…is that it is set up to fail. However, you did provide a very good example of why yield should not be the lone focus of an investor (i.e. Profit Matters! If I gave someone a penny a day for no reason they would have an infinite return, but a real skinny wallet).
Let me provide a more realistic example:
Commission (receivable) Amount: $3,000
Advance: $2400 now, $300 upon closing ($300 profit)
Receivable due in 60 days
Yield = 72%
Annual profit of about $1,800 from the original $2,400.
The actual default rate (not repaid within 30 days of schedule) is about 1% (1 out of 100). Let’s assume that the 1% is a total loss (in actuality the “total loss” percentage is closer to 0.25%) and we don’t get a dime back, then the yeild drops to 67%. If the default rate doubles to 2%, then the yield drops to 61%.
In the case of default one can just approach it the same way John teaches restructuring a balloon payment.
As for your statement that:
“There’s a lot more profit to be made in buying a 30-year note than in buying a 3-month note and most 30-year notes will be much safer because they are secured by real property.”
This borders on the “Cash Now” vs “Long-term” income debate I’ve been watching on NG1. Hmmm, care to give an example???
I know there are other sites (ACFI & others) that may routinely discuss the topic I am about to bring up, but I want feedback from the people that frequent the Cashflow Forum.
There is a company in my area that will give RE agents their commission (discounted of course) when the contract is signed instead of the agent having to wait for settlement in 60 or 90 days. Surely this must be done all over, but it just shows how much I haven’t discovered yet. Is anyone on this forum familiar with purchasing this form of receivable?
My thoughts are that this would be a great compliment (not a substitute!) to note buying and certainly increase my visiblity in the market which would lead to more note deals. I also forsee the advantage of training other folks to run most of the show while I’m out doing other things. Go ahead, tell me I’m an idiot!
Seriously, I’d really appreciate some feedback (both pros and cons) from you smart folks.
Re: Commission Advances…whatcha think? - Posted by John Behle
Posted by John Behle on December 23, 1999 at 13:55:59:
There are hundreds of creative ways to create paper. Whether it is flooring vacuum cleaners, advancing deposits on rentals or doing full or partial advances on commission receivables.
They each have to be weighed as to risk. Advancing money on unsecured, unsure commissions is possible if you carefully inspect the deal and work the numbers. Of course many deals never close - so how do you protect yourself?
The agent is the only one involved in this “paper” or receivable at this time and the only one that would put up collateral. Without that, it is un-secured. The agent could participate in creating a note against the equity in some of their real estate to protect you.
If they put up collateral, then you will likely need to lower your yield dramatically. So, it is a choice - personal loan with high risk and return - or secured receivable with a lower return.
Once you start talking collateral, the question could arise to the agent to go get a much cheaper “equity line of credit” that they could draw from. If you pursue this, the commission has to go to and through the broker. You will need an assignment or agreement with the broker that the funds are ultimately coming to you. The broker may see no choice other than to pay the agent direct and then you run the risk of the agent not passing it on. A broker cannot pay commissions to an unlicensed person or entity. With the agent though you would always have the ability to file a complaint against their license. Knowing that, few would even think of not paying you.
We’ve done some advances for mortgage brokers along the same line - on deals that are ready to close. Most we are having to chase down to collect.
There is an insurance product now called “deposit saver” that advances the rental deposit for credit worthy tenants and then charges a premium. You could arrange that on a private basis (minus the insurance part - it would have to be a loan).
Un-secured paper is a whole world of difference risk and collection wise compared to good, solid trust deeds or mortgages. The best option is always to try and secure the paper.
Re: Commission Advances…whatcha think? - Posted by MN~Chicago
Posted by MN~Chicago on December 23, 1999 at 24:28:10:
Drew:
An immediate thought would be to offer to
advance their commission note for a 10%
cut. A $6,000 commission (pick any number)
would earn you $600. Over a 3 month span,
that is a 43% yield.
If they were to get their commission in
30 days, and you offered just a 5% cut
for cash up front, you make $300, which
would be a 63% yield.
John, taking the worst case scenario, say an unsecured, unsure note where the deal can go south at any moment and never close. In your experience, what discount would be appropriate to compensate for this risk?
…is that the time period is too short for you to get good compensation for your risk. Here’s an example, if someone offers to borrow $1,000 from you and pay you back tomorrow what interest rate should you charge?
Let’s say you try 36% interest and 999 out of 1000 people pay you back and the 1000th doesn’t. For each person that pays you back you get $0.99 and for the person that doesn’t you lose $1000. The net result is a loss of money.
And even at that most people are going to say “No way, 36% and I have to pay it back tomorrow? No thanks.”
There’s a lot more profit to be made in buying a 30-year note than in buying a 3-month note and most 30-year notes will be much safer because they are secured by real property.
Posted by John Behle on December 23, 1999 at 23:36:24:
I am very leary of unsecured paper. To me, it just isn’t worth the time to bother with. I don’t want to be in a heavy collections mode. That extra high yield gets blown to bits once you have to spend time, energy and aggravation in collecting it.
I would only do it under the condition of considering it “speculation” and then the first question to look at is can you afford to lose the money. The second is do you want to have to press and pressure someone for payment.
Of course the stability, reputation and credit of the agent can make a difference. If they are active and full time in the business, they will probably be good for it. Yet if cash flow is so low that they need to borrow the commissions, then that in itself would be a concern. As I mentioned above too, your yield goes south when you aren’t paid on time and have to add in costs to collect. Even though you may be able to reimburse those costs, what about your time?
I really wouldn’t rate it much higher than putting it all on “black” at the roulette wheel - unless you do have an active realtor, with many other listings, good credit and a good reputation. Then maybe. The yield? Minimum 21% if you felt very confident. More likely up in the 30-40 range.
