January 2003
New
This Issue
Back
Issues
NCC
Now Accepts Credit Cards On Line!
Now it’s easier
than ever to order either of our best
selling instructional manuals and software or register for one of
Ed Lisogar’s standing room only educational sessions. NCC has
entered into a strategic alliance with Card Service International of
California. CSI, the industry leader in secure, on line credit card
processing, will now handle all on line orders from the NCC web site.
In conjunction with
this new, convenient service for all associate consultants, NCC is offering
a post Christmas discount on both best selling instructional
manuals. See the related story below for details!
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“Why
all the stupid questions?”
Does an investor
really need to know all of this just to give a quote?
One area that exasperates
new and inexperienced brokers is why we ask all of these questions before
even giving a quote. After all, isn’t that what “due diligence”
is for?
Well yes, but certain
aspects known at the outset will send up red flags for many investors
that brokers will miss. Nothing worse than getting well into a deal
only to uncover information that kills it on the spot. Many times it’s
an issue that could have easily been asked in the first conversation
between seller and broker but was not (lien position, seller’s
price point, etc.).
If you get into
the habit of asking pertinent questions that are relevant to the particular
note type your working on, YOU’LL find that you maximize your
time, just as we try to do on every deal. After all, time is money in
this business, whether you’re a broker or a buyer.
Price Point?
We
always want an asking price to accompany any pool or portfolio submission.
The finance business has changed drastically over the past 16-18 months.
Many loan companies and originators are out of business…gone…nada.
As a result, certain industries (mobile homes are the greatest example)
are finding that they now have to provide in house financing (carry
the paper themselves) in order to move their inventory. Problem is they
don’t want to hold the paper…that’s not what they
do. Historically they had a lender, sitting at that small desk in the
corner of the showroom, just waiting to help a buyer complete the loan
application. Loan approved, dealer is cashed out, lender has a new loan
to service. Fast forward to today: No more lenders, dealer forced to
carry the paper, looks for an “investor” (read: lender),
expects PAR for the new note just like he received full cash value from
the lender previously. Dealer simply cannot believe that there isn’t
a buyer willing to pay PAR and cash him out. Worse he REALLY can’t
believe you have the audacity of suggesting they sell at the discounts
the market is paying these days. As a result the same pool(s) circulate
again and again as one broker after another receives it from the seller
(the same seller incidentally that swears “…you’re
the only one he’s shown this to”). One broker after another
advises that his pool has a market in the 65% range and then listens
as the seller screams about the high discount and moves on. After months
of pricing MH pools (which trade, by the way, at or around .55-.75/$)
and finding out after the fact that the seller expected .97-.98 (or
worse, PAR!) we simply will not review any spreadsheets on any loan
types without some indication of the seller’s asking price. It’s
a simple thing…ask the seller what he realistically expects for
this pool on your very first conversation
On individual notes
is ALWAYS been a good idea to find out what the seller’s NEEDS
are to both determine if you have a realistic seller (as discussed above)
but also to tell you and us which program will work best for the seller
(partial, split, etc.). Few sellers understand the different options
that they have to pull cash out of the note WITHOUT having to give away
the farm. Explaining to a seller how a partial works will show the seller
that you are interested in providing a program that works best FOR HIM.
As you can see this is even more important on pools.
Why is the
seller venturing outside their typical exit strategies?
An “exit
strategy” is simply a fancy industry term for where/who sellers
have been moving their paper to. In many industries, lenders, finance
companies, originators, etc., have all the conduits, exits they can
handle. Rarely do they need to go to the market or utilize outside brokers
to sell their paper. When we’re presented with a pool that fits
that description it surprises us, and the natural next question is why
would they be taking these notes to the market, why haven’t they
utilized their typical exits? The answer to that question will tell
us volumes about the paper and MAY save all of us a lot of time. If
there are glaring “red flags” accompanying the pool it’s
unlikely that we’d buy it either. Again, we might as well get
all the information we can right out of the chute before any of us,
brokers included, spend a lot of time on something that was doomed to
fail from the start. Once you recognize that there is a well established
“good old boy network” for certain pool types, this question
will make sense to you and it should be the first thing that comes to
mind when one falls in your lap. I'’ not telling you to look a
gift horse in the mount, just ask yourself why YOU have been so lucky
to see something that typically never leaves the standard conduit. We
asked a broker this question a few months ago and, in his frustration
that we had the audacity to ask a few questions in our effort to get
to a reasonable price point, he responded “…what a stupid
question…how about, BECAUSE THEY CAN!”. Professional…very
professional.
How long has the paper been shopped?
The length
of time a note or a pool of notes has been on the market speaks volumes
about the quality of the paper, as well as the seller’s realistic
expectations (or otherwise) for the note(s). Any note or pool of any
quality will be bought right out of the chute. If it’s quality
paper and it’s making the rounds, then the seller is likely unrealistic
(see above). If it’s junk, well that speaks for itself. The problem
typically is that sellers will rarely tell you how many investors they
have presented it to…again, as discussed above, many sellers have
no problems telling every broker they send it to that “…you’re
the only one he’s shown this to”. Bottom line is ASK.
When you determine
that the seller has shopped it around pretty well, ask them why it hasn’t
sold? Again, you’ll likely get a song and dance but on occasion
some of the information might be useful.
How long
in business at this location (business note)?
A business
that has just opened has not had the opportunity to develop a steady
clientele (Even more so for hospitality industry businesses-cafes, deli’s,
etc.). We typically want to see a business open at same location, operating
and profitable for at least 3-4 years. Submitting a note secured by
a “start up” is a waste of your time and will not be considered
for acquisition.
What experience
does the buyer have in this business (business note)?
Does the buyer
have any history in running this type of business? Did he leave 9-5
to pursue the “American Dream” of owning his own business?
Too many people dying to run their own business have, unfortunately,
the wrong idea of what running your own business actually involves.
Showing up on Tuesdays and Thursdays and golfing three days a week is
not the typical schedule of the small, business owner. Try being the
first to arrive and the last to leave seven days a week. For many new
owners with little to no actual business ownership experience, 9-5 starts
to look pretty good after a while and many walk from their new venture
and we have a default on our hands. On any business note we’d
like to know the Payor’s background in THIS type of business.
If it’s a new venture for them, it’s likely we’ll
want to minimize our ITV or possibly pass altogether.
What do
you know about the seller?
The seller
may be a private individual, a corporation, a one time seller, a company
that buys and sells a lot of paper, a large dealership (as in auto or
MH paper) or a one lot scratch and dent operation. Believe it or not
we can tell a lot about the paper in question when we have some information
about the seller.
Obviously these
issues are just the tip of the iceberg when it come to our due diligence
however the more time saved early on, the greater YOUR return on time
invested. None of us has any time to waste so the better prepared you
are when coming to us with a potential deal, the faster we can get it
closed and put a check in YOUR pocket.
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State
bankruptcies on rise
Poor
Economy helps to drive personal filings up 10%
Christine L. Romero
The Arizona
Republic Editors note: Many of you are asking why underwriting criteria
is being tightened in both real estate as well as business note acquisitions…the
following is but one article that are in every newspaper nationally,
on a daily basis.
More Arizona residents
are dumping their ever-increasing debt loads by filing for personal
bankruptcy. Personal filings for the first five months of the year rose
nearly 10 percent, to 11,389, compared with a year ago, according to
the U.S. Bankruptcy Court District of Arizona. That's on pace to break
the record set in 1997.
During the five
months, 312 businesses filed for bankruptcy protection, about the same
number as a year ago. Lenient bankruptcy laws, mounting personal debt
and the sluggish economy are being blamed for the increase.
"The continued
record-breaking pace of new bankruptcy filings will likely fuel new
calls for legislation making bankruptcy less available," said Samuel
J. Gerdano, executive director of the American Bankruptcy Institute.
Last year, bankruptcy filings nationwide were a record 1.5 million,
up 19 percent over 2000.
That trend tracked
in Arizona, where filings also rose 19 percent to 24,995, nearing the
record 25,069 in 1997. In addition, average credit card debt last year
was $8,100 per U.S. household, 171 percent higher than the debt load
carried in 1990, according to CardWeb.com, publisher of credit card
data.
Another factor is
the lessening stigma of filing bankruptcy, observers say. "It's
a change in society and the underlying value system," said Marshall
Vest, a University of Arizona economist. In the past, "It was an
honor thing. You paid off your debts."
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Dates
for 2003 Specialized One Day Classes now being finalized
Over the years you
may have had the opportunity to participate in one of Ed Lisogar's numerous
speaking engagements. Whether at The Paper Source, Noteworthy, Cash
Flow or one of the many financial conventions across the country, Ed's
no nonsense approach to all facets of the cash flow industry guarantees
standing room only sessions that are both informative and entertaining.
But make no mistake…the
bottom line is knowledge…and an expedited road to success for
all of National Capital's associate brokers.
Now you can spend
an entire day with one of the most dynamic instructors, lecturers, authors
and public speakers in the cash flow industry, participating in a hands
on discussion of the fastest growing segment of the cash flow industry.
Dates
and cities are now being finalized for 2003.
Click
here for a full description of these sold out classes
E-mail
the company today to put your name and city on the notification list
for times and schedules of interest to you.
* Don't
take our word for it...see what past attendees are saying about this
powerful session!
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Can
a lender call a loan due & collect a prepayment penalty?
Here is a Court
ruling from Peoria IL;
Slevin Container
Corp. v. Provident Federal Savings and Loan Assoc:
Slevin transferred
a property with a $430K loan and notified Provident of the transfer.
Provident exercised it's option to declare the entire balance due and
stated "it appears from the terms of the note that the obligation,
if paid off at this time, would be subject to the prepayment penalty
and, therefore, it will be added to the balance due. "Slevin tendered
and provident accepted the principal but declined to release the mortgage
until the penalty was paid, resulting in this declaratory judgment action.
The question is whether the lender may both accelerate the maturity
of the note upon a sale of the property and also collect a penalty for
prepayment? Provident argued that it was Slevin who forced the acceleration
of the maturity date because of the sale. Slevin argued that selling
the property was not the action which accelerated the maturity date
of the note That result was solely the decision of Provident, since
if they so elected the mortgage payments could have been continued as
in the past.
The Courts
Decision; When the property was sold Provident had the option
of declaring the entire balance due or continuing to receive the monthly
payments until mortgage was paid and satisfied. Neither of these clauses
were such that one would be activated automatically. Provident had a
choice and it elected to declare the unpaid balance of the note due
and payable. The court concluded Provident was not entitled to a prepayment
penalty since once the maturity date of the obligation was accelerated
by Provident. Payment therefore could not constitute
prepayment of the obligation.
Editors
note: Seems that if there was a due on sale clause in the loan documents
the Borrower WAS obligated to pay it early. I guess the argument could
be made that the lender could have always WAIVED that requirement and
continued receiving payments but what would their security be in THAT
scenario as any intelligent buyer would insist on the title being delivered
free and clear…?
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Sole
ownership a mixed bag
Yvette
Armendariz
The Arizona Republic
Editors
note: Here’s some food for thought, particularly for the new consultants
out there deciding which business entity to operate your new venture
under.
Most people enter
business ownership as a sole proprietorship.
"By default,
it's the easiest" of business structures, Phoenix attorney C. Richard
Potts said "If you do nothing, that's what you have, a sole proprietorship."
Nationally, 15.1
million, or 73 percent, of all businesses are set up that way. Like
the three other structures - corporations, limited-liability companies
and partnerships - it has its advantages and disadvantages.
The main attraction
is its ease to structure and cost.
"It doesn't
require spending money with attorneys, at least initially," Potts
said.
Bookkeeping also is much simpler, as the owner doesn't have to set up
corporate or partnership books, he said.
However, Armando
Roman, a certified public accountant, said all businesses should keep
separate accounting records for tax purposes.
Joseph Udall, a
Mesa business attorney, said additional benefits of sole proprietorships
include simple administration and the ability to withdraw money from
the business as needed, without legal or tax limitations.
John Henry Smith,
a business counselor, said the sole proprietorship model makes sense
for many businesses if they don't generate many sales, don't have employees
and have low-liability exposure. But as a business grows, Smith recommends
seeing an attorney about whether the structure continues to makes sense.
Udall agreed.
"Once you start
making money, you expose yourself to risks," he said.
For example, if
you have an employee who gets into a car accident, the business and
the owner's personal assets may be the targets of a lawsuit, Udall said.
You're also personally liable for wages, purchase orders with other
businesses, and unpaid utility bills. Other potential downsides to sole
proprietorships include losing out on tax breaks and difficulty finding
investors, who want the business to be structured, he said. Potts said
that business owners also get more tax savings options for exiting out
of businesses when they use a corporation, partnership or limited-liability
company.
With a sole proprietorship,
there isn't a way to separate business and personal assets, Potts said,
so the business is considered part of the estate when the owner dies.
That's also what
makes it almost impossible to sell a sole proprietorship, he said.
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Standing
Room Only at “The Forum”!
The
Forum, here at NCC's web site is the place to "hang" to
pick up the latest tips, techniques and answers to questions relating
to a variety of arenas in your industry. You never who will be joining
in on the conversation.
Have a question
about a deal you're working? Not sure if there's a market for certain
cash flows? Wondering what's the best way to find certain note types?
The Forum is the industry clearing house for questions like these and
ANYTHING you have to discuss!
According to NCC
President, Ed Lisogar; “We prefer our associates post their questions
at the appropriate section at the Forum rather than send an e-mail directly
so that ALL of our brokers and consultants can appreciate your question
and our answers”. Ed stresses the importance of reviewing the
existing postings before posting your own as in many cases, your question
or topic has been asked and answered previously.
Post
questions or comments on a variety of topics. Join in on an ongoing
discussion. Respond to postings from other brokers as well as investors.
Share your experience with your fellow brokers by adding YOUR OWN comments
to postings already in place.
It's all there for you at the "Forum".
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Lottery
Bill Heads to the Senate Mistakes
Massachusetts
Lottery Legislation
Here’s the
latest development in the MA Lottery Assignability Legislation according
to friends of ours in the industry.
A new Bill, HB 3093,
was passed by the MA House this past week and was referred to the MA
Senate. This is good. If this Bill passes it will allow MA winners to
freely sell all or part of their lottery payments.
Apparently they
have three weeks to pass it and send it to the Governor or kill it for
now.
For those of you
in the state, as well as those of you cash flow consultants that work
the lottery arena, this is worth watching as a lot of the costs involved
(and passed on to broker and/or seller) in any non assignable state
relate to the legal bills associated with the court orders required
to get certain lotteries assigned.
Stay tuned sports
fans!
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Brokering
Meat Paper…now THAT’S Diversifying
By Jon
Richards © 2002 NoteWorthy Newsletter
Brokers can make
large a commission by brokering consumer paper, a little known niche
for the creative cash flow specialist
Just when you think
you have it all figured out, innovative paper buyers develop even more
interesting and profitable note niches. Now you can broker notes secured
by meat!
I recently spoke
with Gina Frame, Sales Representative with Monterey Financial Services
(800-456-2225) about some of the innovative cash flows brokers are bringing
to her company. Monterey primarily buys consumer loans on such services
as vocational schools, health equipment, Internet based products and
services, lasik surgery, plastic surgery, and more. She said they could
now buy bigger portfolios of consumer notes because their credit line
has been increased from $12.5 million to over $20 million.
BROADEN
YOUR MARKETING
As a note broker,
you should broaden your marketing to find companies that hold consumer
loans. In addition, brokers can earn commissions by referring “bad
debt” accounts to Monterey, and good notes for loan servicing.
The most lucrative
businesses to solicit have one or more of the following characteristics:
they provide a service, not a product; they carry their contracts in-house;
they have not yet offered their customers an installment payment option;
or, they need to generate cash for improvements, taxes, inventory, etc.
Brokers can find these businesses by using the Yellow pages, the Internet,
and the local newspaper.
NOT FACTORING
You can also advertise.
Monterey suggests some wording for your ad: BUSINESSES…NEED CASH!”
WE BUY UNSECURED CONSUMER ACCOUNTS RECEIVABLE. PORTFOLIOS OR ONGOING
FUNDINGS ACCEPTED. BAD DEBT COLLECTIONS AND BILLING SERVICES ALSO AVAILABLE.
MAXIMIZE YOUR CASH FLOW WITH OUR RECEIVABLE MANAGEMENT SERVICES. CALL
(YOUR PHONE NUMBER).
Monterey is not
a factoring company, and does not buy business notes. They buy consumer
paper, a still untapped source of brokerable notes. For example, Ms.
Frame said a broker found companies that sell freezers to consumers.
To encourage the consumer to buy the freezer, they stock it with 6 months
worth of meat. The freezer is financed through traditional banks; but
the freezer company finances the meat. The “paper” on the
meat is then sold to Monterey. “There is a lot of volume in the
freezer industry…and the broker that sent us this transaction
is earning a continuing commission.”
CREATIVITY
An even more interesting
niche for paper was developed by a broker who is making over $8,000
per month. Ms. Frame said, “There is a service for parents of
college age children to help them find scholarships and funding for
college. This service generally costs over $1,000, and the company allows
the parents to pay on a contract. The broker then sent us these transactions
and is earning a continuing income as long as we buy the loans.”
Monterey’s
integrity and credibility are among the highest in the industry. This
is important as they expect you to have some basic knowledge about what
they have to offer. When you identify a potential client you should
introduce Monterey to the client and then call them with the client’s
information. The client company should already understand the potential
payout percentage (70 % - 75%), reserve, terms and contract size limitations
prior to direct contact from Monterey. They then work directly with
the client and inform you, the broker, on all correspondence.
Finally, Ms. Frame
told me, “We don’t make the brokers do a lot of work, there
is no cap on their commissions, and they will get paid as long as we
are buying the paper. We do all our funding in-house.
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Happy
New Year from National Capital Corporation!
The holidays are
behind us and we’re on our way to another exciting, prosperous
new year in the cash flow industry.
Now that you took
care of everyone on your list, how about doing something nice for yourself?
Throughout January
and February 2003, order either one of our best selling manual and software
publications, "Cash Flow Correspondence" or "The Business
of Business Notes" and receive a 25% "New Year" discount!
That's right, 25% off of either best selling manual*.
Want them both?
Take 30% off the combined retail price when ordering the two together!
That's a $53 dollar
savings!*
You can check them
both out at the Instructional Manuals page at our web site. While you're
there, read the reviews from industry experts. You'll see why both have
become the technical AND reference manuals of choice for the brokerage
community.
In addition, NCC
can now take your credit card order on line!
So treat yourself
to a late Christmas present and get 2003 off to a great start. The benefits
will be around LONG after the tree and lights are gone!
Remember...this
special offer expires March 1, 2003. Just follow the simple ordering
instructions at the Instructional Manuals
page.
NOTE:
This discounted offer is only valid when ordering directly through National
Capital Corporation.
* Shipping and handling
charges still apply. Shipping and handling will be charged for EACH
manual, whether ordered together or separately.
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Broker
Question of the Month
Every issue the
staff at NCC select a question from the NCC Forum to share with our
newsletter subscribers. Got a question, comment, story or experience
to share? Post it at the NCC Forum.
This issue's
posting is by Tharian Walters who asked:
Ed,
I'd
liked to make a comment; I've seen a couple of your post on other
cash flow website saying that brokers need to be diverse. I second
that motion, as I think about getting into this business, it seems
to always be the same with new note brokers, they only want to chase
down single family residence seller carry back.
Why
is the business note industry still under served? The business note
holder is no different than the real estate note holder. It seems
that even though there are fewer business notes available, they have
a higher discount when purchasing.
Tharian
By Ed Lisogar:
I have to disagree.
80% of the small
business sales in this country are seller financed. That means there
are TONS of seller financed business notes available for the smart
broker. Second, they are far more motivated as they were literally
forced to carry due to the lack of traditional financing. That's great
news.
You ARE correct,
however, in that the discounts are high, particularly when a seller
insists on liquidating the note in it's entirety. You can say with
complete confidence that a business note with more then 3-4 years
of payments remaining will provide 50%-60% to the seller after you
deduct your fees. Most sellers have a minor stroke when they hear
that and that's fine (not the stroke part...). We agree with them,
the discount is horrible. What our services do best is to SUPPLEMENT
the cash they've received to date (the down and the payments) through
either a partial or a split (the report I sent in a separate e-mail
outlines those methods). In this fashion you can provide the seller
with the cash they need TODAY, and allow them to retain income from
the portion of the note not touched at this time.
Brokers that do
not educate themselves on this specialized area of the industry are
constantly met with serious objections from the seller. After being
yelled at a couple of times it's no wonder they walk away from working
these note types...who needs the frustration. HOWEVER the savvy broker
that invests the time to learn the insides and outs of this high profit
side of the secondary market earns nice fees and has little competition.
If you're serious
about the business note arena, head for the Instructional Manuals
page here at the site and read up on The Business of Business Notes,
the original instructional manual and software on this arena. Now
in it's 6th printing, it will take you by the hand and teach you everything
you need to know to succeed where others fail.
Also, drop in
on the Seminar page for information about dates and cities for our
specialized one day classes on business notes.
Great
question.
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…and
finally
A boat docked in a tiny Mexican village. An American tourist complimented
the Mexican fisherman on the quality of his fish and asked how long
it took him to catch them.
"Not very long,"
answered the Mexican.
"But then, why didn't
you stay out longer and catch more?" asked the American.
The Mexican explained that
his small catch was sufficient to meet his needs and those of his family.
The American asked, "But
what do you do with the rest of your time?"
"I sleep late, fish
a little, play with my children, and take a siesta with my wife. In
the evenings, I go into the village to see my friends, have a few drinks,
play the guitar, and sing a few songs...I have a full life."
The American interrupted,
"I have an MBA from Harvard and I can help you! You should start
by fishing longer every day. You can then sell the extra fish you catch.
With the extra revenue, you can buy a bigger boat. With the extra money
the larger boat will bring, you can buy a second one and a third one
and so on until you have an entire fleet of trawlers. Instead of selling
your fish to a middle man, you can negotiate directly with the processing
plants and maybe even open your own plant. You can then leave this little
village and move to Mexico City, Los Angeles, or even New York City!
From there you can direct your huge enterprise."
"How long would that
take?" asked the Mexican.
"Twenty, perhaps twenty-five
years," replied the American.
"And after that?"
"Afterwards? That's
when it gets really interesting," answered the American, laughing.
"When your business gets really big, you can start selling stocks
and make millions!"
"Millions? Really? And
after that?"
"After that you'll be
able to retire, live in a tiny village near the coast, sleep late, play
with your children, catch a few fish, take a siesta, and spend your
evenings drinking and enjoying your friends!"
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