A review of Troy Fullwood’s ‘Power of Paper’ workshop.

This month, our intrepid reporter finds a way to profit from the misery of an entire nation.  But don’t worry, it’s only the Yanks we’re taking advantage of! This lucrative property business system is so clever, it relies on time and effort to get started, and requires little or no cash or risk.

I’ve been on dozens of training courses – but this month I’ve come across a rarity, a real gem.  I’ve actually found a course which teaches a strategy that, from my personal perspective, is both genuinely novel and also well worth doing.  In fact, I’m actually following this business model right now.  Admittedly, I’m doing it in a toe-in-the-water way, rather than diving straight in – but nevertheless I am actually working on it.  I can’t remember when I last wanted to make the effort to follow a new business strategy I’d seen on a course.  That is not to say I don’t learn anything on courses I review, but I tend to absorb snippets rather than fully fledged business systems.  This is different.  I really like this.  It’s very me!

Regular readers of this column will note how much I like to bang on about the US housing market and how it could spell doom for us all.  Yet as you may also be aware, I’m not averse to various strategies based around US investing, simply because you can easily reduce the risks you face by using a business model that insulates you from a fluctuating market.

This will all probably be sounding a bit bizarre to you, let me give you a bit of background to the market.  You’ll probably be aware of terms like ‘subprime crisis’ or ‘credit crunch’, and unless you’ve been on the moon for a while you’ve probably noticed that the Northern Rock has had a bit of a bad hair day recently.  So what’s behind all this nonsense?  Well, it all started a long time ago in a land far away…..

In the olden days, banks used to get money from savers and lend it to borrowers.  The world was a happier & simpler place.  The sun was brighter, flowers were more colourful and family life was pleasant and orderly.  Banks had to be very careful to make sure they didn’t lend to idiots, or they wouldn’t get their money back.  Nowadays, the lenders aren’t lending their own money.  They parcel up the debt and sell it on.  So they make money by making debt look good and selling it fast.  They don’t give a stuff if it gets paid back or not, as it’s not their own money.  Added to this, for years the US has been suffering a housing boom (yes I do mean suffering).  Interest rates have been too low, which drives house prices higher because there’s too much cheap money chasing the same number of houses.  Lenders have seen the jolly fun that’s available in such a happy party, and have thrown caution to the winds and lent money hand over fist on the assumption that rising house prices would save everyone for ever.  In recent years, US banks have been falling over themselves to lend money to ‘sub-prime’ customers.  Many of these customers are people you couldn’t trust to pay you back twenty quid.  (Think of Wayne & Waynetta slob from Harry Enfield and chums.)  It was wonderful whilst it lasted, but as Captain Blackadder said, ‘the plan was perfect in every detail, apart from one tiny flaw.  It was complete bollocks.’

Needless to say, a lot of these ‘sub prime’ customers haven’t been too diligent at making their mortgage payments.  Inevitably, many of the institutions that have been playing this game have consequently come a right cropper, and many have gone to the wall.  When was the last time you can remember a major UK financial institution going bust?  BCCI about 15 years ago, I think.  Lenders going bust is very bad news for the economy.  But the rot hasn’t stopped there.  Because this debt has been sold on every which way, no-one knows who’s got it and who hasn’t.  There’s a whole lot of debts out there – billions of it – that simply isn’t going to get paid back.  No-one really knows where it all is.  A bit like musical chairs, no-one knows who’s going to get left out when the music stops. So everyone is currently scared of lending to anyone that might be holding a big pile of worthless debt.

Now, fortunately, there may be a return to the halcyon days of yore. The silly lenders have got their fingers badly burned.  Many of the ones that haven’t gone to the wall are facing considerable trouble as they try to limit the damage they’ve caused themselves with their stupidly slack lending. Even fairly sensible banks like Barclays and Northern Rock are having to grovel to the bank of England to get the cash they need to keep going.   Now, inevitably, the market is driven by the fear side of the fear/greed cycle and the banks are tightening up so fast that even perfectly creditworthy customers are struggling to raise funds.  Many perfectly respectable people are therefore unable to get finance for their house purchase using conventional mortgages.  This is a serious problem in the US and a growing problem in the UK.  In the UK, a big choke-off on mortgages would be likely cause the market to grind to a juddering halt, but not so in the US.  There’s a little magic they can use to help buy houses over there. When you buy a house in the states, it’s quite common to borrow all the money you need from the seller of the house, using a ‘seller note’.  This is similar to the way you used to buy things on credit in the UK before the days of third party customer finance companies.  In the sunny days of yesteryear, buyers with poor credit often had to do this to buy a house, and we’re seeing a resurgence in the market now.

Which is good news for us, as you’ll see later…

Let’s look at how seller notes work.  When you buy with a ‘seller note’ or ‘owner finance’ something very strange happens that you probably won’t have seen before.  The seller sells the house, but keeps the mortgage.  The buyer pays the seller every month like a bank.  The seller then takes the buyer’s money and pays some of it to the mortgage company, almost like rental.  There may or may not be an end date on which the seller has to pay the full balance off.  Weird, isn’t it?  If you don’t understand it, read the start of the paragraph a couple more times until it sinks in.  Bizarrely, I have it on good authority that it’s technically possible to perform this particular variety of witchcraft over this side of the pond too.  However I’ve never come across anyone who’s actually done it, so I’ll assume that it’s a new one on you and I’ll go through it in a little more detail.  Let’s look at a example with figures.  Say I’ve got a mortgage for $100,000 on my house.  Let’s assume the house is worth $200,000 and I’ve got a buyer who’s willing to pay full value.  I may not be able to get the cash out of him if he’s got a problem getting a mortgage.  So, what I could do is to sell him the house and charge him a fee per month instead of getting a cash sum for the house.  I’ll easily be able to make enough money to cover the interest on my mortgage.  Furthermore, because this is a formal loan agreement I’m perfectly within my rights to impose an even higher rate of interest on my buyer than I have on my mortgage right now.  For example, if I make a monthly payment of $700 on my $100,000 mortgage, there’s nothing to stop me charging him $800 per $100,000 instead.  This chap’s buying for $200k not $100K, so you then double that $800.  Therefore, he’ll be paying you $1,600 gross each month.  You’ll only have to pay $700 out of that, so that leaves you $900 to play around with.  Brilliant!  You get rid of your property and you get an income stream of $900 pcm to waste on champagne and high living.

Except for one tiny flaw….

The problem with this is that there’s a good reason that the bank won’t lend the buyer money.  It’s because they don’t trust him.  He hasn’t got a good credit score, possibly because he’s been a naughty boy.  Someone who’s been a naughty boy before doesn’t really inspire confidence.  So what you need is a system for politely but firmly making people pay.  Most sellers don’t have such a system, so they’re rubbish at making the buyer pay up on time.  They then get very sick of chasing their ruffian buyer for money to pay the mortgage every month.

Which gives us an outstanding opportunity…

We can go in and buy the seller note from the original seller and manage it ourselves.  As the seller is keen to get rid of the hassle of chasing his buyer for money, he may well be persuaded to sell the note for far less than $200,000.  After all, who’s going to pay top money for a bit of paper that doesn’t guarantee anything other than a headache?

But how do we get the cash?

The system is actually much simpler than you might think.  There are banks and lending institutions who will buy seller notes in bulk.  So why does it work for them to buy seller notes, but it doesn’t work for them to give mortgages?  The answer is simple – by buying the seller note at a small discount, they massively increase the effective interest rate they are getting on the money they’ve paid out.  They’re effectively lending mortgage money at credit card rates. The seller of the house will often be willing to accept such a discount due to the fact that they’re often swapping a very uncertain cashflow for an attractive lump sum.  In effect, the seller is paying interest to get the money now rather than later, and to mitigate their risk.  The bank is quids in, because by buying the note at a discount they’re effectively getting all their interest up front – so they don’t have to worry about defaults.  Even if the owner defaults on the note, the bank can move in and repossess with the equity still intact.  Furthermore, the rigorous credit management in this sector means that default rates are not necessarily as high as equivalent mortgage products.  Overall, that makes these deals very attractive for banks, so even when the mortgage sector has got a bad case of the jitters, you can apparently still shift seller notes with ease.

And what makes these deals so special?

The person who’s gone out and found the note is in control of the whole deal, so they’re in control of the money too.  This is the direct opposite of mortgage business.  If you’re writing a mortgage, you may get a fee of maybe 1% from the lender, but that’s your lot.  You can’t negotiate with the punter to get a better deal and slice off 5% just because you’re smart.  But seller notes are fundamentally different, as they’re discounted.  Let’s look at an example.  Bob’s sold his house for $100,000 with a note that commits the buyer to pay an interest rate of 8% over 20 years.  Let’s assume that the bank that’s buying the note will pay $90,000 for that note, because the home buyer’s credit rating means they have to insist on a higher effective interest rate.  Bob’s taken a ten grand hit on this, but how’s he to know where to stop?  If you can persuade him to sell the note for $85,000 cash, then that’s $5,000 for you to pocket, even taking into account the big price cut the bank’s insisting on.  Because this business is very light on paperwork, your costs may be very low.  For example, all you may have paid out on this deal is the cost of a few international phone calls to find someone who’s willing to do such a deal.

‘Sounds good’, I hear you say….

This system will appeal to people who like flipping UK property.  It’s a very similar process.  You identify a motivated seller (although in this case they’re selling a bit of paper to you and not a house).  You negotiate a deal.  You take a cheque.  There’s none of the messing about that is normally associated with UK property trading – insuring, fixing faults, arranging estate agents and all that drivel. Obviously, some basic checks have to be carried out to make sure that the property is good to secure the debt, but compared to the hassle of buying and selling a house in the UK the system’s a breeze.

The course is sold and supported by Ayshe, who’s a regular on the UK networking circuit, providing a familiar face and point of contact for delegates.  The training is provided by Troy Fullwood.  Troy is a highly experienced and very well respected note trader from the US.  Now in case you’re thinking of starting this business on your own, you best realise why Mr. Fullwood is going to be the most important person in your life.  This is because the trainer’s business model is as unusual as the subject covered on the course.  Troy flies in from the states to run a 3-day course with about 15 delegates.  It’s clearly not worth his while for the few hundred quid he earns from each seat.  The way he makes his money is by brokering the sale of notes to the major lending institutions.  Once you’ve got a seller note, you can’t just wander into the offices of a major bank and flog it over the counter.  Such deals are screened, packaged and collated into tradable products and then sold in bulk to international banks.  Troy’s not the only guy in the game, but you’ll need someone like him to get rid of the notes you find.  He runs this course in order to find lots of gophers to go and do his running around.  This is a business strategy for property people with time and energy, but who either don’t have money to tie up in property or simply don’t like leaving ‘dead money’ in deals.   This, in my view, is the brilliance of this course.  It’s a business that generates cash quickly and rewards effort and determination more than investment and patience.  This makes it almost unique among property courses, which so often leave punters with no way to get started other than by shovelling money into their business in an attempt to get it started.  Another great feature of trading in this way is that it screens you from the potential downside of investing in a housing market that by anyone’s standards is fairly risky.

I went on the first course Troy had run in the UK.  Whilst the course content was excellent, there were the inevitable glitches that come from running a first time course.  I’ve given some pretty detailed feedback, and I’m sure things will be smoother next time.  Most of the areas of difficulty were to do with the way that he introduced this subject to a novice UK audience.  It’s a bit radical from us conservative Brits, and the concepts do take a while to get your head round.  Whilst most people in the US are at least vaguely familiar with the idea, the UK delegates were in uncharted waters.  Having had the experience of helping delegates through the tricky bits, I’m confident that next time the course is run it will be a lot easier to get to grips with people who aren’t familiar with this way of doing business.

So is this a good course?  I think that’s an unhelpful question.  There are courses for horses.  If you’re an active investor, this system offers a great opportunity to earn an income stream from trading the property markets with little to no money invested.  It’s not an easy course, and you will have to make an effort during the sessions if you’re going to get to grips with the content and techniques.  However, once everything slots into place it all makes perfect sense.  Another factor to bear in mind is that there’s a lot of negotiation involved in running the business model, which some people will see as a plus point and some may not like.  This course was right up my street, and as such I recommend it strongly.  But it is highly focussed and more intellectually demanding than many on the market.  If you’re interested in pursuing this business strategy, and you’re prepared to put the time and effort in, the course is a must see.  If you’re looking for a general introduction to property, or even to US property, this course will not meet your needs.

If you’d like to know more, Ayshe runs a series of taster courses which you can attend to learn more about the concept and see if you think it’s going to work for you.  Find out more at www.investinthestates.com