Note Network

The concept I learned when I first came into the note business was, and is, the heart of "Winning In The Cash Flow Business". Buy a note, and quickly resell it at a higher price, and make a profit! But I also mentioned that we have several ways to profit from participating in the cash flow business! In addition to buying and quickly reselling for a profit, we can find notes and refer them to other investors, selling that information for a profit. Or we can buy notes for ourselves, and hold on to them, for a profit. In fact, most folks who jump into the note business claim to do so with the intent of becoming "Investors" at some point.

As you can see, none of these activities involves acting on behalf of others. We are simply independent investors, who make a profit from bringing some basic knowledge to the marketplace, and applying this knowledge to find note deals, and making them happen!

One of the primary attractions of "Winning In The Cash Flow Business" is the "ease-of-entry" into the private cash flow industry. No special licenses or bonding; nor any government mandated training is required to get started!

So... why do so many of new folks who come into the cash flow business, immediately want to start representing other people??? Most folks who enter creative real estate investing don't think of themselves as real estate agents, nor do they try to represent sellers or sellers in the sale of their properties. A great many people invest in the stock market, but less than 1% of those are stockbrokers. So what's the deal with cash flow neophytes?

What's In A Name?

Maybe it's because the private cash flow industry has commonly used the term "note broker" as a description for what participants do? Perhaps so many people are used to the connotation of "broker" (as one who represents another) as it applies to real estate broker, or mortgage broker, or insurance broker, or perhaps even stockbroker? But those occupations all require training classes, licensing, and employment agreements with established brokers in order to get started. That's not "ease-of-entry"... and it defeats the primary purpose of why most of us are looking at the cash flow business in the first place!

Maybe it's just because many folks don't understand that, like many words, the word "broker" has several common definitions. It would seem so, given that so many folks instinctively dive into this business with the notion of "acting as an agent" for another, or "representing clients". But why would they even think about doing that, without having gone through the complicated procedures of learning all about the art and science (and in many cases, legal requirements) of "representing others"... i.e. "acting as an agent for others???" I don't know!

To clear things up a little bit here, let's look at Black's Law Dictionary. In legal parlance, the term "broker" is described, among other definitions, as "Ordinarily, the term is applied to one acting for others, but is also applicable to one in business of negotiating purchases or sales for himself." Hmmm... this seems clear enough!

But unfortunately, the term "broker" has apparently created a false impression on both sides of the table, with new note finders, with state regulators, and even in the courtroom. So, if the word "broker" is confusing the guys in our business, judges, and especially YOU, okay... that's simple enough - don't call yourself a note "broker"! Just plain "Note Investor", or "Note Buyer", or "Note Finder" should suffice for most of us. If you want to feel extra special, how about being a "Cash Flow Consultant"?!

But, remember, it is not so much what you call yourself, as what it is that you do in your note transactions. "Representing clients", or "acting as an agent" are definitely activities that most of us in the note business try to avoid - simply for the reason that such activities limit our abilities to act in our own best interests, by way of the common "law of agency" that applies in all 50 states.

The law of agency doctrine puts another whole layer of legal obligations (i.e. "duty of care") on those who act on behalf of another. This is particularly so if we are acting on behalf of another, for a fee. Such "third-party" 'client' representation attaches with it, various requirements for disclosure of material facts; indirectly limits the amount and type of compensation we receive; imposes minimum standards of trust and competence in both our due diligence and negotiating skills - and frequently, creates liability for any advice we might offer to the "client". In many states, licensing issues even come into play, if you intend to represent clients, for a fee!

Seems like if folks wanted to go to all that trouble, they ought to consider becoming a real estate agent, or a mortgage broker, a stock broker... or why not shoot for the "king of the hill" of client representation - and become an attorney?! Given all the disadvantages, why would anyone even want to represent "clients" when jumping into the note business? Why complicate the opportunity, by "representing" somebody else? I don't know!

Who Do I Represent?

I have never seen a course about the note business, or the private cash flow industry as a whole that even remotely discusses anything about representing buyers or sellers. WINNING IN THE CASH FLOW BUSINESS doesn't - go ahead and skim through "Winning" and have a look at the various forms and sample Agreements. Do you see any kind of sample Agreements that you would sign with a seller, for the purpose of "representing" him? Did you run across any forms indicating they could be used for "representing" a buyer in a note deal??

What you will see is... a Commitment Letter (offer to purchase a note); a NonCircumvention Agreement (to prevent either the buyer the seller, or both, from going around you on an offer you have presented); and a Pay Out Agreement (to stipulate your profit out of a given note deal). In other note courses, including several advanced courses published by America's Note Network, you'll see other variations of these types of agreements, under similar names - such as Purchase Contracts, Letters of Intent, Option Agreements, Commitment Letters (which are another form of purchase agreement), Finder Agreements, and Noncircumvention Agreements.

And although a great many state officials, attorneys, and other professionals often appear confused about what we do, that won't matter, if we ourselves aren't confused about what we do. Why don't we just do it the way those before us have done it, and simply act on our own behalf, as a Note Investor, and/or a Note Finder? Why not do what all the course materials suggest, and simply represent yourself?

Then, the only public policy we have to worry about is what every American citizen has to deal with in every day business transactions... the "duty of fair dealing" - which is essentially the only duty that would apply to any individual out there, simply going about his OWN business. That's the easiest path to follow, the cleanest, and generally, by far the most profitable! That's what we call "Winning In The Cash Flow Business"!!!

I've always felt simplicity was the best route in the cash flow business. After all, simplicity is the primary attraction to the business - whether we keep the notes we buy, resell them to others, or refer them to others, for a profit. Whatever you decide to call yourself, keep this very simple fact clear in your mind... there have been an awful lot of folks out here over the past 65 years who have made a lot of money working with "notes"... rather than working with "clients". That's what we do, and that' what "Winning In The Cash Flow Business" is all about!

To win in the cash flow business, we only need to learn a little bit about the basics of what the cash flow business is, and how it works. This is simple enough.

Defining Our Role

Whether acting as an investor, or a finder - the four most important functions we perform also lay the foundation for our success at "Winning In The Cash Flow Business"...

• Gathering meaningful information
• Checking the information for accuracy
• Packaging that information
• Presenting the information to Investors

You will be able to enjoy immense success in the cash flow business, if you do nothing but remain highly focused on these four easy-to-do cornerstones that lay the foundation for all we do in the cash flow industry. This is our raison d'être! Find the deals, put the information together, and put it into the hands of investors in such a way that they can quickly determine what the deal is - and whether it is viable for them, or us.

Controlling Our Deals

It is important to understand how effective our front-end approach to interacting with our potential note sellers is, toward gaining enough control over our deals - and improving our chances of making a profit out of any deal we spend our time on! That's where the four cornerstones above come in. Better to spend our time finding out all we can about the note, and the seller's motivation for selling it, rather than getting all wrapped up in trying to tie the seller up.

But having an Agreement at some point, with either a buyer or a seller, provides us with a basis to legally enforce our ability to actually get paid out of our deals, rather than as a "pure" method for controlling our deals. Once we have the gotten the deal to the point where we want to have some kind of a contractual agreement in place, we have several alternatives we can choose from. A purchase contract, Commitment Letter, or Letter of Intent is a very strong way to gain control, and protect the amount of profit we make on a give note contract.

Which approach we use, and when we use it, is dictated by a number of factors. But a simple Finder arrangement can often be the easiest and most practical approach for wringing a profit out of a deal. Finder relationships are often much simpler to implement, and the note operative's role in a given transaction is more easily defined within the finder context.

Exploring the Finder's Role

The courts in a number of jurisdictions throughout the United States have defined a Finder as one who finds, interests, introduces, and brings parties together for a transaction - The principals themselves subsequently negotiate and consummate. In contrast, a "broker" not only introduces the parties, but also negotiates on behalf of one, or both, of the parties"... with the best interests of that party being his charge".

Unlike a "broker", a finder is a middleman who is not involved in the negotiating of any of the terms of the transaction between the buyer and the seller. Acting only as an Introducing Party allows us more latitude to act in our own best interests. Essentially, as a finder, we are selling confidential information that we developed ourselves - this information, along with the identity of a potential candidate to buy or sell a note, is our stock in trade.

Many states have upheld a finder's fee exception to licensing requirements related to real estate, mortgages and loans, business opportunities, and even securities transactions - in states where such issues have gone to court. California in particular, has a well-settled history of supporting the finder exception to licensing laws in all of these professional areas!

California courts have consistently held that such an intermediary, or middleman, is protected by the finder's exception to the real estate licensing laws, an exception first established by California's Supreme Court in 1923, in Shaffer v. Beinhorn (190 Cal. 569, 573-574; 213 P. 960 [1923]). In that case, the Court held that a person who contracted to introduce a seller to a prospective purchaser did not act as a broker but as a finder; that one who simply finds and introduces two parties to a real estate transaction need not be licensed as a real estate broker; and in such cases, finders are entitled to be paid the finder fee agreed upon by the Parties to the Agreement.

Through numerous cases since that time, California courts have extended the finder exception to a broad variety of areas regulated by state licensing departments as well - and the finder's exception was comprehensively reaffirmed by California's Supreme Court again in Tyrone v. Kelley, 9 Cal.3d 1 (1973), and many subsequent Appellate Court cases.

California's courts have long observed that the purpose of the broker's licensing statute - the promotion of competency and trust - is NOT served by denying [finders] a fee on transactions where [they] merely introduced the principals to one another and [the principals] thereafter negotiated the transaction. An important nexus here is that finder's do not negotiate for any third parties in a transaction, and that they have no ostensible fiduciary duty to either party.

Various courts in other states have applied similar standards in upholding the finder exception, and finder fee cases in New York (Northeast General Corp v. Wellington Advertising, Inc, 82 N.Y.2d 158, 624 N.E.2d 129, 604 N.Y.S.2d 1 [1993]) and Ohio (Legros v. Tarr , 44 Ohio St. 3d. 1 [1989]) have included additional interesting guidelines in their holdings.

A review of case law in various jurisdictions demonstrates that some additional important practical distinctions exist between finders, as opposed to "brokers" - in the circumstances under which licensing may be required, and how each may be compensated.

In general, a "broker" retained to procure a buyer or seller of a property earns his fee only if he was the "procuring cause" of the transaction, i.e... if he (1) produces a buyer or seller who is ready, willing, and able to buy or sell on the principals' terms, and (2) the readiness to perform on the principals' terms directly results from the "broker's" efforts, without a break in continuity. In essence,

However, in the absence of contractual terms to the contrary, some courts have held that a finder is entitled to his fee if the "Introduction" results in a transaction, irrespective of whether a third person brings the parties to agreement. The causation, or "procuring cause" requisite is satisfied by the mere introduction itself, even if the negotiations between the principals are abandoned and later successfully resumed - provided the renewed negotiations are connected to and stem from the original introduction.

Also, although a party to an acquisition is ordinarily held to have no liability to a finder in the absence of a contract, to pay for such finder's services - an exception exists where the party or its agent misappropriates the finder's proprietary information and uses it to such party's benefit. In such case, an agreement to pay may be implied in law and the finder can recover in quantum meruit.

Thinking these issues through carefully, you'll realize that these subtle differences between a "broker" and a finder, seems to offer a substantial advantage to the latter approach!

Though we can make finder agreements with either a buyer, or a seller - it is generally more tactful to use a finder agreement with the note buyer, in most situations. This buyer-finder approach will not prevent a seller from legally marketing his note on his own, or through other brokers or finders, nor will it obligate a seller to pay you any kind of fee if the note is sold without your Introduction to the buyer or his representatives. But, as we have suggested in several reports available on ANN's website , you can gain a great deal of control over the deal, at least for the time you need it... simply by working professionally and diligently through the seller interviewing and information-gathering process!

More importantly, the buyer-finder approach allows us the best avenue for avoiding the duties imposed by the law of agency doctrine as much as possible, especially from the seller's side of the table. In most situations, this is where the law of agency generally would have the most potential ramifications. Experienced note buyers are less risky "clients", if we are ostensibly deemed to be acting as agents.

But, we really don't want to be an agent for a buyer either, when we can help it. And we usually can! Gathering information on a particular note deal; then completing a finder's agreement with the end-buyer for that deal, provides presumptive argument that we are merely an Introducing Party. Thus, we are somewhat protected from ostensibly acting as an "agent" (i.e. "broker") in another principal party's best interest - which offers more freedom toward simply acting in our own legitimate best interests.

This kind of relationship allows us a great deal more latitude in sharing what information we learn with either Party in the transaction that may have a material influence on the outcome of the deal! This is an important principle to keep in mind, seeing as how part of our most effective function in successful note dealing includes making a solid effort to determine the three factors behind a seller's motivation level. We want and need to use this information… but it is clearly material to the outcome of the transaction - and if we are acting as the seller's agent (or ostensible agent), we are precluded from using such information to our own benefit. So, don't be an agent!

There are situations where it makes sense to act as a finder for a seller. This might be the case when we know the seller is shopping hard, or may reverse field on us in the middle of a deal. Or, when a seller approaches us and actually asks if we can find him a potential buyer. In those cases, we can simply switch around the wording in the sample Finder Agreement we have provided on the next several pages, replacing the word "Seller" with the word "Buyer" wherever it appears, and vice versa!

Form And Substance

A fairly comprehensive Finder's Fee Agreement is illustrated on the next several pages. This is only one type of possible contractual format. There are others that are simpler and less comprehensive, but which may suffice to get the job done. Others can be more complex. As with all contracts, this one allows for numerous points of negotiation of terms, and where necessary, some terms and conditions can be "struck-out", as dictated by the needs and wants of the parties to the agreement. Also, as with all examples of forms and agreements offered in publications such as this, the user is advised to have his on legal counsel advise on the viability and appropriateness of the forms for the individual user.

What if you are working with a cooperating note broker or another finder? Maybe you have the note, and the other fellow has a potential investor for that note, or vice versa. No problem - it is a simple process to modify the form above. Here, it would be a case of both of you looking to protect each other for sharing contacts that involve revealing investors, as much as sellers.

For example, you might want to replace the existing Paragraph 7 (Noncircumvention) in the example form, with the following, in the event you are worki ng with another finder, or buyer who indicates he will likely pass your deal through to another end-buyer...

7. Noncircumvention - The undersigned parties, intending to be legally bound, hereby irrevocably agree not to attempt to circumvent, avoid, or bypass each other, directly or indirectly, for the purpose of avoiding payment of fees, profits, or otherwise, by way of any corporation, trust, part nership, or other entity, or individually by either party to the other, in conjunction with the above referenced transaction(s).

A few minor changes in the language will create the protection you are looking for in that scenario as well. Many of these fellows will have their ow n forms too. Chances are good that they will send you their form, in order to protect themselves from you going directly to their potential buyer. T urnabout is fair play, right? And if their agreements meet your needs, you can simply float with them, and save yourself any extra work.