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The 10 Biggest Mistakes Note Brokers Make

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During the last several years I have tried to determine “What makes the best note brokers successful?”

I have personally had the benefit of seeing the industry from a wide variety of views. From start-up home based broker to Assistant Vice President of Metropolitan Mortgage, and co-owner of Diversified Investment Services, I have seen the cash flow industry from all perspectives. I could spend hours discussing the positive traits that the best brokers in the country posses.  For the purpose of this article, I would like to mention what I feel are the biggest mistakes brokers make. Individually, these are not huge problems. However, if you find yourself having trouble with several of these, you could be missing out on a lot of money making opportunities.

1. Not Knowing Why the Note Holder is Selling

If you do not know the answer to this question, you have already begun an uphill battle to purchase the note. How can you possibly structure a purchase to take care of the sellers needs if you do not know what those needs are? All sellers WANT a full, 100 cents on the dollar purchase. What they will ACCEPT may be something entirely different . I once dealt with a seller that was shopping his 100K note. He told every broker he wanted a full purchase. Everyone offered him 80K – 85K. (A 15K – 20K discount.) It turned out that after I spoke with the seller I found out all he NEEDED was $11,500 to go on a cruise. A simple partial. I couldn’t believe that none of the other brokers (5 of them) had taken the time to find out “why” he was selling. There are almost an unlimited number of ways to purchase a note. Your job is to determine which method will work best for your seller. You can not do that without knowing their needs.

2. Quoting Without Seeing the Documents

The industry seems split on this subject. Some brokers believe that you must have the documents in hand to quote (“no note, no quote” policy). Other brokers simply give quotes all day on the phone without seeing any documents. I have done both and I can tell you the advantage to seeing the documents in advance is twofold. One, you have a more committed seller. If the seller took the time to send you the documents, you know they are at least somewhat serious about selling their note. Secondly, you know you are dealing with accurate information. Often the seller will not remember the correct payment amount or that there was a balloon or bump payment. Additionally, quoting the deal without seeing the Payors credit is a big problem as well. Some brokers feel it is necessary, others do not. More deals are cut due to the credit worthiness of the Payor than any other reason. The credit may also determine what yield you will get from an investor. If you quote “assuming” good credit, you will find yourself in a numerous amount of re-bidding situations that you could have avoided by obtaining the credit report up front.

3. Not Knowing All Of the Ways to Purchase a Note

With increased competition, a simple full or partial purchase may not get you the deal. You need to know ALL of the purchasing programs that are available to you. You may use each purchasing method only once or twice a year, but it will be the difference in your buying more deals and outbidding your competition by a significant percentage.

4. Poor Packaging

Packaging is your opportunity to sell the deal to the investor. Too many brokers neglect this step. Your packaging may determine; How much will be paid for the deal, if the deal will be purchased, how you are perceived as a broker, and how fast the deal will close. It does not do you any good if you find great deals all day long but cannot package them in a way that the investor can see that. A large number of deals are not purchased simply because the broker did not take the time to put together a complete package.

5. Letting the Seller Control Your Negotiations

Remember that you are dealing with the art of negotiation. You want to maintain control at all times and keep it conversational. Do not appear too desperate. You want to make the deal, but the more matter of fact you can make the conversation (as if you do this all the time) the better off you are. Additionally, be prepared to walk away. If the seller is pushing for an unrealistic price, let them know. If you can not come to an agreement, leave the door open for the seller to come back. Often they will.

6. Poor Marketing

This one seems obvious. The important thing to remember is “cost effective” marketing. You may be getting some response from an ad in a certain paper, but is it cost effective? Many brokers continue a specific marketing method that has long since panned out, but they stay with it for emotional reasons. Be prepared to keep moving. If you do not, you may go broke before you ever get enough deals.

7. Telephone Skills

Remember that you are running a business. No matter how many times I have heard this said, I can still call a broker, get a machine and hear dogs barking or children in the background. If I hear it, so does their note seller. Doesn’t instill a lot of confidence, does it? Always be professional!

8. Shopping the Note

This is something that just makes a broker look bad. Know your investors and what they will purchase. If you send out 10 requests for a quote and choose one of them, you still have nine other investors that wonder where the deal went. Not a big problem on one transaction, but if you get the reputation for sending them all over, it is difficult for the other 9 investors to take you seriously.

9. Incorrect Balances

This occurs when the broker simply takes the word of the seller on what the current balance of the note is without checking. Often when a file is closing and the documents are being prepared, it becomes obvious that you are dealing with an incorrect balance amount. You must, at that time, search out the correct balance information; thereby causing delays in your closing & possible price adjustments.

10. Keeping Your Word

If you say you are going to call a seller on Tuesday with appraisal results, call them back on Tuesday. Even if you do not have the results, call them. Simply state that the results are not in. Waiting an extra couple days makes you look unprofessional. In this case, you could not control a late appraisal, but you can control your calling the seller as promised and let them know the status. Also, by keeping them involved and aware of what is going on, your seller will be more cooperative down the line.

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.

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.

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