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03

Flip the Rest

Earn fees flipping deals you don't want

We’ve got a deal that doesn’t quite fit our Decision Matrix, let’s find a buyer and earn a spread. This can be a tentative process if you have initially represented yourself as the end buyer, so make sure that you come clean ASAP if you intend on finding a buyer for the deal. Don’t lead the seller on as if you are going to be closing the deal if you have no intention of doing so. Even if the deal dies when you ask the seller if you can find a buyer for the trade, it is a much better alternative than being blacklisted and lose all future opportunities.

How to Get a Seller’s Blessing to Market their Asset

For some sellers, an intermediary working on their behalf to move product is not ideal and attempting this conversation will quickly kill the trade. On the other hand, if the seller is truly an “off market opportunity” that doesn’t have any secondary market experience, your services might be greatly appreciated. Intuitively knowing what type of seller you’re dealing with will take time and experience but in the short term, approaching the topic head-on is your best bet. Here’s a smooth transition (if the seller’s pricing guidance is already on the table):

Script A: “After digging into these assets, this trade doesn’t fit into our wheelhouse. However, we have a few buyers in mind that would be a great fit, do you mind if I share the opportunity and get the ball rolling?”

This easy kick-off to a potential flip works if you know what price the buyer is expecting for the deal and you can find a buyer that would be willing to pay more. We will get into your compensation soon but in the meantime, this transition gives the seller a no obligation option to get another buyer on the hook.

On the flip side, if no pricing has been discussed you’ll need to use a different approach:

Script B: “We’re seeing some issues with the deal that would put our pricing even at the high-end at X% of UPB, does that fit your expectations?”

Make sure to low-ball here because if they say they’ll take the trade, it needs to be a good enough deal that you’ll fund instead of flip. If they agree that the pricing is too low, encourage them to put a number on the deal, where they need to be to make it work. Now you can transition to script A with the knowledge of the target price to exceed with your flip buyer.

The point of this step is to show the seller respect, that you have put time & energy into the deal and are willing to offer an alternative to help them achieve their goal of liquidating the asset(s). What we didn’t do here is start the compensation conversation. If they ask you can certainly tell them that you “earn a few points” from sellers you help achieve a successful sale. But for the most part, it is understood.

Where are the Best Buyers?

For this process to be truly as represented to the seller, you should already have a few buyers tee’d up. The good news is that buyers are much easier to come by than great deals! And if you have the deals, you’ll be able to attract the buyers. An easy place to start is, of course, Google. Many buyers pay for “We buy notes” ads and will be at the top of page 1. Other buyers use organic content marketing and can be found on YouTube and further down the Google search results. All of the most serious buyers attend note investor conferences like DME, Note Expo, PaperSource, MBA & IMN events. At the end of the day, buyers are begging to be seen – they want more opportunities and they are putting themselves out there to find (if you know where to look). The secret sauce here is to start compiling a Buyer’s Rolodex. This is simply a spreadsheet of contact information but with the crucial data of Purchase Preference: asset type, geography, target trade size & other “Buy Box” details. Some note buyers will include this information on their website and marketing materials, others will need a short phone/email interview to gather the right information.

Your Deal Summary Spreadsheet

To set yourself apart from the “joker brokers” of the secondary market – you’ll need a consistent Deal Summary format that will be your differentiating feature. Essentially, this just means: making your buyer’s lives easier. You want to have all of the pertinent details of a potential opportunity organized and apparent – with a Yes or No judgment possible upon first glance. Most loan flippers will send out this Summary via email with more details to follow for the buyers that say Yes.

The best note flippers will only reach out to the buyers that are the best fit for each potential trade, rather than blasting out an opportunity to their entire list. The important factor here is to Add Value – don’t just press Forward on the email from the lender, add some context, additional detail and your own indicative research – show the buyers not only why they might be interested in the particular opportunity, but why they should continue to keep an eye for your opportunities.

Pre-Vet your Buyer LOIs

As you know from the last lesson, buyers first complete their indicative research and then submit a Letter of Intent. Since you provided much of the indicative research in your Deal Summary, your flip buyers should be able to turn around an LOI in order to move into exclusive due diligence pretty quickly. Since you are servicing as an intermediary, it’s now on you to play proxy for the seller, pre-vetting the buyers that send in LOIs. Let’s dig into the most important factors to review:

  • Price: this is first priority, is the offer in the seller’s ballpark – can you make a spread?
  • Contingencies: do the buyer’s factors appear reasonable or does it look like you’ll be putting the seller to work to fulfill their needs?
  • Timing: based on any initial conversation with the seller, does the buyer’s timeline look like it will be conducive to the seller’s?

Fee Structures

There are many ways to approach compensation when you bring great deals to market. We left Fee Structures to the end of the course because approaching this conversation too early with your buyer/seller can quickly turn a deal sour. Although there are some merits to speaking up sooner than later with many factors in the loan sale process, you don’t want to come across as doing it solely for the fee. Everyone already knows that there is money to be made when transactions occur and if you have followed the mantra of Adding Value, you will have provided evidence up front. Unless your counter-party asks you point blank to name your fee earlier in the process, it’s better to wait until there is a potential transaction imminent (and when you have buyer LOI in hand, now is the time).

  • Easy-Fee Deal Structure

The easy-fee deal structure is simple – the seller pays a percentage after they have received proceeds from the buyer. This is easy because they have the funds in hand and you invoice them for your percentage when the deal has successfully closed. The typical fees range from 1% to 7% or more depending on the deal. For larger transactions where you are essentially just making introductions, <3% of the contract price is typical. But for smaller deals where you are providing more of a hands-on coordination of the transaction, 5% or more is fair. As a point of context – FIXnotes charges 7% to our sellers after marketing, negotiations, LPSA/AOM/allonge prep and servicing transfer facilitation. On the other hand, when we help a larger buyer move a portfolio that they will be handling the post-sale logistics we earn 3% of the final contract price.

The timing to present your fee typically corresponds with the delivery of the buyer’s LOI. If you are particularly distrustful, you could share some of the offer details with the seller along with a fee agreement contract for their execution (in other words, holding out on revealing the buyer until you have an agreement in place). If you have a good relationship and a reason to trust the seller, you could attach the buyer’s LOI along with the details about your compensation expectations. You might not even have a formal contract in place but operate on a shared understanding of your role & remuneration. At the least, I wouldn’t leave it to just a verbal agreement, make sure to document your agreement in an email.

  • Earn the Spread Deal Structure

Another approach which we teased in the first section of this lesson is to earn the spread between what a buyer is willing to pay and what a seller is willing to accept. If you have a price from the seller, just find a buyer that will pay more (much easier said than done!). It’s a tricky proposition because unless you are contracting to buy the loans into your entity and “table-funding” by having a simultaneous contract with the flip buyer and your company, the flip buyer is likely to see the amount you’re earning solely through your negotiation skills. Personally, I find this strategy a bit less “value add” and a bit more extractive but it is certainly lucrative if you can manage all the moving parts. Another real estate strategy “Wholesaling” is similar, where the Wholesaler is primarily a marketer looking for deals, they get a seller to sign a sale agreement that allows for the assignment of the contract. Within the specified timing, they find a buyer to assume their contract at the higher amount.

  • Advanced-Positioning Deal Structure

In the perfect world you’ll earn a finder’s fee from the buyer and a success fee from the seller – and it can be done! It’s a more advanced approach that typically requires some a few successful trades under your belt to execute. You can start while you are working on adding new client’s to your Buyer’s Rolodex. Instead of offering to send them anything that comes across your desk, mention a finder’s fee agreement for their consideration. It might be a non-starter, but if you can sell it – many buyers that are eager enough for product understand that you’ll work harder on their behalf if there’s a fee incentive for a completed trade. This buyer-side compensation can be paired with a seller success fee but is less likely to be paired with making a spread as you are essentially working on behalf of both the buyer & the seller – transparent fees throughout the transaction are imperative for a good faith deal that encourages repeat business.

The fee structure(s) you implement are only limited by your imagination and what the market will bear – but keep in mind, the more you ask the less likely you are to see repeat business. There is a delicate balance to consider between the perceived value of your market-making services as the compensation you require. Think long-term and deliver more value than you extract and you’ll make your future-self happy to have an easier time getting deals done. This represents a major difference between real estate wholesalers and mortgage note flippers – wholesalers are finding homeowners for one-time transactions and other than their buyer relationships (which as we already explained earlier are much easier to come by), they don’t orient themselves for repeat business with their sellers. In the secondary mortgage market, you can make a great career with just a handful of great sellers – so treat them well!

To take the next steps, complete our in-depth course on building a Loan-Sale Advisory for a lucrative secondary market career starting from scratch – Mortgage Note Matchmaker (mastermind masterclass)

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