Private Mortgage Notes

Episode 18:

Private Mortgage Notes | How to Buy, Sell, Broker or Invest

Tracy Z. Rewey has handled millions of dollars in owner financed real estate notes, private mortgage notes, and alternative cash flow purchases since 1988, becoming a well-known industry expert.

Tracy shares her 30+ years of insider secrets with real-life examples that help you realize profits today and build cash flow for the future.

Tracy began her career in real estate closings and title searches leading to a position with Metropolitan Mortgage & Securities. During her 10 years with Metropolitan, she mastered a variety of positions including broker relations, investment analysis, closing management, underwriting, and BrokerNet™ software development.

Tracy left her position as Vice President of Metropolitan in 1997 to open Diversified Investment Services, Inc, with her husband and business partner, Fred Rewey. From start-up note broker to corporate officer for the nation’s largest note buyer, their experience covers all aspect of marketing, closing, underwriting and servicing cash flow notes.

Co-author of Promote Your Note Business and the acclaimed Personal Profit Series, Tracy specializes in the use of tax-advantaged retirement funds to purchase both notes and real estate.

She has received numerous industry awards including:

  • 2002 NoteWorthy Industry Achievement Award
  • 2001 Discount Buyer Association’s Lifetime Achievement Award
  • 2000 American Cash Flow Association Million Dollar Club Award
  • 2000 Top Producing Broker Award (Jeep Grand Cherokee) from Metropolitan through National Contract Buyers

Tracy shares her unique insights and experience with both new and experienced brokers through a variety of specialized services offered by Diversified Investment Services, Inc., a Florida note buying and training company. Since starting her own business, Tracy has learned to leverage a small business marketing budget using the power of the Internet, Social Media, SEO, and Local Internet Marketing. Online marketing has become the lifeblood of her company and she enjoys helping other business owners see the same results!

What you’ll learn about in this episode:

  • Tracy’s background and her path to starting her own business
  • The best ways to invest in and find private mortgage notes
  • Why Tracy goes after notes that already exist instead of creating her own — and why that’s not the only way to do it
  • Earning while you learn: getting referral fees for passing along notes to investors
  • Investing for interest income
  • Buying private mortgage notes for discounts and setting your rate of return
  • Enticing people to pay off early to increase your yield
  • Buying just a portion of a private mortgage notes
  • Why you don’t have to live in the cities you buy private mortgage notes in — but why you should try to become a local expert too
  • Laws you need to know about that make specific states more complicated for buying private mortgage notes
  • Things you need to look at before pricing out a private mortgage notes
  • The biggest nightmare Tracy ever faced
  • The four signs of a con
  • The best deal Tracy ever made
  • Tracy’s training program that demystifies the financial calculator



Welcome to the Real Estate Investor Summit Podcast. Coming to you straight from the smallest big town in Texas, with your host, mentor, and owner financing master, Mitch, AKA Be the Bank, Stephen. The possibilities of life without a J-O-B start here. So grab your pen and paper and listen up. Y’all just might figure out how to fail forward to financial freedom.

Hey, investors. Are you tired of struggling to find financing for your real estate transactions? Are you tired of overpaying your hard money or private investor? Introducing Capital Connection. The world’s first and only true source of sources. We, at Capital Connection focus 100% of our efforts, time, and resources on finding the absolute, best resources in the nation. We then connect you directly with those sources. It’s really that easy. Please go here to learn more now. 1000houses.com/capital.

Mitch: This episode is also sponsored by Fund and Grow. My friends at Fund and Grow, Mike Banks and Ari Page, are doing a fine job helping my students find funding for their deals. So I want you to go to 1000houses.com/grow and listen to how they’re getting my students 0% interest money, and/or, very, very affordable bank lines of credit. Now we want to remind you that yours truly, has interviewed Mike and Ari personally on this podcast. So you might want to go back and catch that.

But, I also want to tell you that today, sixty of my students have raised a combined $6 million in credit, that is tailor-made for the creative real estate business that we’ve been talking about.

Don’t have good credit? Well, let me tell you about that. I have another 20 or 30 students that are working on their credit. And my friends at Fund and Grow can help you with that as well. So I want you to go to 1000houses.com/grow and check it out. The right funding source can change everything.

There you have it. Thank you Fund and Grow for sponsoring today’s show.

This is Mitch, and you have made it to the Real Estate Investor Summit Podcast. And we’re gonna get you some Tracy Z Rewey today. And she’s in the note business. I can’t wait for you to talk to her.

But first, I gotta pay homage to my sponsors. Today’s sponsor is moatnoteservicing.com.  Are your collections falling further and further behind because you’re too nice? Do you dread those collection calls? Is your account analysis being done each year? Or is record keeping just not your forte? If so, let moatnoteservicing.com stand between you and your payers, and all those issues and problems.

That’s moat, M-O-A-T. Like the moat that goes around the castle. moatnoteservicing.com. That’s owned by founder Shannon. Shannon is been 20 years in the note collection business. She has collected tens of thousands of notes. She’s licensed and bonded, and has made this collection service affordable for you. And she can even show you how to get your payer to pay for the note collection service fee. So how about that you guys? Free note servicing collection. So contact moatnoteservicing.com because you should be out making deals.

All right. We’ve got that out of the way. My very nice sponsor. I appreciate them very much. But we gonna get on to this conversation with Tracy Z Rewey. WE’re gonna get you some Tracy Z Rewey right here. Tracy, tell us a little bit about yourself. Hello, how are you? And all those good things.

Tracy: Well hey, Mitch. I’m doing well thanks. Survived hurricane Matthew out here in Florida, so I can’t complain. Today it’s beautiful and sunny like it’s supposed to be.

Mitch: Well I’m glad that you’re safe and dry and above water. Tell us a little bit about your history so we can catch up with exactly who Tracy Z is.

Tracy: Sure. So I got started in seller finance notes back in 1988. And I’d always been familiar with owner financing. I grew up in a real rural area, so there were a lot of properties that couldn’t get any other type of financing.

Definitely I was aware of it. It didn’t seem unusual to me for my real estate closing type background, but I didn’t get involved in the buying and selling the investing side of in until 1988, when I went to work for an institutional investor.

So I’d moved to the big town, right? The big city out in Washington State of Spokane Washington, and went to work for a big institutional investor. I started out doing closings for them and then I got into the underwriting and due diligence. And then somebody showed me a financial calculator and the light bulbs went off.

And I headed up their closing department. I helped them go national, then I was in charge of branches. Then I became the person who was the go to person for all the securitization. Trying to explain common sense approaches to underwriters and securities. And all those.

Anyways, it was an interesting time and I have to tell you, was like, wow, was the best way to learn the seller finance note business. And I did that for 10 years. And one of the things that they didn’t allow you to do was buy notes for yourself.

So, and that was understandable. Because, you know, they didn’t want you taking deals from them, right? I was intricately involved in a lot of deals, so they didn’t want you to have a conflict of interest.

So I would buy and sell real estate, and I did buy and sell some real estate with owner financing as well. I did some rehabbing, but, I’m telling you, I knew where the, in my mind, for me, the best place to be was buying and selling the real estate notes themselves. The paper, you know, the security. Collecting those mailbox payments as we call them.

So after 10 years of working with them I went out on my own, and that was in 97. And started Diversified Investment Services and bought and sold notes for myself. And that was just a wonderful experience because now I was working for myself. And it had ups and downs and goods and bads. Investing your own money versus a big company, corporation’s is different.  We can’t afford to lose as much, right?

So I, I’ve had to learn and tweak. And I didn’t have the same kind of marketing budget they did. So over the years, I’ve definitely done that, so, you know, fast forward now. It’s 2016 when I’m getting close to 20 years on my own, and then 10 years doing it for somebody else. So I love the seller finance note business. It’s been good to me, and that’s sort of my history.

Mitch: Wow. 30 years in the business and I will, I started to chuckle there a little bit, when you said it was a whole different game when you invest in your own money.

So you’ve written us a, you’re gonna give away the 21 Tips for Investing in Real Estate Notes. And so, just so the listeners can get this written down here. You can get this 21 Tips for Investing in Real Estate Notes from Tracy Z.

And that’s actually, I think I need to point that out. Tracy Z, that’s just the letter Z. That’s her real given name, so don’t be confused. It’s not Z-E-E, or Z-E-A, or Z, anything. It’s just Z. Just Tracy Z.  Rewey, R-E-W-E-Y.

But, if you go to 1000houses.com/notes, that’s plural, N-O-T-E-S, then you’re gonna get this a, you’ll have a chance to get this 21 Tips for Investing in Real Estate Notes. Make sure you don’t capitalize that word notes. It needs to be all lowercase. There seem to be some grumblings about putting capital letters after the .com/. You want to have all lower case notes, N-O-T-E-S.

So, I don’t know that we have time to go through a whole 21 list here, but I would like to find out, like, what is the top 5 ways that you, the best ways to invest in notes or to find notes? I mean, can you give us like the top 5 Tracy?

Tracy: Yeah, absolutely. So I know that you love owner finance notes too. And, definitely one of the methods is to create your own. I, I know you talk a lot about that and that’s definitely your specialty.

Mitch: Yes.

Tracy: I take a little bit of a different approach, and I go after notes that already exist. So I’m not having to find the properties, and buy them, and resell them, and create a note. I actually go for notes that somebody’s already done all the hard work. And I can …

Mitch: Well, I agree with you. I agree with you, you know, it’s actually the short cut to what I do and I’ve had people ask me, “Mitch, isn’t it just easier just to buy notes that other people have created?” And I said, you know, in a perfect world if you can find enough of them, it certainly would short cut things. I just, I don’t know, how I got into my niche and why, but I feel like I’m more in control of my inventory …

Tracy: Yeah.

Mitch: … I feel like I can write my paper the way that I want my paper to read. You know, with what I need. But …

Tracy: Your strategy is great too, and you have more profit in yours. I mean, if we were to sit here discuss pro and con, you get to build in more profit in yours. So they’re definitely advantages to doing what you do. And a lot of us in the note business do a combination of both. So I’m definitely not knocking it. I was just poking fun at myself a little bit.

Mitch: No, no, this is what I like to say. On this show, my affection, the strategies that I have the most affection for is the buy with other people’s money. Go out and owner finance it, and, you know, get a down payment and collect payments for a long time. That’s my favorite strategy. That doesn’t mean it’s the strategy for everybody in the planet.

And that’s why I like to have people like you Tracy, who come on and show us a different angle. And this is really a perfect angle because buying notes and selling notes is not that much different than the owner finance strategy that I use when I’m building the note from the ground up. So, I just want to make it clear that, it doesn’t, what I want my audience to get out of this is their path to financial freedom. Whatever turns them on. What they want to do. So, we’re very interested to hear your 5 ways because maybe …

Tracy: Yeah.

Mitch: … the way you do it appeals to someone else when my way doesn’t. So, tell us more about how you’ve been successful buying and selling private mortgage notes.

Tracy: Absolutely, and I appreciate the opportunity.

So, the place that I suggest people to start, unless they already have a background in buying and selling private mortgage notes, is to earn while you learn. So the simplest steps to strategy one would be to find a note, refer it to another investor and earn a referral fee. And you’re not gonna get rich off of that, but you’re gonna get a whole lot of education and you’re gonna earn about 3-6%. Probably. That’s the average fee. 3-6 % of what the investor invests, you can earn as a referral fee.

So that’s gonna be the simplest way. And Like I said, it’s gonna help you start a marketing method, and find private mortgage notes, and get a pipeline, and then refer it for a fee. And then you get to learn the ins and outs of it. So, you get to earn while you learn. So that, that would be the first strategy.

And then, when you’re ready, the money, in my opinion, is over investing for interest income. So, then when you’re ready, you could find a note, you can buy a note, and we always find private mortgage notes at a discount. And that discount is determined by, you know, the risk. The pros and the cons of the note.

So, you know, there you get to set your rate of return, obviously has to be competitive, for you to be able to be able to purchase the note. Cause the seller, you know, has to have a reason to sell that note at a discount. But investing for interest incomes, where you, payment comes in and a certain amount goes to principle and interest. So you get that interest, plus you get to earn back your discount because you didn’t pay full face value.

Mitch: Can you give us a story or a case study or example of a recent note that you’ve done?

Tracy: Sure, sure.

Mitch: We like stories.

Tracy: Yeah, stories are good, aren’t they?

Mitch: We like stories around here. Tell us a story. Once upon a time there was a guy with a note.

Tracy: Once upon a time. All right. So I’ve got one here from our 5 Ways to Cash in on Cash Flow Notes. And that’s a free download too, that they can get when they go to that area that you talked about.

Mitch: Yes, 1000houses.com/notes. Put notes all lower case. All right. Tell us your story there.

Tracy: All right.

So we do quite a bit of business with mobile homes and land. Not as much mobile home only, although that’s great for certain types of investors as well. But here would be, and I usually do a smaller sized example. Because 1, smaller deals, you know, spread your risk around, and 2, most people say, “oh, I could get comfortable with that, ” and then, once you learn that process or that strategy, you can apply it to bigger deals if you want.

So this …

Mitch: Great.

Tracy: … Yeah, so this was a well-seasoned note. So, again, I work with existing seller-financed private mortgage notes. Now, you can apply it’s, as your strategies they are creating them. But these are existing ones. So you’re marketing to people who already hold a note.

So this was a deal out, out in Texas actually. And it was on a mobile home and land, an older mobile. And the property had sold, with owner financing, for $32,500, and they’d only put about 5% down.

So the time they came to us the seller had collected 95 monthly payments, and they wanted to sell all the remaining payments for cash today. And so …

Mitch: How many payments were left?

Tracy: … A, there were only 25 remaining payments left on that one. So the balance had paid all the way down to $8924 and some change, and it was payable at 9% interest. And the payment was $392.88/month. So, as often the case in these kinds of deals, the payer didn’t have great credit. Not surprised, right?

Mitch: Right. Surprise, surprise.

Tracy: Surprise.

But, what it did have going for it, was they’d been paying for a long time, and a, you know, it was an affordable home for them. So, it did have some delinquent real estate taxes, and then we found out the insurance had lapsed. So things were kind of piling up that it wasn’t our favorite deal. And a lot of investors had said, “no,” altogether.

But we looked at the land only value, in case, you know. Then we looked at paying the delinquent taxes, and we decided to make an offer for that note out of our self-directed retirement account for $2531.00. So, you know, we’re getting $8900 balance for paying about $2500.

So the seller was tired of all the headaches. They needed the cash, and so they sold it to our retirement account. So if you look just at that, as a pure return, you put it into an HP12C financial calculator, like we teach people to do in our How to Calculate Cash Flows training, is, you know, that was a return over 180%. Off of just a small, $2500 investment, that would get paid off in 25 months, 2 years and a month.

And the great news is, we actually paid off early on that. We gave them a little discount to pay off early, and so, our yield actually went up on that deal. So that’s an example of what you can do. Not all of them are gonna have that great of return. But there’s something you can do with a smaller note. It’s harder to get those returns on larger private mortgage notes, obviously, if they’re more conforming types of properties. But, you know, those are they types of things you can do with these small notes that some of the bigger investors overlook.

Mitch: Wow, so let’s just recap real quick. You negotiated to buy a $8,000, was it $8,092, or was it $8,900 …

Tracy: It was $8900, $8924 and some change was the principal balance.

Mitch: … Okay, $8900 …

Tracy: Yeah.

Mitch: … Yeah so, so, they bought almost, almost a $9000 note for $2500 and some change. It turns out to be a 180% rate of return. But then, you went and inspired your note payer, of the note that you bought, to pay you off early, if you’d give them a discount and they just said yes. And so, you were able to jump your yield up. How much did you jump your yield up, do you know? Have you calculated?

Tracy: No, I don’t have it right here, but I, I will have to do that for you. I think it was, you know it was, close to over 200 by the time it got done.

Mitch: Wow. So, you know, you don’t need a lot of money, to start off with if you’re making 200% yields. It’ll grow pretty fast on its own, won’t it? You know?

Tracy: It will, yeah. And it’s not every deal that’s like that, obviously, I picked a good one. But it, you know, they’re out there.

Mitch: Yeah, well you’ve got, we’ve got, all different kinds of ranges. I mean, you can’t expect to make 200% rate of return every time you walk out the door. But it’s nice to know that they’re out there. And, so what’s the next word of advice when we’re trying to emulate the success of Tracy Z?

Tracy: So once you get comfortable with private mortgage notes like that, then you can move into building a portfolio with a self-directed IRA. Or placing private mortgage notes with other people’s self-directed IRA’s.  Or just other people’s money in general. We talk a lot about self-directed IRA’s, cause these are great types of investments to put in IRAs cause they don’t require a lot of maintenance. Like, you know, because they payer is paying the taxes. The payer is paying the insurance. So you’re really just collecting, or paying a servicing agent, as you mentioned earlier, to collect the payments for you. So they’re good for IRA’s, a Roth or traditional IRA. Either way, they’re tax-free or tax-deferred. But they can certainly be bought and sold outside of there as well.

So then you move into that. And then definitely move into restructuring notes. We just touched on that a little bit. But there are ways to entice payers to pay off early, or change the terms, that if you put in a financial calculator, it’s gonna give you a better return in the end.

And then, one of my favorite ways, the fifth way, would be partial participation. So we do a lot of work with partial purchases. Especially on private mortgage notes where we might not to buy the whole thing cause the risk is a little bit high. So we’ll go in and we’ll invest less. And, of course, the payer is not going to want to sell everything for that smaller amount. But they can sell a portion of the payments, a portion of time. And that’s what we call partial participation. So we do a lot of work, that would be the fifth strategy we use a lot, is the partial participation strategy.

Mitch: Yeah, a lot of people don’t know that you can buy part of a note. So let’s just say there are 180 payments left on a note. And you, you know, the person’s not all that well seasoned, or the property isn’t worth much more than the balance is. So you don’t want to take that entire risk for yourself and buy the entire note. So you just buy like, you know, the next 25 payments, or the next 30 payments. And, for, for a price. And so, a lot of people don’t know you can do that. And it’s a, it’s a tremendously smart move because, you can invest and hedge your bet at the same time. Because the note seller’s really not gonna let you fail in that case, if they if they’re owed a lot of money. So, they’re …

Tracy: Yeah.

Mitch: … Go out and protect you.

Tracy: That’s exactly right. So you’ve got the seller that’s still in the deal with you. You’ve lowered your investment to value. You’ve bought the portion of the note that’s most valuable, which is the more immediate payments, rather than the ones way off in the future. And so you’re not the dis, having to discount the seller as high. So it’s more palatable to them as well. And then there are ways to split up partials. I mean, you don’t have to buy all of, like, we might buy 15 years of payments, or we might buy 50% of the next 30 years of payments. So there are different ways to split it up.

Or we might buy 500 and give 300 to an investor and take the other 200. Or, you know, there’s all kinds of strategies you can use. You can do WRAPS, you know, where you’re sending off the payment to the underlying. So that, you know, there’s just different strategies to use. But all kind of play into that kind of partial, partial participation.

And that’s one of the things that we teach people a lot in How to Calculate Cash Flows, is how to run those numbers. I personally love the HP12C, that’s what I was taught on. I also use T value, so, I was, I’m big on making those numbers match up. And T value’s nice cause you can have a print out to show everybody, you know, what happens if the note pays off early, if it goes into default. I mean, there are things that could happen. It’s not always gonna pay, and often does not pay exactly the way the note says it should.

Mitch: Right, but you know, that’s one of the reasons I love doing this podcast series here. Real Estate Investors Summit Podcast. Is because I learn something all the time from the people I’m talking to. And I never thought about buying a note where I get half of each payment, or a percentage of each payment. I never thought of that. I always thought it was all of the note, or partial on a note, and I didn’t know there was all these in-betweens. Which is why we have smart people like you on the call, Tracy.

Tracy: Oh, well thank you. Yeah, well you know they work great when you have somebody that’s maybe in their 60s, 70s, 80s. And you say, “Oh, we’re gonna buy the next 15 years, but don’t worry, you get, you get the final 15 years.” And they’re thinking to themselves, “um”, and they say it I mean, you know, “I don’t think I’m gonna be around to collect them.” And of course they can go to their heirs, but that doesn’t fulfill their immediate need. So if we split the payment up, then they get some every month, just like we get some every month, and so it fills their needs now. They don’t have to wait way off in the future.

Mitch: So, Tracy, I can tell that you are a very creative person. You have a creative mind. I think that’s an excellent answer for people who don’t think they’re gonna be around to collect the last payments of their note. I think that’s a perfect resolution.

You know, I get a lot of students, or potential students, that want and love the owner finance strategy that I teach and preach. And, the problem is, they live in areas where houses are just too expensive to really use the owner finance strategy the way that I use it. I deal in affordable homes. I deal in Walmart homes for Walmart people. And, not the bottom of the bottom, but I deal in the middle range. And owner financing, for me, works best when the balance that’s owed by my payer, is 120,000 or less. And it really starts to hum when the balance is under 100,000. And the lower the balance is, the better my strategy hums along.

But some of these people live in places like Los Angeles where a 3 bedroom, 2 bath house is $550,000. You know? And …

Tracy: That’s mind-boggling.

Mitch: …  Yes. And so they’re real intrigued with this owner financing strategy. And the reason why I’m bringing Tracy Z here is because, here’s a strategy that you can use from anywhere in the planet, right?

Tracy: Yeah, absolutely.

Mitch: Do you see all these houses that you buy notes on?

Tracy: No, rarely do I see them. You know, if they’re local, definitely I would. But, no you can send out somebody to do a BPO, broker’s price opinion, or a drive-by appraisal before you purchase it. If I’m buying a mobile home only without land, then I do like to stay closer to home and go see them. But if it’s got some dirt attached to it, it’s real estate or a stick built home, or anything like that, no. A lot of notes can be bought long distance.

Mitch: Yeah, so, I think this is a perfect strategy for people that understand and appreciate the investment that has a solid, physical, collateral piece attached to it, that you can substantiate a value on. And I think it works perfectly.

Now, how do you deal with all the different states? Because they have, do they have different laws? Is it, are there states that you like to do this in and states you don’t like to do it in? Or, you know?

Tracy: Yeah, well I used to buy in all fifty states. And then I got smart and I simplified my life. And now I mostly buy closer to home. But, you certainly can. But you do need to check the laws of your state. There are a couple of states, like California, that says if you’re going to advertise that you broker notes or you buy and sell notes, that you have to have a real estate broker’s license. So I stay away from those, typically, unless I’m in California and wanted to get a real estate agent’s license.

But most states, or for the most parts, don’t have laws that say you have to be licensed to be an investor to buy the note. Or even to refer the note for a fee. But you definitely want to check with the laws of the state you’re gonna do business in.

You know, I’m not an attorney and I don’t know the laws of all fifty states, but most of our students, you know, haven’t had any issues there. Especially if they’re looking to buy notes for themselves.

So yeah, you want to understand, the rest of its pretty much real estate law, right? So if it’s mortgage law, real estate law. So you’re buying, you’re taking assignment of a mortgage, or a deed of trust, those are the most, two most traditional. You’re getting the original note, you’re getting it endorsed.

That’s one of the things in my twenty-one tips is, you know, know the process and hire experts to help you. It’s usually gonna be a title company that will do the closing. But you want to make sure you get that original, you get it endorsed, and you check the different things on our due diligence checklist.

You know, you make sure, taxes are current, and the property’s insured if it has a building on it. And just the basic things that you would think to do. We always talk to the payor to make sure they’re happy with the property. We try to get a verifiable payment history. It’s not that we won’t buy the notes if any of those things come up with a glitch, it’s just that our offer’s going to be different. Or perhaps it’s going to be lower. Or it might be structured as a partial.

So just make sure that you understand those tips, or you’re hiring somebody that does a good job to do the due diligence for you. And there are companies in our directory that will also, you can hire out to perform that for you if you like.

Mitch: Yes, boy you have just a ton of resources I bet. So, the first thing, you said a whole mouth full there, so I’m …

Tracy: I did. I’m sorry. I’m guilty of that.

Mitch: … I was just jotting, well no, that’s good. That means you’re enthusiastic and passionate and you know your stuff. So, you know, we really don’t have scripts around here because the people that we’re talking to, they live this life. They don’t need a script. And …

Tracy: Yeah.

Mitch: … And so sometimes we bounce a little bit because a, but let’s break it down here for a second.

Tracy: Absolutely.

Mitch: One of the things you said was, you got smart and you started picking certain areas. I think this is probably, and I want you to affirm or recant. When you localize, where you’re trying to buy private mortgage notes, either by state or by county or whatever, you’re actually being able to brand yourself more effectively, right? Than trying to shotgun all over the United States. Cause that’s a big job.

Is that one of the reasons why you started to tighten up your area, or your region?

Tracy: Yep, yep, that is definitely one of the reasons. You can become known as the local expert, and you also get more in tune with what’s going on. And you also can get a lot of deals based off of referrals that way, so your marketing budgets go down.

So, there are several good reasons for doing that. And I feel that most people, you know, given a choice, they’d like to do business locally. Now if your price is, you know, comparable and your service is good, then they’d rather do business with somebody locally. So that kind of gives you a leg up.

Because there is quite a bit of competition if you decide to go nationally and do direct mail and some, and online advertising. It’s a lot of, it’s a lot of competition. So one of the ways you can set yourself apart is to be your local expert.

Mitch: By being local, you also could have the same resources that you go back to time and time again. And not have to find a different resource for every different market. Your resources will start to, be able to be used over and over again, instead of having to find a new resource every time you find a note in a different state or something, right?

Tracy: Yep, absolutely.

Mitch: Okay, and you also said, and I don’t know if the listeners caught it. You talked about people in California, if they wanted to buy private mortgage notes, that they had to have a broker’s license or a real estate agent’s license. But that’s if they buy notes in California, right? Can a Californian buy houses in Texas, for example, without, cause I know in Texas you don’t have to have a broker’s license or real estate license to buy and trade private mortgage notes. So, can, can a Californian can go to a state where they don’t have to have a license and they can start investing there, right?

Tracy: My understanding is yes, but I’m not an attorney and I don’t play one on TV. But my understanding is yes, and I’ve seen people do it. And, the issue is that if you’re advertising you buy and sell private mortgage notes in California, then they notice that and ask for that. But if you’re an investor in California buying in a state that doesn’t have any of those types of rules or regs, than yeah, as far as I know. And we’ve done it ourselves. It’s not a problem.

Mitch: Okay, and like she said, we are not attorneys and we’re not CPA’s. These are our own personal opinions. You take them for better or for worse. Make sure you substantiate the kind of business and the location of where you want to do business, with your attorneys because it just makes sense. I mean, if you’re gonna get in the business, you gotta become, somewhat of an expert. And, if you’re not, the end all expert, than you gotta hire an attorney or someone to explain to you exactly what the rules and regs are. But once you get it, you get it. Then you’re off and running.

So, I want to ask you, maybe like, two big questions. What’s the worse thing that ever happened to you? And the reason why I ask this is because, we both know, and everyone should know, that there is risk involved. And let’s just talk about your biggest nightmare that ever happened. And we’ll get that off the table, and then how to avoid that in the future.

Tracy: Yeah, well, when I went out on my own I started buying private mortgage notes. I bought a deal where, at closing, we found out the insurance had lapsed. The hazard insurance. And, you know, that happened to us a lot at closing when I worked for a big company. And they had the wherewith all and they had these forced placed insurance policies, and blanket insurance policies. And you know, and so, you know, we would just buy and then we’d force place, or you know, we’d make people bring their insurance current.

But I got to closing. A lot of pressure. There was a lot of, the seller, you know, the seller really needed the money. It became a personal story. And so, you know, I knew I should have stopped the closing, and made them get the proof of insurance. You know, the plan was to get the forced placed insurance on Monday, we closed on a Friday, and guess what happened over the weekend?

Mitch: What?

Tracy: The property burned down. Yeah.

Mitch: Okay.

Tracy: So, yeah.

Mitch: And a lot of people would, a lot of people would think, that that’s, “Oh my gosh, I just got zeroed out.” But guess what? You still had the land, right?

Tracy: Yeah, absolutely. So, so now you go to plan B, and we still had the land. But the land was not as, the same value as what was owed on the note. And the payer tried to figure it all out, and get it right. But they had a wife who was terminally ill, and there’s all sorts of sad stories. Things happen, sadly, in life with people, and they just were not able to find a way to make payments on a piece of land that no longer had a home to live in. I mean, fortunately, everybody was safe and alive. But, understandably, their motivation to make payments and their ability to make payments had gone away. So we, they wanted to not pay anymore, and so we, took the property with deed in lieu of foreclosure. And so now we started marketing the property. And …

Mitch: Can I chime in right here?

Tracy: Yeah, go right ahead.

Mitch: So Tracy, so to put this all into context, give us the numbers. What was, what was your, how much did you pay for the note? And what was the value of the property before it burned down? And then when it burnt down, what kind of predicament were you in by the numbers?

Tracy: Okay. So, I’m pulling them up here. So this was actually in Oregon. It was like a 1940’s bungalow style home. And this is actually, the details of it are a part of our blog that we share with people. Seller had sold it for 45,000. The buyers put five down. They carried back a note of 40,000. When we bought it, there was about 37,000 and some change owed on the balance. And we were in it about 31,250. So that’s what we’d paid for the note.

So it should have been worth about 45,000. It hadn’t appreciated or gone down much, you know, in the, amount of time. I think a couple years of payments had been made when we bought it. So, excuse me, no. I’m looking here at our notes. The fair market value at the time we bought the note was $60,000 due to appreciation at the time. But most of the time we would just go off the $45,000 sales price.

Mitch: So, you get this house, you know, fair market value somewhere around sixty. You paid 35,000 for a note, and then it burns down and you’re left with just the land.

Tracy: Yeah.

Mitch: What was the land worth? Or how were you able to, what were you able to salvage out of this?

Tracy: Well we got a land only value that said it was about 24-29,000, land only. Course, this was after the fact, not before the fact, which is part of what, the lesson I’m learning here, right?

Mitch: Yes, yes, we learned, we learned to size up what the land is worth, just in case.

Tracy: Yes, well especially if you’re going to allow it to close without an insurance policy. If it had insurance it would have been no problem.

So, if we back up a minute. The big problem was we’d closed without making sure, or making them put that insurance current. Cause if it had happened, then the insurance company would have paid us off as the loss payee, as the mortgagee. So that would have been no problem. That’s why the insurance is there. But because the insurance wasn’t there, now you’re just stuck with this land only value.

And the next problem, we had on it, was that, you know, it was going to cost quite a bit to get rid of the building. Cause the building didn’t burn down all the way. So we did two very creative things. And, at the time, I had this wonderful woman working with us who was our processor, and I still miss her to this day.

But she says, “Hey, my husband does volunteer fire department stuff, and they’re always looking for buildings to practice on,” she says, “You know, we don’t know anybody there,” we were in Washington State at the time, but she says, “Let’s call the volunteer fire department and see if they will use it as a practice lot. And burn the rest of it down and save us about $5000 in, in cost to get all the debris gone.” Cause it was becoming, you know a, a hazard with the debris there, and the county was not happy. And, so anyway, that’s what we did. We contacted the fire department and they did a burn on the property as a practice. So that saved us about $5000 in the cleanup costs on the property.

So then we started marketing the property. We had the property owner next door who had a very nice, $250,000 home. Cause it was one of those areas where you could have a really nice home here, and then you could have a small house here, and then over here, maybe a mobile home. So they gave us a low ball offer, and so, they made a $10,000 as is offer to purchase the lot next to their home.


Mitch: Did you take, did you take that? Or, I imagine you could have got more for the lot if you owner financed it to someone else. But was that the case or not?

Tracy: So what we did was we talked to him about how, you know, that was too low, and what we had into it, and we’d like to at least get out whole. If that wasn’t acceptable to him, we’d have people who contacted us about maybe putting a mobile home on the lot.

Mitch: Ah ha. A little, a little, a little, if you don’t, I will.

Tracy: So, they brought their offer up a little bit, and at the end of the day, I think we were out about, somewhere between 5 and $10,000 on that deal. But to have only lost 10,000, which could have been something much worse.

That was the lesson that I learned. Don’t get pressured into closing when you know that you shouldn’t. I tend to, little bit, you know, get involved with the personal side of people’s stories. And you definitely have to remove yourself from that situation and say, these are my due diligence items, and you know, this is what I require. And, just hold firm to that. And, you know, also, look at getting forced place insurance or getting a blanket policy that will protect you. There are other things that if you’re going to take those chances, I mean, who would have thought that it would have burned over over the week, burned down over the weekend?

So, so definitely have your due diligence checklist items. Don’t waiver from that. Unless the deal, you have an out that makes economical sense if the worst case scenario does happen.

Mitch: Okay so, again, a mouth full here, and let’s just, I want to reconfirm, the mistake you made is a mistake that I’ve made. Several times, and it takes a little while to bolster up, and not let that happen again sometimes. Because, when you start getting involved in the personal stories, and the cancer stories, and the life and death situations, or the sob stories. This is when I’ve made my worst deals too. I’m a very compassionate person. I feel for these people. And you have to learn to remove yourself from the emotional side of these deals and do what’s right for your company. Your company doesn’t have any emotion. It has a bottom line, and your job is to protect that bottom line. And, you have to take the emotion out of it.

So, a great lesson here, Tracy’s bringing up, is be careful when you start getting emotionally involved. Because this leads me to my, my next little tidbit you’ll want to be sure to write down. There are, and this person that Tracy was dealing with, I don’t feel like, or it doesn’t sound like, they were cons, it sounds like, it was just the circumstance, and very bad timing. And, you know, even in a couple of days later, you would have had insurance. But, but it burned down on the next day.

And so, I want to, appraise you all of something that I’ve learned to recognize. The four signs of a con. And so, the four signs of a con are, first and foremost, they always give themselves a noble façade. They are a minister. They are a priest. They are a marine. They are a policeman. They are someone of high regard. And that’s the façade that they’ll will give you. That they are this kind of person.

The second sign is, they need to close extremely fast. Extremely fast, for personal and emotional reasons. And they always, and, that brings you to the third sign, is they’ll try, they’re appealing to your compassion. They’re appealing to your compassion,  of why you should move fast to help them.

And the very last sign is, there is very good, or extremely good, potential profit for you, or your business, in this transaction, if you would accommodate them. Those are the four signs you need to look for.

When those four signs line up, start, start slowing down. Start pulling back, and start focusing really heavy on your due diligence. Because this is the four signs of a con. Noble face. Big profit. An emotional story, and the need to close fast. And when you see all of those things line up, buyer beware. Start slowing down and backing up.

What do you think of those four, four indicators, Tracy?

Tracy: I, I highly endorse that. I think you could do a whole podcast just on that. I think those, you’ve boiled it down to a nutshell.

Mitch: Yes. And then, in my book, My Life & 1000 Houses, Failing Forward to Financial Freedom, I did get conned twice, by two cons. And I was able to con the con back. And they’re very interesting stories. They’re called a, Conning the Con # 1 and Conning the Con # 2. They’re in the stories towards the end of the book there. So if you’re interested in how I conned the con back, and got made whole, then you’ll find that story very interesting. But I will tell you this, when you’re trying to get your money back from a con that you’ve already lost control, you have to appeal to their greed.

Tracy: Um hm.

Mitch: And, you can get back in, and sometimes undo what’s been done, if you’ll appeal to their greed from a third party position, unbeknownst to them. So, a, I’ll let you read the stories to figure out, just exactly what I said and what that means.

Boy, now we talked about a bad thing that happened. The sequel to that question was, what’s the best deal you’ve ever done, Tracy? What, tell me your, the victory that, you’re still trying to surpass.

Tracy: Well, you know what, I am kind of, I’m a careful investor. So, you know like, I just like doing, I like to wash and repeat those little deals like I talked about early on, with the, you know, I mean, normally their about 15-20% yield, not 180%. But I like to wash and repeat those kinds of deals.

One of my favorite stories though, and it is a, it’s on our blog as well. Yeah, I call it the church note. And it’s where we bought a partial. We bought a full, and we sold a partial to an investor, and then we kept the back end. So,  we made like 1000 or, $2000 at closing. And then we actually owned the back end of a note. You know, it was a sizeable back end. And then the note paid off early and we got a nice, big mailbox check. That’s one of my favorites because, it was a deal that we did without putting in any of our own money.

Mitch: And so, about, what was that check worth to you? That last sizeable note. Can you give us a number? More or less.

Tracy: I, yeah, so that note, let me just pull up the numbers here. So we had a seller that had a note on a church. And you can read all the details of the funny background story of buying private mortgage notes on church properties. But, needless to say, we decided it wasn’t a note we wanted to buy, but we would be happy to broker it to another investor who didn’t mind buying private mortgage notes secured and paid by churches. So, we had sold that note to the investor at closing, and we kept the back end.

So, the seller sold all of it. The investor bought a partial, and we kept payments in the future. So we made a small fee at closing. And then we had this residual income. We were supposed to get the last approximately 15 years of payments. And so the wonderful thing about that was, we didn’t actually have any dollars invested in that deal. So we made some money at closing, and obviously had some time and energy invested. And then we kept the back end. So, this deals into that paying off. Quite a few years went by, and then the deal paid off. And so, we got a payoff check for our residual interest of around 50,000, $57,000. And that was like mailbox money, right?

So that was a wonderful, that was one of our best deals that we did, where we didn’t even have to invest any money. And you could try to put that into a financial calculator. You have to at least put a dollar in there because it says error five. It says you can’t make that much money without investing anything.

Mitch: Yeah, it’s infinity or something, so …

Tracy: Yeah, exactly.

Mitch: … You made a couple thousand when you sold the note …

Tracy: Yeah.

Mitch: … And I’m gonna guess you didn’t, you know, I’m gonna guess here …

Tracy: Yeah.

Mitch: … But, you don’t want to do private mortgage notes with churches because you don’t want to get yourself in a position to have to foreclose on a church. Is that why you don’t do it?

Tracy: Yeah, yeah, I say there are several reasons that I personally don’t, but other investors will. One is it’s a special use type of property, so if you do get the note back it’s, you know, it’s a little bit harder to sell.

Number two, you know, verifying income is kind of tough. I mean, you know, I always, I say that, you know, if the pastor runs off with the organist next week, you know, I don’t think the parishioners are gonna be donating very much. And so how are they gonna make their payments?

And then the third reason is, no matter what your beliefs are, I just don’t want to be the person who had to foreclose on a church. I don’t want to.

Mitch: Absolutely so. So, you made a couple thousand when you pawned off those issues to someone who didn’t care about those issues. And then, a few years went by, and they paid off, and you made, you know, say 57,000. So it was a $59,000 turnaround, kind of money from heaven if we can use that.

Tracy: Uh oh, you said it, not me.

Mitch: Money, money from heaven. You know, they were lucky enough to pay, be able to pay off their note, and you know, the pastor hadn’t run off with the organist yet. So they had enough money to pay off the note.

And I think those are all great valid points. You know, I just want to say again, Tracy is a very creative person who knows her business inside and out. If you’re gonna go into this business, or any business, you should have a mentor. To help you avoid all these little nuances, that you can’t possibly know until you’ve lived through some of them. Tracy’s lived through a ton of these instances. She’s been in the business over thirty years. Ten years with some, with another company, and twenty years on her own. So you know that she’s seen a lot of things happen. A lot of things good, and a lot of things bad.

So, to go into a note buying business and not have the benefit of a person like Tracy is, to me, just, the definition of insanity. Why would you go want to learn all these lessons on your own?

I know that mentorships sometimes cost. And, to some people, they seem very expensive. 10,000, 15,000, 20,000, 30,000, I know people charging 50,000 and 100,000. But when you compare this to a college degree, and what you get when you walk out of those doors. And you compare the kind of money that you can make, and the fact that, you don’t have to look for a job. You’re creating your own job. And there’s potential to make money, if you don’t make mistakes. And here’s, here’s the thing about mentorships.

You can measure a mentorship by its success, by how much money you make. And it’s very easy to say, well this mentorship was worth it because I paid x, and I got back x plus. But what you can’t calculate, is how much money did that mentor keep you from losing? Because, if they’ve kept you from losing, then you’ll never know how much money you would have lost if you did not have their tutorial skills.

And so, I’m just saying, no matter what genre you want to go into. You should hire someone who’s been there before. Who is in a position that you wish that you were in, or want to be in in the future. And you’ve substantiated that they’re real, and that they’ve actually done what they say they’ve done. And that, they’re, on another hand, a good mentor is, meaning, they actually take the time. And make sure that they give you the resources, and the face time, or the phone time, or whatever you agree to. Make sure that, the people are getting that time, and they’re happy with it.

And so, I want to thank you Tracy, for coming on. I don’t think we could have had a better podcast about private mortgage notes. Because I think you’re, just hitting everything right on the head of the nail there, so …

Tracy: Well thank you.

Mitch: … I appreciate it. I appreciate your being on, again go to, 1000houses.com/notes. Make sure you put notes in all lower case. And you’ll get the 21 Tips for Investing in Real Estate Notes, right there. And I suppose you’re gonna find a whole lot more, when you start looking into Tracy and all the free stuff she has to offer and all the advice.

And then you can consider, her course or her mentorship. I think you’d be a better person for it if this is the business that you’re gonna go into.

So, anything else we missed? Or anything we need to cover that I haven’t covered, Tracy?

Tracy: No, and I appreciate very much that you had me on the call today. Thank you. It’s great. We’ve had a lot of our students that bought private mortgage notes, you know, that wanted to go into creating private mortgage notes, locally, that have also worked with you and have been very happy with your class as well. So I see what we do is very compatible. We’re in the same industry, we just come at it from different angles.

And one of my big passions right now, that I touched on, is I want everybody to learn how use the financial calculator. And everybody gets scared when they talk about calculations and numbers, and so, I take it and break it down easy. I’m not a math major, but I do understand money.  Especially when it’s how to make it and put it in your pocket.

And so we have a very affordable, $97 training course that I just kind of did because I wanted people to not be afraid to learn how to use an HP12C, and understand the time value of money. Because if you’re gonna buy and sell private mortgage notes, you’re leaving money on the table if you don’t know how to use that calculator. So, that’s kind of been my passion in the last year, in addition to teach people how to buy and sell notes themselves. But really, you know, let’s de-mystify how you use a calculator, and how to run calculations in our business. So that’s kind of one thing I just wanted to mention to people.

No matter, even if they’re not buying and selling private mortgage notes. If they’re just wanting to know how to finance a car and get a good deal. I mean, you got all those things. You need to know how to use a financial calculator because nobody minds your money like you.

Mitch: Exactly. And I do want to say, that in my strategy, I just use a cash on cash rate of return, which is a very simple formula, you know? Your annual income divided by your investment. Hit the % key and get your percentage rate of return. So, I deal on a cash on cash, very simple formula. Just trying to keep it simple.

But, if you’re going to be in the note buying the business, it would, it’s extremely important that you learn how to use those a, financial calculators. And I think, to pay $97 to learn how to use one, if you can’t figure out how to get your $97 back after you learn how to use one, maybe you should go into a different business. Because, with Tracy’s help and that calculator, you should be able to make your $97 back.

And with that being said, Tracy, I want to thank you for coming on the Real Estate Investor Summit Podcast. And please tell your friends, you can go to 1000Houses.com and you can see all the podcasts. Please tell your friends. Please share the podcast link. Till we meet again. Want to thank you Tracy and, and a, I hope you have a great year this year.

Tracy: Thanks. You too, Mitch.

You’ve been listening to the owner financing master. Mitch, Be the Bank, Stephen,  On the Real Estate Investor Summit Podcast. Let us now blatantly, without apology, bribe you towards financial freedom by offering you, a whole bunch of free stuff. Go to 1000Houses.com and get you some. And Y’all come back now, ya hear?


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