PROFITS IN DIRT: LAND NOTES!
Note brokers who get rich do so by developing niche markets. That is they develop an expertise in an area of notes where these is no competition. If you are only going to broker first notes on owner-occupied, single family residential homes, you will face stiff competition in finding them and then in getting the best price. A good niche market note broker will be working with note sellers who are not shopping the note and in a market where there is no competition.
One niche market that has not been fully exploited is land notes. There are profits to be earned by you the note broker, and many of the corporate note buyers listed on Direct Connect will buy them from you.
The secret in buying and brokering land notes is to locate safe land note that profitable for you and brokerable to an investor.
- First, you want to buy notes only on developed land, not just dirt. Developed land means the roads, electricity, telephone, water and electricity are in, but there is no building.
- Second, you want to buy land notes with recourse back to the note seller. This means the seller of note is personally liable if the payor defaults on his or her payments.
- Third, you want to have a realistic appraisal on the land value. I say realistic because developers can distort the value by selling a parcel to a colleague at an inflated price. New buyers and some appraisers will use this phony sale price to give an inflated appraisal.
- Fourth, you need to run a credit check on the payor. You should only try to broker land notes with good payor, who have close to “A” credit.
- Fifth, verify that the payor made a cash down payment of at least 25% on the property. This verification can come from the closing statement or from talking to the payor directly.
- Sixth, you should call the payor to verify that he is happy with his purchase, and he is not unrealistic about making profits on his new property. Many land developers will “oversell” a developed lot, leaving the buyer with dreams of riches in few years. When the buyer’s dream bursts you do not want to be stuck with a disgruntled payor.
- Finally, you will need to keep your loan to value below 50% if you want to broker the note to a corporate investor. You do this by agreeing to buy only part of the payment stream. For example, if you and your investor are comfortable with a $30,000 value for lot in a residential area, you would multiply .50 times $30,000 to get the maximum investment for your note buyer. In this case, most other investors would invest $15,000 in this note. If there were a $22,500 note to be sold, you would offer to buy only part of the payment stream.
There is an existing note on the property that the developer wants to sell. The note looks like this on your calculator:
N I PV PMT FV
120 10% $22,400 $297.34 $0
Since you know many corporate note buyers listed on Direct Connect will only invest $15,000 in the note you place that figure in Present Value (PV) of your calculator. You also learn, by calling our office, that we will buy land notes of 5 acres or less at a 13.74% yield. You put this figure in the I/Y column. You know that the payment is $297.34 with goes into the Pmt column. The only thing left to calculate is the number of payment you expect your investor to buy. It looks like this:
N I PV PMT FV
76 13.74% $15,000 $297.34 $0
This means the corporate investor could buy 76 payments of $287.34 for $15,000 to get a 13.745 yield. You might offer $13,000 to the note seller to allow yourself a $2,000 commission.
Convincing the Seller
Your seller will agree because land developers and lot salesmen usually need cash. In this case you will show him that he is receiving $13,000 cash today and when he gets the note back in 76 months it will still have a balance due of $10,914. In his eyes he is not taking a discount at all and we are rewarded for understanding the time value of money.
Your goal is find a good supply of lots, and a hungry developer. Advertising that you buy land notes is one effective way to locate them. Other brokers have had luck working with real estate brokers, others contact developers by phone offering to finance some of their sales. Your marketing creativity can be rewarded with 3 or 4 of these deals a month.