How to Buy and Sell Notes

Mike Hambright: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright and on this show I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week which are available in the iTunes store or by visiting FlipNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright with FlipNerd.com and welcome back for another exciting VIP interview where I interview some of the most successful real estate investing experts and entrepreneurs in the industry to help you learn and grow.
Today I’m joined by Dawn Rickabaugh, the note queen who’s a high- volume note buyer and sought after trainer of teaching people how to buy and sell notes and a seller finance specialist. So it’s a great show. We haven’t talked a whole lot about notes on the show before. Before we get started though, let’s take a moment to recognize our featured sponsors.

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Hey Dawn, welcome to the show.

Dawn Rickabaugh: Hi Mike, thanks for having me. It’s a pleasure.

Mike Hambright: Yeah, glad you’re on. As I just said, we really haven’t had a lot of note experts on before, so it’s going to be great to talk about this. And for a lot of folks, most people would consider me a veteran real estate investor. I’ve bought hundreds of houses and I have a financial background, so I understand conceptually notes but know nothing about how to transact in notes. And I know there is a whole other world out there that I’m just not part of, so it’ll be great to kind of share some of your insights.

Dawn Rickabaugh: Yeah, the thing that I think is interesting is that most people who are into real estate don’t realize that they know more than they think they do about notes because in some ways it’s been set up to be a really sort of arcane or late-night infomercial. It’s been shrouded in mystery and partly because maybe people make a lot of money coaching you if it’s super, super hard to understand.

Mike Hambright: Yeah.

Dawn Rickabaugh: To me, every investor it’s just the dance between property and paper. They’re two sides of the same coin, property turns into paper and paper turns into property and so . . .

Mike Hambright: They go hand in hand. Sure.

Dawn Rickabaugh: It’s so important. Just a few key concepts really can open up the path for what you can do, your options.

Mike Hambright: That’s great. Well Dawn, hey, before we get started, talk a little bit about your background. I know you did not start as a note buyer or a real estate investor at all like many of us and you have a very interesting story. Why don’t you tell us a little bit about your background and kind of how you got started?

Dawn Rickabaugh: Yeah, well, I graduated with my RN, my Bachelor’s Degree in Nursing and I went to work in the ER in the ICU and I loved that. And then I popped out lots of babies then as time progressed mainly my life revolved around my family and I had switched to a type of nursing where it was more like a paperwork job where I could work three days a week and I had autonomy so that . . . Because for me if I was going to have all these babies, I didn’t want anyone else to raise them, so anything that would give me more time and it wasn’t up to daycare was important to me.
But anyway, after a few years even though it gave me a six figure income working three days a week which was phenomenal. I never expected it to do that. It’s just that I was getting brain dead. I felt trapped because I had ceased to grow and they sold the company, and then thankfully they started taking away some of the seducing qualities like how much money we can make and how free we could be with our time, so then that gave me the liberty to say I’m three years late, but it’s time for me to just make the jump.
And in the meantime I’d taken all these courses. I’d taken every course you can think of like the Robert Allen stuff and tax liens, and trading on options. I always thought even though I was doing my W-2 and raising my family, some day I think I have the ability to make money in real estate notes, stock market kind of stuff and the notes is what I fell in love with. I just kept coming back to that.

Mike Hambright: Yeah, why is that? What interested you? Most folks love the fact that they can touch, and feel, and see a house. And obviously there is an underlying asset behind it really is the note.

Dawn Rickabaugh: Right.

Mike Hambright: But just talk about how you gravitated towards that versus what most people do is the physical asset of the house.

Dawn Rickabaugh: Maybe I’m lazier than you guys or something because I actually . . . Well, and this thing, financial calculator.

Mike Hambright: Yeah.

Dawn Rickabaugh: When I learned how to use this I don’t know what happened, but all of a sudden I just felt like it just opened the world to me and I felt so smart, and I felt empowered, and I just loved . . . There is just so many ways that you can break it up. I can tell you a quick story about how I had picked up a nice property with owner financing. I should have kept it as a rental, but guess what? I was too lazy. I didn’t want to manage a property and so I turned it around with owner financing and wrapped it, but I might get that property back someday, right? They may not make their balloon payment four years from now.

Mike Hambright: Right.

Dawn Rickabaugh: I don’t know. I just love the fluidity and the ease of it.

Mike Hambright: Yeah.

Dawn Rickabaugh: Yeah, I really do.

Mike Hambright: Yeah. Well, so just to kind of get real fundamental here since we haven’t had a lot of people on the show before, just talk about a really high level. What is a note? It seems so obvious, but let’s go through 101 here.

Dawn Rickabaugh: That’s a good place to start Mike, so a note is a promise. It’s an IOU. I promise to pay you $100 a month for the next 10 years for whatever reason. So like a real estate note or a car note, or a boat note, if it’s secured with something that’s one thing, but we could have an unsecured note too, right? I could have a promise, an unsecured debt. That would make you like a credit card or it was a personal loan to your cousin that you should have never done that you’ll never see the amount of it.
So it’s just a promise. So notes are I need money. And when in real estate notes to buy this property. So either you go to a bank, you borrow the money, you sign a note and deed a trust or mortgage. Or you go if you’re a flipper and you’re using hard money, you go to the private lender. What do they ask? A note and deed of trust, right? So if you don’t keep your promise to pay, the lender can take the asset back to satisfy the debt, right?

Mike Hambright: Yeah.

Dawn Rickabaugh: So note is the promise. Security instrument is the beef behind it. So if someone own or carries a property, they get the same thing. They’re not lending money, but they’re lending their equity which is like their money that’s trapped inside the house.

Mike Hambright: Sure.

Dawn Rickabaugh: So then the buyer brings a down payment. The seller becomes the bank and they start receiving those monthly payments. And if they ever want to cash out of those monthly payments, they can get 50 cents on the dollar, 80 cents on the dollar, or zero depending on how they’ve set up their owner finance transactions. So notes are created three ways that we mostly know of, banks, private lenders, owner will carry property sellers, and I can do either. I do some private lending where I originate the note and most of my business the majority is buying discounted paper of owners who have carried who now want out.

Mike Hambright: I see.

Dawn Rickabaugh: I don’t know if I stayed top level.

Mike Hambright: Yeah, it’s easy to start to dive down. So before we talk about that, like how you go about buying notes from owners who have carried the financing, let’s kind of stick with the fundamentals and just talk about how a transaction typically occurs, like how an investor finds opportunities I guess to either buy or sell notes.

Dawn Rickabaugh: Okay, so you have to realize okay, where are they created? A note is born out of a private loan. Those guys when they’re lending they’re usually staying at what, 60, 70% loan to value there?

Mike Hambright: Sure.

Dawn Rickabaugh: Those guys usually don’t want to sell at a discount. Their whole point was they knew what they were doing.

Mike Hambright: Right.

Dawn Rickabaugh: Owner financed deals, they often don’t even know that they can sell the note. So what you got to look for if you’re searching is people who have carried back paper, they’ve offered seller terms on the sale of their property and chances are they don’t even know they have something that they could sell.
How about the real estate agents that help people close with owner financing? I had someone last week who’s an agent. Says, “I’ve used owner financing to help my clients sell their properties for years and I never knew there was a secondary market for the paper. And now if I can learn that, then I can not only close more deals because owner financing will put more commissions in my pocket, but I can make a fee on learning how to sell the note. Help my clients liquidate if they need to.”
So you’ve got real estate agents theoretically are a really good source, investors, there’s a lot of mom and pop investors who at some point in their life get tired, so if you want to do title searches, you can. Who carried paper? Who was a private beneficiary in that slot?
And people who own their properties free and clear is another great one, but you can pull those lists if you want, but increasingly investors like yourself are saying, “Gosh, I’m going to buy.” In my market, I can buy properties in the 20 – $30,000 range and I can sell them on owner carry for 60 or $70,000, but I need to figure out how can I liquidate an get at least my operating capital back and things like that.

Mike Hambright: Yeah.

Dawn Rickabaugh: You got to hang out and start talking to anyone, attorneys, financial planners. Jeff Armstrong has a book called, I think, “Every Good Idea That There Ever Was to Buy a Note”, something like that. So I would suggest people go over there and buy that if they really want to know all the ideas there are. I think it’s ArmstrongCapital.com, Jeff Armstrong.

Mike Hambright: Okay.

Dawn Rickabaugh: He has written a great book about that.

Mike Hambright: So Dawn, talk about why somebody that has owner financed their own house maybe and sell it onto someone else, why would they sell the note? If they’re willing to sell the note at a discount, why wouldn’t they have just sold the property at a discount? Talk about kind of how that makes sense.

Dawn Rickabaugh: Yeah, that’s a great question. A lot of time just to sell the property they need to carry the financing and they may in the beginning not intend to sell the note. So let’s say, hey, I want $100,000 for my property, no one can get a loan, so I’m going to have to carry just to get my price or maybe if I’m offering terms, I’ll bump it up 10%, okay. Now my property I’m going to be able to sell it for $110,000 with 10% down and create a note and get the rest over time, or I could sell to the cash buyers for $65,000 and then they go, “Hmm, I think I’ll take the 110.” Because a lot of sellers get stuck on price, right?

Mike Hambright: Right.

Dawn Rickabaugh: And it’s not a bad thing. So if they end up keeping the note, then they usually do well and they defer capital gains, and all those things too, keep their money working for them, but then life happens, right? You know that as a house buyer.

Mike Hambright: Yeah, absolutely.

Dawn Rickabaugh: Why would someone sell to you at a discount?

Mike Hambright: Right.

Dawn Rickabaugh: They need money, something happened or they’re moving out of the area and they just want to liquidate all their ties. I just got one under contract. It was awkward between family members and the one didn’t want to be on the hook for having to foreclose if the other family member didn’t pay, so sometimes there are awkward situations, divorce scenarios, things like that.

Mike Hambright: Yeah.

Dawn Rickabaugh: And then with notes you don’t have to just say all or nothing, like with a house you can’t just sell one bedroom, right, of a four-bedroom house. But if you have a note, they can sell three years of the next ten year’s payments just to get the money they need now without taking a massive discount and walking away from the asset completely.
So basically someone needs money or there is some hassle factor, or they have another investment. Let’s say if I can take a discount here to get out of this and get some cash, I can double my money in the next six months with this great opportunity that just came up, or a business I want to stop, or grandma went in the hospital. I don’t know, stuff.

Mike Hambright: Yeah, and typically in your business and kind of what you advise, I assume you want collateral on the house and you obviously prefer to have first lien deed of trust. Is that the only way you invest or do you do some creative things there?

Dawn Rickabaugh: Well, I do a variety of things, but yeah, first position, I have to look at everything like I’m going to end up with that property and what am I going to do with it if I get it.

Mike Hambright: Right.

Dawn Rickabaugh: There are sometimes when I go, oh, this is a gamble and I’m buying it like it’s a discount, like it’s a non- performing note, and it’s going to default, but it’s like some little mobile home thing. For some reason I just liked it, but I would have never wanted the collateral, but that thing performed like a dream.

Mike Hambright: Yeah.

Dawn Rickabaugh: But I calculated in my risk and how much I paid for that note, probably 50 cents on the dollar and they paid off early, and I probably got over 100% return on that one little investment.

Mike Hambright: Yeah.

Dawn Rickabaugh: But still, most of the time I like to be in first position. My loan to values when I’m making a loan, originating a loan are 60% usually or less.

Mike Hambright: Okay.

Dawn Rickabaugh: If I’m buying discounted paper, I’m usually even less than that. I would say most of the time I’m under 50% of the value of the collateral so that I’ve got a lot of protective equity on top of me if anything goes wrong because it’s going to take me a while. If I’m the bank, then I’m the one that has to foreclose or deed in lieu, cash for keys, go hope to take possession of it before all the copper gets stripped out of it, stuff like that. So what was the question again?

Mike Hambright: I don’t remember, but let’s ask another one. So as a note investor, talk a little bit about the importance of where the properties are geographically relative to you. And I know that even for actual real estate investors I’ve always felt comfortable doing it in my market, but I know a lot of people now that just buy all over the country. They’re comfortable in lots of different markets, but talk about how that comes into play in your world.

Dawn Rickabaugh: Well, when I lived in southern California which was most of my 50 years of living, I just barely move to Carson City, Nevada, so I haven’t really gotten the chance to explore the local market here. I’ve been here a month so far, but in California I couldn’t do this owner financing and note gig if I just only wanted to stay in my market. So the note market, unless you’re just doing private loans, I always stayed within an hour or two hours of my office there. But buying discounted paper it’s advisable.
Well, Texas for instance. You guys do a heck of a lot more owner financing than California does for sure. There are some areas of the country where there is a lot of paper being created, so you kind of got to go where the product is. I think about, okay, if I had to foreclose, I would rather do deed of trust states than mortgage states because to foreclose it’s usually quicker and cheaper to get the asset back.

Mike Hambright: Yeah.

Dawn Rickabaugh: What does it take, forty-five days to foreclose in Texas?

Mike Hambright: Twenty-one.

Dawn Rickabaugh: Yeah, so if someone doesn’t pay you, you’ve got your asset back. If you do something in New York or New Jersey, or even South Carolina, it might take you three years to get your property.

Mike Hambright: Yeah, that’s crazy.

Dawn Rickabaugh: So you have to think about that. What was the right word? The regulation or the legal process in that state.

Mike Hambright: Yeah, right.

Dawn Rickabaugh: But I have notes all over the place.

Mike Hambright: Yeah, and for the most part you don’t care where they are unless something goes south, right?

Dawn Rickabaugh: Right, but you handle that conversation in your head before you pull the trigger and buy it.

Mike Hambright: Yeah.

Dawn Rickabaugh: So that’s why if I want to limit my exposure and I think there is some upside. But let’s say it’s a pretty new note, there is only six payments made so far, that’s not a long seasoning.

Mike Hambright: Right.

Dawn Rickabaugh: I might say, “Well, I’ll buy a partial. I’ll buy the next two or three or five years and I’ll keep my overall exposure in that one deal low until its proven itself and has a better track record. And then maybe I’ll buy the rest of it afterwards.”

Mike Hambright: Okay.

Dawn Rickabaugh: Or I just know that I want it and I’ll buy it at whatever 50 cents on the dollar and maybe hope. I never really buy hoping that I get the property, but sometimes it happens anyway.

Mike Hambright: Yeah, so talk a little bit about how note buyers like yourself are funded because effectively you’re acting as the bank.

Dawn Rickabaugh: Yeah.

Mike Hambright: Unless you’re independently wealthy, where do people get their funding to effectively fund those deals and I guess effectively make a spread in the middle, right?

Dawn Rickabaugh: Right, so the people that are listening or me personally?

Mike Hambright: You personally or if you want to share what you do.

Dawn Rickabaugh: Oh, yeah. There is a lot of money fleeing out and rightly so fleeing out of the stock market and Washington, and Wall Street. And so there is just tons of money increasingly getting into self-directed IRAs. So those are qualified accounts, but people can invest in anything.

Mike Hambright: Yeah.

Dawn Rickabaugh: They could buy a house. They could buy a note. They could make loans. There is almost nothing that you can’t do in a self-directed IRA, so that is a great source of money. So let’s say someone had 300,000 in some mutual fund thing, Schwab or one of those guys.

Mike Hambright: Sure.

Dawn Rickabaugh: Maybe they’ve been making zero to one percent for the last several years. Well, they’re not going to be able to retire on that, right? So if they roll that money out if it’s a solo, 401(k), a Roth IRA, a traditional IRA, you just roll that into its equivalent. That is a lot of money sitting there that’s just passive. It’s in a tax-deferred or tax-free environment. Those people need the rain makers like me, like you to find deals and they want to put in the money.
So I guess when I first started out I really felt the only way for me to make money was to get a note under contract to sell it to one of the big five companies that was out doing it at the time.
Well, it just wasn’t working and I got so frustrated and when my career really took off was when I just said, “I’m ready to make the decisions and I’m going to pull the trigger with some of my money. I had some close pocket investors that believed in me and took the spin with me the first time.
And then as that just started more and more people, like I didn’t even have to ask and they’re just like, “Well, can I invest in your notes because I’m getting one or two percent over here. I’m getting nervous of the stock market. I would rather be giving because seven, eight, nine percent is a very reasonable and attainable return that’s, I think, fair to both sides.” So there’s a lot of money that just wants a piece of investing in real estate, investing in paper without the daily grind.

Mike Hambright: Right.

Dawn Rickabaugh: So money has just dropped in my lap. I actually have more capital than I can put to work.

Mike Hambright: Sure. It’s a good problem to have, right?

Dawn Rickabaugh: Yeah, and you had introduced me as a really high- volume player, but I’m not one of those really. You can see this is my home office. I’m a one person show with a part- time assistant. I’m not like a big hedge fund that buys these big massive pools and stuff like this, but I do. Up on my board I’ve got six notes that I am in some process of buying right now with three or four emails that I haven’t got to from over the weekend. So I don’t know.
If your listeners can just get the idea that if you learn just a little bit about owner financing and the discounted note business, you will find more ways to put properties together. If you want to buy a property, buy with owner financing. Ask the seller to carry. Oh, they don’t want a payment? Okay, let’s reverse engineer it so I can buy the note and they get what they want.

Mike Hambright: Right.

Dawn Rickabaugh: So there is just a bijillion [SP] ways to . . . It just expands exponentially if you just understand a little bit about discounted notes. Do you just want the fundamentals of what makes a good note? What makes a note sell at 80 cents on the dollar instead of 40 cents on the dollar?

Mike Hambright: Sure. Yeah, that’d be great.

Dawn Rickabaugh: Okay. One of the biggest mistakes I see people make, they carry paper is usually if they’ve been advise by their attorney, their CPA, and their real estate agent who don’t know better, but they just copy the banks. Okay, the banks are lending at 4 or 5% for 30 years, so that’s what I’m going to do. That’s fine because if you don’t have a better way, if you don’t have a way to make more than 4 or 5% returns on your money, that’s a great way to leave your money.
But if you need to sell that note two years down the road, you got 28 years to go. Maybe the person dies. Now the heirs are going, “We don’t want 800 bucks a month for the next 28 years. We want to liquidate and split the money up.”

Mike Hambright: Yeah.

Dawn Rickabaugh: Well, that note is probably going to go for, even though it might be well secured. Meaning it might be against a great property that’s really desirable, but still the yield is so low that someone’s going to come in and most likely offer in that 50 cents on the dollar range.

Mike Hambright: Right.

Dawn Rickabaugh: Why? Time value of money, inflation. If I get $800 today, it buys groceries for a family of four.

Mike Hambright: Right.

Dawn Rickabaugh: How much will it buy 28 years from now? That last payment is not really worth anything, so the biggest problem I see is long amortizations. People don’t understand that. They go, “Well, look how many payments that you’re stacking up. This is a million dollar note.” By the end of it they don’t get that no, if they paid off their note now, they’re only going to pay me the balance of the note.

Mike Hambright: Right.

Dawn Rickabaugh: I am not guaranteed. It’s not like an annuity that for sure I’m going to get for the next 28 years.

Mike Hambright: Right.

Dawn Rickabaugh: So the best thing people can do is . . . Mike, if you have a property that you pick up and you decide it’s better to flip it to somebody for cash, you’re going to own or carry. Let’s say, what’s a typical price point in your market?

Mike Hambright: Let’s just say 150,000.

Dawn Rickabaugh: So you bought it for that.

Mike Hambright: Let’s say we bought it for 100,000.

Dawn Rickabaugh: And it’s worth 150.

Mike Hambright: Okay.

Dawn Rickabaugh: Okay, so someone comes to you and says, “I really want to buy this, but I can’t pay you all cash.” Are you going to go retail instead of wholesale, right? Is that a retail price?

Mike Hambright: Sure, yeah.

Dawn Rickabaugh: Yeah, okay. So then what can you do to minimize the discount you will take if you’re going to sell your note? What’s the first thing? You’re going to want a $2,000 down payment or a $30,000 down payment.

Mike Hambright: As much as I can get.

Dawn Rickabaugh: As much as you can get because that’s the hard equity. That’s the protective equity that makes you feel warm and cozy at night.

Mike Hambright: Yeah.

Dawn Rickabaugh: So if the market goes up or down, you know that you are not going to have financial loss statistically speaking.

Mike Hambright: Right.

Dawn Rickabaugh: You want the biggest down payment you can get. You want the biggest monthly payment that they can afford without putting themselves in jeopardy because if they can afford 1200 a month instead of 600 a month, see the person who can only pay 600 a month needs a long amortization.

Mike Hambright: Right.

Dawn Rickabaugh: If they can afford 1200, then you can maybe pull it down to a 12 or a 15. There are a lot of notes that are fully amortizing in seven to ten years. So the shorter the amortization, more money, sooner, better. Biggest down payment, shortest amortization, and the highest interest rate that you can get them to agree to, and it doesn’t violate usury laws.

Mike Hambright: Right.

Dawn Rickabaugh: And then get someone else to service it for you. For 15 bucks a month have someone else service it because then there is a verified payment history so that when you go to sell the note to someone like me, we want to know if this is performing an maybe you’re not very good at keeping records.

Mike Hambright: Right, or if you want that person to essentially re-fi and cash you out.

Dawn Rickabaugh: Right, exactly.

Mike Hambright: Yeah.

Dawn Rickabaugh: Exactly. So those are some of the nuts and bolts of it.

Mike Hambright: That’s great. We could talk about this all day long. It’s such a huge kind of space. Well Dawn, we’re kind of running out of time here, but talk a little bit about if folks want to learn more about what you do. I know you help educate others and then maybe how they will learn more to find out how to work with you or how to kind of educate themselves.

Dawn Rickabaugh: Great. Thank you for asking.

Mike Hambright: Yeah.

Dawn Rickabaugh: NoteQueen.com. That was a brand that I took on in 2007 when I went out on my own.

Mike Hambright: Yeah.

Dawn Rickabaugh: And it was sort of a joke in the beginning, but it turned into oh, what the heck. You don’t remember Dawn Rickabaugh, but you remember [inaudible 00:29:04]. Anyway, I wrote a book called “Seller Financing on Steroids”. There is a free download on my site, NoteQueen.com, and that’s a good place to start because it’s sort of an introduction. And then from there, there’s lots. I put a lot of information on there that’s for free. I have some YouTube channels that are actually showing people how to use the financial calculator.

Mike Hambright: Okay.

Dawn Rickabaugh: I have an online paid content site that’s very cheap where a couple times a month we go through real live deals. And so people really see everything of what I’m doing and just building a little community there, but anyway NoteQueen.com is the place to just sort of get tapped in and start dipping your toe, and see if it’s something that you resonate with.

Mike Hambright: That’s great. We may have to have you back for note investing 201 or 102, or something Dawn.

Dawn Rickabaugh: Yeah, I would love it.

Mike Hambright: Awesome. Well hey, thanks so much for your time today. This has been great information. I know we just basically touched the tip of the iceberg of all you do in your business and all that you can do in note buying, but we definitely appreciate that kind of jump start at least.

Dawn Rickabaugh: Well, thank you very much. It’s a privilege to be here.

Mike Hambright: Yeah, thank you and stay in touch, and we’ll talk again soon. Okay?

Dawn Rickabaugh: All right. Thanks a lot, Mike.

Mike Hambright: Have a great day.

Dawn Rickabaugh: Take care.

Mike Hambright: Thanks for joining us on today’s FlipNerd.com podcast. To listen to more of our shows and hear from incredible guests, please access all of our podcasts in the iTunes store. You can also watch the video versions of our shows by visiting us at FlipNerd.com.