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Tracy Z. Rewey

DIS Adds Master Note Broker to List of Services

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(This article was written by Jeff Thomas and reprinted by permission of the American Cash Flow Association from the January 1999 issue of the American Cash Flow Journal.)

Fred Rewey. Tracy Z. Do these names sound familiar? If you’re a regular in the industry, they should. You may recognize Tracy from her role as editor of the Cash Flow Connection. She was at Metropolitan Mortgage and Securities from 1988 to 1997, most recently as vice president and national production executive. Tracy developed the BrokerNet™ software program for brokers.

Fred, an Oxford attendee whose cash flow beginnings started with his ownership of Take Note Investments, working with Jon Richards and later Judy Miller, has recently added the role of visiting instructor for the American Cash Flow Institute to his list of credits. He also was a vice president at Metropolitan from 1995 to 1998, among other things developing and maintaining the second release of BrokerNet™ after Tracy left in 1997.

It was at Metro that the two met. Now they’re husband and wife, and more relevant to this story, the owners of Diversified Investment Services, Inc. (DIS) in Spokane Washington.

Tracy Z left Metropolitan about a year and a half ago and it wasn’t long before she found herself in a Master-Brokering role. “Before we only did Master Brokering by word of mouth,” she says. “We were a smaller shop then, and we did quite a bit of consulting work in addition to buying for our personal account.”

Brokers would come to her with deals they didn’t want to process or deals they felt could be a risk. She states, “Now, so we can take on more business and be prepared to give that service, we’ve added staff members, and Fred’s come onboard. We have a senior closer that used to be with Metropolitan too. She’s been in the business for eight years, and she’s a really good processor. We feel like we’re prepared to take on more business.”

Looking at deals from both sides of the industry

Although Fred Rewey and Tracy Z have considerable experience brokering notes, anyone looking for a Master Broker shouldn’t forget that both held officer positions with the largest institutional buyer of private mortgages. “We’ve seen a lot of what’s out there,” states Rewey. “What’s unique is that we came from the funding side of it.”

Tracy continues. “We’ve watched the industry grow. I’ve been in it for over 10 years, and there are many brokers I’ve worked with through the years that now are top producers. It’s great to see,” she says. “When the companies we worked with got bigger and bigger, we got away from helping those who are new in the business. And so we want to get back to those roots and give them the benefit of our knowledge and expertise and let them learn along the way.”

Master Brokers are typically in place to be a co-broker rather than a mentor. And as the deal unfolds, the Master Broker lets the broker know what he or she did and why. The process is usually very hands-off. And all knowledge comes from seeing how the Master Broker handles the deal. In general, brokers don’t call a Master Broker until a deal is in place.

DIS takes a slightly different approach to the Master Broker relationship. Fred explains, “We’re probably more open than some [Master Brokers]. I’ll help somebody with a brochure or talk to them about their marketing and things like that.”

One way DIS helps the broker get hands-on experience is through the use of conference calls. “If they want to listen to us negotiate with a seller so that next time maybe they can do it, we can get on a three-way conference call because we have that technology,” states Z. “They can introduce us as the underwriter who wants to ask a few questions. We’re very open to setting it up so they can learn from the process and advance in their knowledge.”

Rewey adds, “We’re not looking for one deal where they send it in and we take our spread. We’re looking to develop relationships.”

For new brokers, there are many advantages to the Master Broker system. Because of their experience, Master Brokers bring a wealth of information and experience to the table including the following:

  • The ability to qualify or disqualify a deal quickly
  • Experience using different structuring techniques
  • The ability to process a deal quickly
  • Experience in negotiating fees
  • The ability to get the deal closed without mistakes
  • The ability to get it done, period – especially in tricky situations

Since a new broker may not yet have the experience to handle a deal as well as a seasoned Master Broker, he or she can take advantage of handing off the deal. There are a couple of reasons why: First, the broker gets the chance to watch an industry professional in action – someone who’s really good at what they do. It’s real experience that cannot be recreated in a training environment. Second, the broker receives part of the commission but without having to perform the work of processing and closing the deal.

The benefit of advanced funding

DIS primarily purchases notes for its own account. The notes are held for long-term investment or future resale in large portfolios. However, to take advantage of volume and pricing incentives, DIS also brokers transactions. When they do (also as in the case of a co-brokering situation), they use their own funds to provide a quick closing. DIS calls it the Advanced Funding program.

“We cut a lot of time off because we are the decision-makers,” says Tracy Z. “We’re using funds in our own credit lines, so we can pull the trigger when we think the deal is ready. All our deals – unless it’s an excessively-large commercial deal or something outside of our normal appetite – we fund ourselves.”

Rewey summarizes, “They get the benefit of having a mentor, but they don’t lose the benefit of being direct with someone who can make decisions and fund rapidly.”

Options for brokers

Diversified Investment Services will work with brokers in one of two ways, depending on the broker’s preference. One is a referral program. The other is a submission program.

Predetermined fee. If the brokers prefer, DIS will work with them before the deal to set a mutually acceptable fee – typically $1,000 to $1,500. Then DIS will negotiate the deal for the broker.

Negotiate your own deal. DIS will offer what they are willing to pay for the deal, and the broker can then negotiate something less to pay the seller.

“We’re pretty flexible,” Rewey states. “We can have a set amount if they want us to work the deal. Or it could be a split or better. There are certainly plenty of deals where they make more than we do. Whatever they need.”

Consulting – without the price tag

“We provide advanced consulting services for some of the more well-known investors out there. And we charge a fairly hefty fee for that,” states Z. She offers this expertise to brokers as well. “The people that come to us as Master Brokers get the benefit of that consulting service without any cost to them; they get it just because they sent us a deal.”

Fred Rewey and Tracy Z have over 15 years of combined industry experience. From start-up note broker to corporate officers for the nation’s largest note buyer, their experience covers all aspects of marketing, closing, underwriting, and servicing cash flow instruments. However, more impressive than their success is their willingness to share the knowledge that helped them achieve the position they hold in the industry.

Tracy Z states, “If they’re committed to bringing us business down the line when it works, then we’re dedicated to helping them find that business.”

Diversified Investment Services, Inc. is a note investment company created by Fred Rewey and Tracy Z in 1997. In addition to marketing and purchasing notes for its own account, DIS also works with brokers providing consulting, closing, and training services.

‘Tis Tax Time Season for Note Buyers

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(Reprinted from the December 1998 issue of The Cash Flow Connection Newsletter)

Chestnuts, open fires, Jack Frost, a mail box full of catalogs, Sunday papers twice the normal size…it must almost be….tax season. The holiday season is just a short six days away from the end of another tax year. While April 15 looms as the dreaded tax deadline, there are actually quite a few filing deadlines in January that affect many cash flow professionals. It may understandably be the last thing on your mind, but don’t be caught unaware. We’ve compiled a basic primer for some of the more common 1099 and 1098 tax form filings utilized in our business. Just remember, we don’t make the rules!

As a general rule, every person engaged in a trade or business must report to the IRS any payment of $600 or more made to any person during the calendar year for items such as rent, compensation for service, commissions, interest and annuities. To make these filings, the IRS has provided a series of 1099 forms.

Form 1099-MISC

A 1099-MISC is usually filed for each payee on reportable compensation type payments of $600 or more made to non-employees and/or independent contractors. These are frequently issued to report referral fees paid by note buyers to consultants/note brokers.

Form 1099-DIV and 1099-INT

If your business is incorporated, your corporation will have to file a Form 1099-DIV for each person to whom it pays dividends of $10 or more each year. You will also file Form 1099-INT for each person to whom you pay $10 or more in interest on bonds, debentures or notes issued by the corporation in registered form. These 1099 forms are also required for any other payment of dividends or interest on which you are required to withhold tax.

Form 1099-S and 1099-B

In general, Form 1099-S must be given to recipients of the proceeds from the sale of real estate, while Form 1099-B is given to recipients of the proceeds from the sale of securities. Typically, these forms are handled by the escrow, closing or funding agent; however, it never hurts to verify that it has been appropriately filed.

Form 1098

Federal law requires that you give From 1098 to any individual from whom you receive $600 or more in mortgage interest during the year in the course of your trade or business. Form 1098 generally has the same filing requirements as the various 1099 forms. If payments are made by the payor to a third party escrow, collection, or servicing company, chances are this is being handled.

Filing Deadlines

The appropriate form is prepared for each reportable party and sent to the IRS with a duplicate form sent to the individual payee. You must also prepare and file a Form 1096 summarizing all the information on the forms in the 1099 series. Each of these forms is due to the IRS by February 28 of each year for the prior calendar year. A copy must also be sent to the recipient of the payment by January 31.

Penalties

There are stiff IRS penalties for not filing the appropriate 1099 forms. First, there is a $50 penalty for failure to obtain an appropriate tax identification number and/or filing late. There is also a penalty for not filing or not giving a 1099 to a payee, which runs $50 per failure. Since there is a separate penalty for not giving a copy of the 1099 to the payee, as well as for not filing a copy with the IRS, it can cost your $100 for each person for whom you fail to prepare 1099’s.

Exemptions

Fortunately, a number of important exemptions from the 1099 filing requirements will eliminate most of the people or companies to whom you are likely to make payments of $600 or more. You do not have to report:

  • Payments to corporations
  • Payments of compensation to employees that are already reported on a W-2
  • Payments of bills for merchandise, telephone, freight, storage, and similar charges.
  • Payments of rent made to real estate agents
  • Expense advances or reimbursement to employees
  • Payments to a governmental unit

Electronic Filings

If your business files 250 or more returns for a calendar year, the IRS requires an electronic or magnetic media filing. These returns include Form 1098, the Form 1099 series, the W-2 series, and various others. The electronic filing is in lieu of actual paper forms and includes very specific formats for the computer tape or disk which must be met.

This overview should assist the cash flow professional in identifying potential filing requirements. This is not intended as tax advise so please review your specific situation with a qualified tax advisor. Free tax publications and forms can be obtained by from the IRS at 800-829-3676 at www.irs.gov

Note Broker Fees – Too Much or Not Enough?

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(Reprinted from the October 1998 issue of The Cash Flow Connection Newsletter)

Negotiating the purchase of a cash flow note is about providing a service to sellers desiring cash rather than payments over time. While providing an essential service, the cash flow industry is also a for profit business. Cash flow brokers earn their profit through fees or spreads resulting from the difference between the price the seller agrees to accept and the amount an investor will pay. But how are these fees determined? Is there such a thing as making too much or too little? While these questions might be considered a “hot potato” they are certainly worth exploring to determine how we will individually conduct our business.

Determining the Fee Amount

Two of the most common questions posed by new brokers are “What is an average fee?” and “How much should I make?” The answer from experienced pros invariably contains the words “It depends.” And it does depend. The type of transaction, the amount of competition, the ease or difficulty of placing the paper with an investor, along with hard costs, overhead costs, and time involved in closing the transaction, are all influencing factors.

After viewing thousands of transactions I would venture to say that the current average fee on a typical $50,000 residential note runs between $2500 to $3200 (or 5-6%) before costs. If you factor costs in the approximate amount of $1100, comprising of $600 for title and appraisal plus $500 for overhead costs, this leaves a net spread or fee of $1400 to $2100 (3-4%). This is a very modest cost estimate and doesn’t take into account higher expenses for commercial appraisals, high premium title report states, a large staff, or expensive marketing campaigns.

These types of fees represent the bread and butter for many cash flow brokers. There are certainly instances where a much higher fee can be earned. A fee in excess of 10% is typically the result of a hard to place note resulting from defects in the title, property, or credit history of the payor. Higher fees are more frequently seen on commercial transactions due to the size, skill, and additional overhead required to close this sort of investment.

How much is too much?

Some might be quick to respond “There is no such thing” or “Take what you can get.”

Others may feel it is a mute issue since today’s competitive market has made it more and more difficult to score a “home run” on fees. While less frequent than in the past, opportunities to earn higher fees still present themselves. The prudent and ethical business person will ponder the question “How much is too much?”

Why care? First, there is the issue of ethics that any professional must adhere to. Second, if we don’t regulate our actions they could be regulated for us. Third, if you fail to determine an appropriate fee structure, it might be determined by your investor. Let’s explore these issues further.

The subject of ethics is often felt to be a personal one. The “Can I sleep at night?” test might work for some. However, to make the test more tangible, it becomes a matter of what a court will deem appropriate or unconscionable. Generally, only a person who feels they were treated unfairly or taken advantage of will seek justice in the court of law. Unconscionable action is defined as unreasonable or unscrupulous actions that are not guided by a conscience.

Unconscionable action can be subject to prosecution and sentencing for the charged party but the more global effect can result in an industry with a tarnished image that sets the stage for ensuing regulation. In reviewing such a case the court will look first to existing statute. Finding a highly unregulated industry, the court may look to what is customary in our industry or an industry deemed similar. They may consider the average fee of a mortgage broker (1-2%) or the standard commission charged by a realtor (6-8%) as a basis of comparison. The knowledge or sophistication of the seller would be another consideration. Someone could take it a step further and make it their personal mission to protect the public from unscrupulous actions by proposing specific regulation. Nothing will bring on regulation quicker than a grandmother in tennis shoes shouting foul play. Regulate your actions or have them regulated by others.

Some investors, realizing the potential for risk, have begun internal reviews on the amount of fees being earned by brokers. At least one investor has an internal policy that if a gross fee exceeds 20% of the amount being paid by the investor it must be reviewed by management for acceptability. A fee in excess of 20% could be justifiable once costs are calculated into the mix. For instance, there are often the same hard costs incurred on a small note as a large note which equates to a much higher percentage on a smaller note. However, if an investor feels there is potential liability in purchasing a note with a high broker fee they might suggest either a) the broker obtain the seller’s written acknowledgement of the fee; or 2) the broker purchase the note himself and age it for a period of 30-90 days prior to selling to an investor. These actions can provide protection to both the broker and the investor.

How much is not enough?

This might be an even harder question to answer than the first. Each person in business must decide on the price of goods or services they provide in order to meet overhead and make a living. This price can be dictated by the cash flow needs as well as competition. When dealing with this issue there are two important items to contemplate.

First, it is misleading to quote an unrealistically high price to the seller (translating into an unrealistically low fee for the broker) just to “bag the deal.” Unfortunately this is becoming a frequent strategy used in competitive markets to take a deal away from another broker quoting a realistic price. Sadly, the broker quoting the unrealistically high price knows they will cut the seller at the last minute yet have a high probability of keeping the deal due to a seller’s resistance to start over. Interestingly, the brokers using this tactic are often the same ones charging what could be considered unconscionable fees.

Second, don’t charge so little that you run yourself (and potentially other brokers) out of business. You are a professional charging for a specialized service. Take a moment to pencil out your hard costs and overhead costs. Once you have deducted these costs estimate the number of hours you will expend on the deal and divide it into your net fee. Basically, this is the price per hour you are working for. If it’s single digits you might as well work at the local fast food joint, at least they provide benefits plus discounts on greasy food, and you don’t have to pay for the food before you sell it. Value your time for yourself as well as the industry as a whole.

For now, fee determination is a personal decision for each independent operator. However, it serves us all to combine a healthy interest in profits with a genuine regard for the welfare of our industry and any role our actions may play.

Selling Mortgage Notes – Mastering the Simultaneous Closing

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(Reprinted from the June 1998 issue of The Cash Flow Connection Newsletter.  Please visit our online newsletter for more updated information including  Selling Mortgage Notes – Where Have All the Simos Gone? Published November 2010)

With investors reporting over 40% of their new private mortgage purchases having less than 12 months seasoning, it’s no wonder the simultaneous close and working with realtors are some of the hottest marketing techniques. Perfecting the simultaneous close provides an alternative to conventional financing that can enable sellers to sell, buyers to buy, properties to move, realtors to earn, and investors to profit.

Working with the purchase of a private mortgage immediately following the real estate closing provides opportunities as well as challenges. Investors know that one essential component of the simultaneous close is maintaining it’s identity and distinction as a private purchase money mortgage. It is an alternative to lender financing not another form of a loan. Over the years elements have been identified that aid in maintaining this important distinction. A review of these may prove helpful for use in your own business activities.

1. Become familiar with basic residential mortgage lending requirements.

While traditional mortgage lending requirements do not typically apply to a seller financed purchase money mortgage or real estate contract, you should become familiar with them anyway. Why? First of all, this makes good marketing sense. How can you position seller financing as a great alternative to the traditional loan if you don’t understand how it works?

Secondly, it is essential to know what constitutes a loan and is subject to a variety of governing laws. Anyone in real estate investments should be aware of the number and brevity of regulations passed to protect the borrowing consumer. There are the Consumer Credit Protection Act of 1968, Truth in Lending (TIL), Regulation Z, Real Estate Settlement Procedures Act (RSPA), Home Mortgage Disclosure Act (HMDA), Usury, Mortgage Broker and Lender Licensing, and the list certainly goes on. It isn’t late night reading but become familiar enough with them that you can either 1) comply or 2) completely avoid any activity that falls under their application.

2. Substance Over Form

The substance of a seller financed real estate transaction and your level of involvement have a considerable impact on maintaining the purchase money distinction. It is important to remember that the seller is allowing the buyer to purchase the property by accepting a certain amount down and the remaining amount over time with payments of principal and interest. The consideration for the lien is the purchase of the property. The seller is the one extending credit by accepting installments on the sale, rather than a lender providing cash to the borrower for payment to the seller.

It is certainly appropriate for the seller to request a financial statement and a credit report from the buyer since they will be relying on their credit worthiness for payment. The form or authorization the seller utilizes should in no way reflect the lending of money. Once again the extension of credit is from the seller by accepting an installment sale.

Once the seller and buyer have agreed upon a price and terms of repayment an investor can provide a quote reflecting the amount they would be willing to invest or pay for the lien subsequent to closing. As an investor it is advisable that you don’t get involved in the actual negotiation of terms. Avoid determining such items as down payment, interest rate, and payment amount. Be certain that the real estate agent, seller, buyer, and closing agent, clearly recognize the difference between seller financing and a loan.

3. Your words say it all.

Loan is a four letter word. Abolish it from your private mortgage investment vocabulary and do not confuse the issue by using incorrect terminology. There are sellers not lenders, buyers not borrowers, investors not banks, seller financing or purchase money liens not loans, and never ever are there points, origination fees, or buy downs!

4. The Documents

It’s all in the details. The documentation that the closing agent prepares plays an important part in evidencing the items outlined in substance over form. As the potential investor, review them carefully to be sure they utilize the correct terminology. Be certain that the financing instrument clearly states it is a purchase money lien and names the seller as the mortgagee or beneficiary.

Pay particular attention to the closing statement. It is fairly common for the closing agent to use a HUD-1 Settlement Statement. This however is not a preferred closing statement for owner financing since it was primarily developed for traditional lender financing and is filled with inaccurate terminology. If your agent insists on using this form review it closely. Be sure they leave Section (F), Name of Lender, blank or put in the property seller’s name and address. Line 202, Principal Amount of New Loan, of Section J, should also be left completely blank. The agent should utilize an empty line in this section and entitle it seller carry back contract (deed of trust, or mortgage), purchase money lien, or something similar in order to correctly reflect the amount paid by buyer. Of course avoid all lending terminology including any items in Section 800, Items Payable in Connection With Loan. Again, the buyer shouldn’t be paying discount, origination fees, or any other items typically associated with a loan. If the buyer is paying for an appraisal or other item, have these listed in Section 1300, Additional Settlement Charges. These may seem like small items but again, it’s all in the details.

5. Doing it Right

In summary, if simultaneous closings are part of your investment portfolio, learn to clearly recognize and differentiate this product from a traditional residential real estate loan. If planning to originate loans, be confident you are aware of and comply with all regulations as well as licensing requirements. If working with both product lines, consider utilizing separate entities to conduct each business activity. It is certainly appropriate to obtain legal counsel on these issues and of course, as in all business transactions, treat people fairly, ethically, and with professionalism at all times.

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