How to Find & Sell Cash Flow Notes

Cash flow notes are debt instruments represented by negotiable documents. Essentially, they are IOUs that can be bought and sold. When you buy a cash flow note, you become the creditor. Although there are many different types of cash flow notes, such as mortgages, trust deeds, tax lien certificates and even lottery winnings, notes secured by real estate are among the most popular. People sell these notes, often at a deep discount, because they prefer to receive a lump-sum payment rather than periodic payments extending over years. It is possible to conduct a successful business brokering the sale of discounted cash flow notes to real estate investors and later moving on to buying and selling these notes yourself.

Things You'll Need

• Investor database

Instructions

1. Draft a prototype contract outlining the terms of your transactions with cash flow note investors. The key provision of any such contract will be your finder's fee and the conditions under which it will be paid. Most finder's fees are defined as a percentage of the total value of the deal. Because you are essentially acting as a middleman, the contract should specify that the investor owes you a finder's fee for the purchase of any particular note within a certain amount of time after you introduce the investor to a note seller.

2. Locate qualified and reputable local real estate appraisers who can help you determine the value of any real estate securing the notes. Investors will usually require an appraisal before purchasing a note secured by real estate. Remember that the value of the note depends both on the value of its collateral and the creditworthiness of the debtor. Determining the true value of a cash flow note is a complex process that requires considerable experience, which is why it is best to start off as a broker rather than as a note buyer.

3. Advertise your willingness to purchase cash flow notes. This advertising can take the form of newspaper, magazine or Internet advertising. You should also establish a website devoted exclusively to this purpose. Building up a steady stream of clients will ultimately depend largely on referrals and word-of-mouth advertising, and this will not happen overnight.

4. Search for available cash flow notes by contacting local banks, mortgage brokers, real estate agents, title companies and escrow agents. The trick here will be to find the right person to speak to. With banks, your best bet will be to call corporate headquarters and ask to speak to a representative from the secondary marketing or the loss mitigation department.

5. Compile a master list of available notes based on the results of Steps 3 and 4. Because this information is constantly changing, you will probably have to update this list several times a week. Do your best to rank these notes in terms of their real value. For example, a note based on a subprime mortgage is likely to be worth far less than the value of the real estate that secures it, because of the high risk of default and subsequent foreclosure expenses. The same applies to nonperforming and underperforming notes.

6. Locate potential investors for your cash flow notes. Many sources exist, including local real estate agencies (for contacts with real estate investors) and investor websites (see Resources). During the early years of your business, these investors will likely have a better understanding of the actual value of the cash flow notes on your master list than you do. Because these notes will be purchased with the investors' money, not yours, it is the investor who will decide which notes are worth investing in and at what price.

7. Act as a mediator by helping the note seller and the investor reach a mutually acceptable price and terms of agreement. Much of your value will consist of the legwork that the investor lacks the time to do: finding note sellers, arranging for real estate appraisals and collecting data.

Tips & Warnings

• As you gain experience and build up your reputation, client base and available capital, you should begin buying cash flow notes on your own account and selling them to investors rather than acting as a middleman. Be sure that you fully understand how to appraise the real value of a cash flow note before becoming an investor yourself.

• Be wary of scams. The cash flow note business is the subject of many websites offering to teach you the business or provide lists of available notes and investors for a fee. Not all of these sites are disreputable--just make sure you check out their reputation before doing business with them. The cash flow note business is like any other. Success requires hard work and patience.

Resources

• Read this Article in Spanish
• Cash flow note investor
• Investor database
• Database of cash flow note investors