out on the page. Besides, those goofy little borders? Everyone’s doing them. Be different! 3. Advertise consistently – it’s better to be in a smaller paper more frequently than a larger paper once.

Yellow Page Advertising: Yellow-page advertising is expensive so I really don’t recommend it to the beginner. On the other hand, if you can get a small display ad in your local yellow-pages, you should do so. Things to remember: 1. Use a small Display Ad – it will draw a lot more response.

2. Whatever you do, don’t make it a “business card” ad – you know the kind: they look just like a business card! Yuck! Boring! Be creative and use some of the verbiage that I’ve listed above.

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IMPORTANT TERMS TO KNOW

Paper:
You’ve heard about it, read about it, and are ready to experience it. No, the term isn’t just for the material these words are printed on! In this case, the term paper refers to the specific documents that represent a debt and the collateral that secures it. When I discuss paper, I’m referring to a mortgage or trust deed on a house or other real estate. Banks buy and sell paper all the time, as do private investors. During this workshop, we will be discussing using paper to facilitate real estate transactions.

Note:
A note is nothing more than an I.O.U. The note is the evidence of the debt. In lending, a buyer (also called the payor, mortgagor, or trustor) acknowledges his debt to the lender (known also as the payee, mortgagee, or beneficiary) by signing an I.O.U., which is called the note or, in some states, the mortgage note. The simplest form of a note is a dollar bill, which is the U.S. Government’s promise to pay upon demand. A personal check is another common form of a promise to pay, or a note. If the seller offers owner financing, he or she (or they, in the case of a couple) are creating paper. The buyer signs the note at the closing table. If you will be acting as the buyer, you will be signing this I.O.U. at closing.

Mortgage/Deed of Trust:
The mortgage, or deed of trust (trust deed) is legal evidence of the collateral for the debt. The actual collateral is the property supporting the mortgage or trust deed. This document gives the lender the right to take back their collateral (the property) if the payor stops paying. I heard a closing agent succinctly describe a mortgage as the document that says, “You don’t pay, you don’t stay.” Funny, she was from Texas, too… Seriously, I can think of no better way to describe a mortgage. As soon as it is created (which is at closing during the sale of the property), the mortgage (or trust deed) is filed at the County Recorder’s office, and becomes part of public record. It you want to find notes for sale, the County Recorder’s office is a great place to start, because all real estate notes have mortgages or trust deeds attached to them (or should, if the lender wants any leverage against the borrower). The mortgage

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is the document that gives the lender (or the seller, if he or she is carrying paper) the right to foreclose.

Special Note: All mortgages and trust deeds should be recorded. Not all are. You can count on banks, S & L’s, finance companies and private lenders, etc., to record their mortgages and trust deeds—they know how important it is to do so. Exceptions can occur when notes are created between family members or two private individuals who don’t know their own best interests. One of many reasons for doing a careful title search is to seek out unrecorded liens against a property. A good title agent will be quite diligent about this—but be sure that the right checks are made.

Who Are the Players?
In all real estate financing, there are two major sets of players: Those who are paying the payments, and those who are receiving the payments. Depending on the state and local custom, the payor is also known as the Grantor, Mortgagor, or Trustor. Just remember that all of them end in “or.” Members of the other set, those who receive the payments, are known as the Payee, Grantee, Mortgagee, or Beneficiary. In this case, those receiving the payments end in “ee.” Now I know that you are pretty sharp, and have figured out that beneficiary doesn’t end in “ee.” You’re right. In a state where the Deed of Trust is the main security instrument (vs. a mortgage), the players are the person making the payment (the Trustor), the one receiving the payment (the Beneficiary), and the guardian of the trust, the person with the power to foreclose, the Trustee. But hey, beneficiary sounds like it ends in “ee!”

Foreclosure:
A foreclosure is the lender’s act of taking back the property because of nonpayment. Each state has its own foreclosure laws. In some states, if the payor stops making payments, the lender can take the house back in as little as twenty-one days. In other states, this procedure may take up to two years. I bring up foreclosures because they are the mortgage or trust deed owner’s or note investor’s only remedy should the payor stop paying. If you plan to invest in real estate or in mortgages, you should also be aware of the foreclosure laws in your state, and how they are affected by your state’s homestead and bankruptcy laws. My company

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has had to foreclose on very few notes in the last eight years. We credit this to the effectiveness of our up front homework—our due diligence.

Lien Position:
This is a very important concept, because the position of the lien affects the ability of the lien holder to foreclose. Let me repeat that in simple English: When a lender (or seller) accepts an IOU, he or she (if they know what they’re doing!), immediately secures it by filing the security instrument (mortgage or deed of trust) as a matter of public record. When this happens, that action puts a lien against the title of the property. The borrower cannot give clear title to someone else before paying off the note, or, satisfying the lien. When a lien is in first position, it means that the lien holder (person receiving the payments) got to the Recorder’s Office first. A first lien has priority over all liens that come after it, or that are subordinate to it.

Example: If you were to sell your house today, you might find buyers who qualify for a mortgage with a traditional lender, but who may ask you to carry a small balance as a second mortgage (lien). The lender’s first lien mortgage takes precedence over your second lien mortgage. If the payor falls behind on their payments to you, you would, in order to foreclose, need to keep the first lien’s payments current. If, on the other hand, the first lien holder foreclosed, they could totally wipe out your position, unless: 1) you had the cash to pay them off, 2) the property sold for enough to pay you both, or 3) you made an arrangement with the first lien holder to take over paying the first lien.

Loan to Value:
Also known as LTV, this concept reflects the amount borrowed by the payor in relation to the value of the property. LTV is a great indicator of risk. Let’s say that you want to buy a $100,000 house, but have only $5,000 in cash for a down payment. You hope to borrow the rest from a lender, and succeed. In this instance, you would be borrowing $95,000, which represents 95% of the property’s, or 95% LTV. Note that LTV will change as the mortgage or trust deed is paid down, and as time passes and the value of the property goes up, as is normal, or goes down, as can

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happen when markets take a dive. When buying a property and creating a note, the current value at that time is all that matters. NOTE: After one year, the remaining balance will not have changed much—most of the first payments are interest—but the current value may have gone up considerably in appreciating markets or dropped in markets where values are falling. The note investor’s risk (and the property investor’s risk) is directly proportionate to the LTV on the property. The higher the LTV, the less equity held by the borrower, and therefore the greater the risk of default. Hey, if things go bad the buyer has a lot less to lose than if he or she had put down a larger sum of money.

Equity:
And speaking of equity, equity goes hand in hand with Loan to Value, because it is the amount of value present in a property above the remaining balance(s) of all liens. Equity is the difference between the current value of the property and what is owed on the property. If a seller has a $100,000 house with a first lien (to any lender) of $80,000; his or her LTV is 80%, his equity is 20%, or $20,000—if that’s the only lien. If there are additional liens, the LTV goes up, and the equity goes down. If $80,000 is the total of all liens, then the 80% LTV figure is valid. As noted above, equity increases as the loan(s) are paid down and as property values increase. Equity can decrease if property values in an area drop faster than the loan is paid off.

Assignment:
Let’s say that the lender is running out of money. Seems inconceivable, doesn’t it? When you think about it, you’ll realize that even though lenders have very deep pockets, those pockets aren’t infinitely deep. At some point, their money will start running out. Assignment is how lenders generate more cash: When a lender loans money, he or she sells the mortgage to another investor. In other words, they are exchanging cash for the right to receive cash flow. Running low on cash means that the lender has accumulated a lot of receivables (cash flow) in the form of mortgage notes. Now he or she (or the company) is mortgage rich and cash poor. In order to reverse that situation, the lender sells those notes to someone else, this time exchanging the right to receive payments (the cash flow) for cash. Even the big boys play this game.

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Assignments happen all the time on the secondary market. As an example, lets use a hypothetical situation involving one of the nation’s largest lenders, Countrywide Lending. Now let’s say that Countrywide, a major national mortgage bank, makes $100 million in loans, then turns around and sells those loans to Wall Street for $100 million, plus some profit. Unlike private investors, Wall Street will accept a lower yield, and thus will buy at a premium (pay more for the note than what is owed on it), vs. a private investor who wants a higher yield and thus buys at a discount (pays less for the note than what is owed on it). Now they have their $100 million back in their pocket to loan all over again. (See ITV.) Private sellers who have carried financing may also exchange their cash flow When Countrywide (or our example private seller/owner financer) sells their notes, they assign the right to receive payments to the entity buying the note. It’s like endorsing a check to someone else: When someone writes you a check, you have the right to receive that payment. When you endorse that check to someone else, you are assigning to him or her the right to receive that payment. The same holds true for mortgage or trust deed notes. (right to receive payments) for cash.

Investment to Value:
Unlike LTV (reflecting what the borrower pays vs. the current value of the property), the ITV reflects what the investor invests in relation to the value of the property, i.e., what the investor pays relative to the current value of the property. Let’s say that the $100 million in loans that Countrywide is carrying is backed by $120 million of real estate. Their ITV on their loan portfolio is 83% (100/120 = 83%). notes at a discount, their ITV will be less than 83%. If Wall Street pays more for those notes, their ITV will be higher than 83%. If Wall Street buys those

Discount:
Why in the world would a private seller offer to sell his or her note at a discount? If a seller were owed a principal balance on the note of $96,000, why would he or she take less than that in cash? The answer is quite simple. When a seller carries back financing, he is agreeing through the terms of the note to receive periodic (usually monthly) payments over a long period of time—up to thirty years. In many (but not all) cases, the seller would rather have the cash now. They would rather have less cash in hand now than

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wait for more cash spread out over thirty years. Whether this is a desirable and good deal for the seller depends on the seller’s needs, and on whether the seller understands the time value of money. See box below.

Time Value of Money: Think about it: If I offered you a dollar a year for the next ten years, or eight dollars today, what would you choose? My guess is you would choose the latter, because of the time value of money. more about the time value of money in yours. Because of inflation, among many other factors, money is worth more today than it is in the future. Speaking of the future, I see

Yield:
This term applies only to the note investor. When a person borrows money, his cost of renting that money is known as interest. Interest is what a person pays, yield is what an investor receives. The best way to illustrate this is with an example:

Example: You decide to loan Frank, your neighbor, $500 dollars. He agrees to pay you only the interest (you charged him 12%) every month for the next five years, at which time he still owes you the principal balance of $500. Meanwhile, you have profited by a whopping $5 per month, or $60 for the entire year. He is paying interest of 12%; you are receiving a yield of 12%. In the twelfth month you get tired of collecting only $5 per month, and you want all of your money back now. Frank can’t afford to pay you $500 now, nor (you secretly suspect) will he be able to do so in a few months as agreed. Along comes Nora Note Buyer—someone who is willing to give you cash in exchange for your cash flow. She offers you $460 for your note. You accept… You took a small discount, selling the $500 note for $460, yet you had already recaptured $60 in payments, which makes it come out twenty bucks better than even. Remember, you wanted all of your money back, now! Nora now has the right to receive $60 per year, but instead of having $500 invested, she only has $460 invested. By investing less and still receiving the same monthly payment, her yield is now higher than 12%. She gets $60 per year on her $460

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investment. Frank is still paying 12% interest, but because she has less than $500 invested, Nora Note Buyer is now receiving a 13.07% yield on her money.

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FILLING OUT THE WORKSHEET
YOUR INFORMATION Date: Contract Buyer: Name: Company: Phone: Fax: The Date the Sheet is Prepared. Most investors will assign a contract buyer to work with you. This is YOUR name, NOT the name of anyone else! YOUR Company. YOUR phone number, or the best place to get hold of you. YOUR fax number, or where you would like us to fax your offer!

TRANSACTION INFORMATION It is important for us to know the details of the original transaction when the note was originally created. They tell us the value of the collateral, and the risk-related factors of LTV and ITV. Names: We ask for the buyer and seller’s last name only to reference the file. We refer to the file in our office as “Seller pays Buyer”. This will be especially helpful to all of us if the seller has more than one note he is carrying. Down Payment: It is important that we know how much money the buyer put own on the property. This determines LTV, and also equity, each of which is a risk factor. The greater the down payment in relation to the sales price, the lower the risk. Sales Price: The sales price comes into play because it gives us a rough estimate of today’s property value. SPECIAL NOTE: If the property has sold within the last 12 months, the Note Investor

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will use the sales price, or the appraisal, whichever is lower, to determine value. On the other hand, if the original sale is over 12 months old, the Note Investor will only use the current appraisal to determine ITV. Lien Position: We discussed this in an earlier chapter; obviously a 2nd lien carries a lot greater risk than a first lien. Most institutional note investors do not purchase 2nd liens, unless they meet stringent criteria: they must be at least ½ as big as the first. Private investors, however, have more lenient guidelines. Buyer’s Credit: Though at this point this is an arbitrary question, the answer will give the Note Investor guidance in pricing the note. The worse the credit, the more risk to the Investor; the ITV will be lower, and the yield higher. It used to be (back in the good ol’ days) that Note Investors would buy a note regardless of the buyer’s credit, as long as the buyer had made the most recent 12 months house payments on time. This is no longer true! Today’s Note Investor considers credit as a factor:

SPECIAL NOTE: Most Note Investors will not touch a note where the payor has a credit score below 525. The risk simply outweighs the potential return.

MORTGAGE/TRUST DEED INFORMATION Date of Mortgage: It is important for the Note Investor to the date the mortgage as created, which usually corresponds to the date of the sale. This indicates the age, or seasoning of the note: the more seasoning the note has, the lower the risk.

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Loan Amount: To accurately price a note, the Note Investor needs to know all of the terms of the note, including the original principal balance. Term in Months: Most calculators use months (rather than years) in their calculations. You should get in the same habit. The term indicates how many payments were originally associated with the note. The shorter the term, the sooner the Investor gets his money back and the higher the yield. It’s that Time Value of Money thing again. Interest Rate: Obviously, this is an integral part of the note, directly affecting the amount of the monthly payment. The higher the interest rate, the more the note is worth. In fact, the closer the interest rate is to the Investor’s required yield, the smaller the discount. Payment Amount: Payment is very important; Note Investors are buying a series of payments (cash flow) that directly affects their yield. Most sellers will know this amount, though occasionally, the buyers will round out their payment to a different number ($497 payment; payer pays $500 month). Though this messes up the calculations, it is easily fixed –get a copy of the note itself.

GAME HINT: When you are filling out the worksheet, get a copy of the note whenever possible. This accomplishes two things: 1) You will always submit accurate information to the Investor, and 2) It helps you quickly determine whether the seller is really serious about selling his note, or if he is just looking. If he balks at letting you see the note, he, in effect, is asking you to make him an offer on his car before you have even seen it!

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Balloon Date: If the note is due sooner than the amortization term indicates, there is a balloon in the note. It is imperative the Investor knows when this large payment is due: it determines how many payments remain for the Investor to purchase. Example: Suppose a note has a 360-month term over which it is amortized, with a balloon due in 60 months. Even though they used a long term to determine the amortization (this keeps the payments smaller), there are actually only 61 payments in this note. There are 60 regular payments, and 1 large, balloon payment. Balloon Amount: By now, you should know that Future Value determines the balloon amount. (What is the above note worth 60 months into the future from the start date?) This is very important: Investors want to make sure that the payor can pay this large payment through refinancing or selling his home when the note (balloon) comes due. Payments Made: If the payers haven’t made all of their payments, the note is considered to be delinquent. Because the risks are so high, most Investors do not invest in delinquent paper. Sometimes, this line may reflect that 49 payments have been made to date, when, in reality, 53 should have been paid. Pmts. Remaining: An Investor is purchasing Cash Flow. In other words, when Sellers want to sell their entire note, the first question you/Note Investor should ask is, “How many possible remaining payments are there to buy?” Current Balance: All fully amortized notes decline in principal each month. In other words, each payment includes some interest in it, as well

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as some principal. If the payer were to refinance today, how much would he owe? This is the current balance.

PROPERTY INFORMATION Type: The property is the collateral for the note, and the investors need to know what their security is. Obviously, their risk is different with a single-family home as collateral than it is with a commercial piece of land. Different answers to this question determine different yields required by your investor. Owner Occupied: This is, again, a risk-based question from the note investor. The risk is less if the buyer occupies the property, rather than if they are purchasing it for rental property. The rental income (if applicable) should be high enough to offset the payment on the note. Location: While most investors invest all over the country, some areas have actually depreciated over the last several years. Giving your investor the zip code of a property helps them make a more educated decision on how much to invest in the note.

NEEDS & COMMENTS The comment lines are for you to give your investor any supplemental information about the property. The seller’s needs are very important. Either this is a line neglected by most brokers, or they put in “as much as possible.” You and I both know that this is never really the case. This is probably the most important line on the entire form. The information on this line will allow you, or your note investor, to creatively structure your note and your offer.

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Asking the right questions… There are several ways to get information from the seller to fill out the worksheet. Don’t be bashful; just be yourself. You may decide to tell the seller that you need certain information in order to “give him a fair and accurate price” for his note, and that you have a list of questions. Then you won’t feel so bad about just going from one line to the next on the worksheet. On the other hand, you can ask conversational questions. I have listed some possible questions and scenarios that will help you in getting the information. Property Type What type of property is it? Don't just ask that question without clarifying it. Very often they may say, "Oh, it's 10 acres in Williamson County." Ask further: Does it have a building on it? Is there a house on that property? They may answer, “Oh yes, the folks live in it." Now you know it's a single-family, owner occupied property. If you had just accepted their first answer, you would have believed it was 10 acres of raw land. Again, take the time to ask questions to qualify the answers they give you so that you have complete information. Sales Price and Down Payment How much was the sale for? It's very common that note holders will misunderstand this question and instead tell you the original balance of the note. Make sure that you follow up "How much was the sale for?" with "How much was the down payment when they bought the property from you?" Example: You: "How much was the sale for?"

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Note Holder: You: Note Holder: You: Note Holder: "Oh, the sale was $30,000.00." "How much did the buyers put down?" "$5,000.00." "So you took back a note for $25,000.00?" "Oh no, we took back a note for $30,000.00! So I guess they paid me $35,000.00 for the property." This is not an uncommon conversation. When you ask them about the down payment, take the time to review the numbers with them (as in the previous example) to make sure that they add up. Sometimes they'll tell you "They put down $5,000.00" and when you run back through it, you may find that the buyers actually put down $3,000.00 (or some amount other than $5,000.00). Again, take the time to ask qualifying questions to verify the information they're giving you. This doesn't need to be confrontational - you can do it in a very friendly, conversational way. Note Amount What was the amount of the note they took back? By asking how much the sale was for and how much the down payment was, you should be able to determine the note amount. Again, ask the question. The answer they give you may be different and will help you to uncover incorrect information in the first two answers. Terms of the Note Talk to the seller about the terms of the note. Ask them how much the monthly payment is. Occasionally, the seller won’t know the exact figure. When this happens, it is up to you to extrapolate the answer. Start by asking them whether the payment amount includes just principal and interest, or principal, interest, taxes and insurance. Ask the interest rate of the note. With this information, you should be able to calculate the amortization. Now that you have a good idea of the structure of the note, ask the seller the term of the amortization. If your figures

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show a 30-year amortization and you say, "So this note was to be paid over 30 years?" and they respond, "No, it was to be paid over 15 years", you know that you've got to do some more digging. Repeat the questions (though in a different way) regarding the interest rate and what is included in the payment. Is there a balloon payment – maybe in fifteen years? Play around with the numbers and find out if perhaps a different interest rate and different amortization would produce the correct payment with that mortgage amount. Keep asking questions until you get to the bottom of it. Very often there will be a simple misunderstanding or a lapse of memory that caused the numbers to be different. Again, asking the right questions in a conversational format will usually produce the answers you need. However, if you are unable to make sense of the numbers they have given you, then you must ask them to see a copy of the closing statement and the note. Those two documents will give you the definitive information that you need. Date of Sale The date of the sale is really not as important as the date of the first payment. By asking for the date of the sale, you create an opportunity to cross-reference the date of the first payment. Note sellers often need help in remembering the date of the first payment. The following exchange is usually successful: You: Note Holder: You: Note Holder: You: Note Holder: “Do you remember what year you sold the property?” “I think it was three years ago.” “So it was in 1999?” “No, that’s not right. My cat died in 1998, and that was just after I sold the house.” “Do you remember what month that was?” “Yes, it was June. I remember now because Fluffy died in

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July. Fluffy was my cat.” You: Note Holder: You: Note Holder: “Let me clarify, the buyers made the first payment to you on July 1, 1998? “No, they make their payments on the 12th of the month, but now that I think of it, it was July 12th of 1998.” “I’m sorry to hear about Fluffy – did you get another cat?” “Of course!”

You just verified that the date of the first payment was July 12, 1998, and you did it without pressuring the seller for information. Once you have obtained all of the information on the note, make sure that the seller understands that these are the numbers you are working with, and that any differences could result in a change to your offer. Don’t make a big deal out of it; simply make sure that you don’t leave yourself open to the problems later on if the numbers change. Taking the next step… Tell the sellers that you have several investors that you are going to check with, because you want to get them the best possible price for their note. You will contact them within a day or two to let them know what the price is. Thank them for their time and move on to the next prospect.

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EXISTING NOTE WORKSHEET
Today’s Date: Your Name: Company: Sale Information: Buyer: Down Payment: Sales Price: $ $ ____________________________ SMI Buyer: _________________________ Phone: Fax: Pays: Seller: A B C D

Buyers Credit:

MORTGAGE/TRUST DEED INFORMATION: First Lien Date Of Mortgage Date First Payment Made Date Next Payment Due Original Balance Term In Months Interest Rate (%) Payment Amount Balloon Date Balloon Amount # Of Payments Made # Of Payments Remaining Current Balance PROPERTY INFORMATION: Type (please check one): SFH improved land Owner Occupied (please check one): Yes Location: City: SELLER NEEDS: $ COMMENTS: Second Lien

2-4 commercial No (held for rental) State:

condo/townhome
If N/O/O

Monthly rental income: Zip: BROKER NEEDS: $

$_________

SMI FUNDING GROUP (512) 351-8142 Office * (512) 374-4948 Fax * smifunding@gmail.com