Building trust can be pretty challenging, but the results can be rewarding. By being honest, your reputation as a trusted note broker will help you build your success as you scale. Derek Louden from Gardiner Capital Group is the third in a long line of real estate investors from the Dallas area. In this episode, Derek talks about how to become a trusted and reliable note broker. We dive into what it takes to be a counterparty that note buyers and sellers want to work with. So tune in to this episode and learn how to avoid the common mistakes note brokers make and build rapport with the people you want on your side.
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Honesty Is The Best Policy: How To Become A Trusted Note Broker With Derek Louden
Welcome to the show. I am joined by Derek Louden from Gardiner Capital Group.
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Derek, how are you doing?
I’m good. How are you? It’s good to be here.
I’m not too bad. Most people haven’t seen each other face to face in a few years even though we talk on the phone now and then. You’re one of the earlier people I’ve met in the notes world back at a Note Expo in 2017 or 2018.
It would have been ‘18 or ‘19.
It was somewhere in there. Introduce yourself by telling us a little bit about you and what you do.
I have been in some form of real estate investing for a number of years. My family did it before me. Specifically, with the notes piece, I got into the notes like a lot of people do. You hear them and they’re doing some form of rental. Maybe they’re a flipper and then they say, “Maybe having tenants, toilets, and all that stuff is not for me.” Although that works great for some people, it wasn’t for me.
I started searching for something that could give me a good risk-adjusted return. As you’re investing money, you want something that’s going to compensate you for any risks that you’re taking. Like anybody else, I started listening to content and talking to people. You got one of my cold emails. I was reaching out to folks in the industry, trying to find people that I could ride on the sidelines with and figure out how to do the thing.
The more I learned, the more I said, “This is something that I can turn into something and that could I could do on the side.” I worked full-time. I have a family, so I needed something that wasn’t going to soak up all my time. This seemed like it was going to give me that right balance between return on investment and return on my time, but also not completely consume everything to get those returns.
It was probably 2017 or 2018 when I started doing the research. I was listening to all the podcasts and they all ended up with some paid training. I had done that road in another initiative a while back. I said, “There’s got to be a better way. I’ve got little time and little capital. If I have to get into this, lose some money, and call it education, then I’ll do it.”
Some of those programs are pretty expensive as well.
As you're investing money, you want something that will compensate you for any risks you're taking. Click To TweetThey have their plates. There are fundamentals that you can sit, watch a bunch of videos, talk to a bunch of people, and listen to all the podcasts in the world, but you’re never going to learn until you get out there and it’s your money on the line. You’re making the moves or you’re asking the questions and you’re making the mistakes. When you make those mistakes, that stuff sticks with you. “An expert is somebody who has made all the mistakes.” That’s the old saying. I said, “I need to find somebody that’s out there doing this thing.”
That’s when I found a local meetup group. I paid a VA to strip all the emails out because they didn’t hide the emails, which I got lucky. I emailed 300 people. The email was like, “Here’s what I’m looking for. I’ve got a little capital. I’m looking to learn. I don’t want anybody to come at me with paid courses or anything like that. I’m looking for a partnership.” I probably talked to 20 or 30 people that came back to me because I raised my hand and said I had some money. Here come all these people with deals, but no money, which is fine. You were one of them. You made the shortlist. We did that JV together.
I did three JVs and watched the process from there. In 2018 or 2019, I was still learning. What I was starting to hear was that the pricing was starting to go up. The asset class was getting a little bit more attention. All the guys that I saw that I could tell they knew what they were doing, all of a sudden, were buying bigger tapes and starting to raise funds. They were moving up the food chain, so to speak, so they could continue to get that pricing. I said, “I’m not there yet. I’m not going to go raise a fund. I’m still in the middle of these JVs. I don’t know what I’m doing.”
That’s when I got to my place, where I said, “If I can get out there, find a couple of deals, get a first look at them, and decide, ‘Is this a good deal for me? Does it fit my criteria? Is this where I want it to be? Is it the right size?’ then, I could seek out help, go in, and see if I can take it down. I could also broker it off.” That’s what got me doing this hybrid brokering and buying model that I’m in.
I’m interested in learning more about how you got into brokering. It’s a hot topic. People ask me a lot about it. I’ve never done it. I brokered one note in my entire life. A one-off was the way it worked out. I didn’t go out looking to do that, but I know that’s the way a lot of people like to enter the business. You don’t necessarily need a bunch of capital to go and do that. Tell me a little bit more about what led you down that.
I went to the Paper Source symposium out in Vegas in 2018 or 2019. I heard this guy, Jeff Armstrong. You can look him up.
I saw him talk at the conference I was back in April 2022.
He’s been around. That’s what he does. He is a, “Go out and find individual owner finance notes.” This is one person. Your readers are going to come from all over the place, but there are two ways you can do it. You can go out and source your notes from institutional hedge funds where they’ve been originated by a bank or an institution of some kind. They could also be these mom-and-pops out there who own a house and they want to sell it. Maybe they can’t get somebody that is going to qualify for traditional bank financing.
If they have free and clear equity in the house, they can write a contract, take a down payment like a bank, write a promissory note, and have a mortgage or a deed of trust. They are carrying that note, and the person that’s buying the house from them is going to make payments to them. Those are one-offs. I’ve seen them as small as $10,000 and I’ve seen them north of $1 million. They’re all over the place. They carry all kinds of terms.
The Wild West gets thrown around. It’s not that crazy. When I was first getting into it, I remember there was a guy up in the Pacific Northwest. He had this long page about how these owner finance notes are written on bad paper and they’re not worth going after. I haven’t found it to be the case. Back to your original question, in my head, I was like, “I can go out and source the deals myself.” It means that I can go out and market for them. I’ll talk about the marketing piece in a minute because that’s fundamentally what it is. It’s being good at marketing and getting the most inbound.
Anybody that is reading this who has tried wholesaling, it’s the same thing. You’ve got a funnel. You start up here. You got to hit a qualified audience. As you do work your way down the funnel, eventually, some of those will drop out into closed deals at the bottom. I said, “If I get a first look at them, maybe I can help educate them and get them to a deal. That’s going to give them what they need.” If they need a little cash for whatever, I can help them with that, and then in exchange, I collect those payments going forward. That was the one piece of it.
The second piece was when you’re brokering a note. Typically, you’re working on the other side of the table with somebody who’s more experienced than you are. I’m bringing a deal to somebody else. That was an iteration of the JV arrangement where I said, “I’ll bring somebody a deal.” I’ve done the work. I’ve spent the money, which I’ll talk about, to bring them this deal. What they’re going to do in return informally for that is they’re going to show me how they vet the deal. I’m going to get to hear all the questions they ask. I’m going to get to see everything that they want from a file, what’s good, and what’s bad.
When they see one where they say, “I’m not taking that one,” I can be like, “Help me out. Why didn’t you like that?” They say, “It’s because of this.” From any other one that comes across my desk and I see those features, I can be like, “I know that that’s not worth getting into.” You do enough of those and all of a sudden, you start to get in your head this sense that you can look at a deal and say, “This one’s worth digging into. I see this.” I can tell by talking to a seller whether they’re not serious, they don’t know what they’re talking about, or maybe they’re not shooting straight. That’s part of the experience I’ve picked up a lot over the past couple of years in doing that.
That sounds like you’ve gotten to the point where you can do the back-of-the-envelope type of analysis. I know my business. I’ve seen that. We’ll build all these systems and spreadsheets. You do it enough and you don’t even necessarily always need to use it. You know by looking at stuff.
This is what Jeff Armstrong talked about. I would recommend anybody go out and reach out to him. He sells some information. You’ve got a course. His is more owner finance and brokering focused. That’s why I’m talking about it that way. I didn’t know he charged very much, but that’s where I started. He talks about having multiple lines of marketing in the water. You might be doing classified ads, direct mail, paid searches, and talking to real estate agents. You have all these lines in the water. You never know what one is going to bite at any one time, but you got to be doing them all in order to pull those leads in.
When you talk enough and you get a seller talking to you and say, “This guy’s not serious. I can tell he’s talking to six other people. He’s just looking for the best price.” The way you make money as a broker is you are getting a deal. You’re taking it to a funding source and they’re going to give you an offer. You then subtract something to cover your cost, plus a little profit. There’s no hard and fast rule of what that is. You have to understand. If you’re the only one they’re talking to, you might have a little bit more latitude. If they’re talking to three other funding sources, you’re bidding against them in terms of who’s going to take the thinnest slice.
That’s a pricing game at that point.
They’ll work with who they trust. There’s a tremendous amount of rapport building. As you’re talking with them, you can instill a sense of, “I know what I’m talking about. I’m going to shoot straight with you. I’m going to tell you what it’s worth. If you don’t like that, that’s fine. Call me back if you change your mind down the road.” If we’re way far off in terms of our pricing, what I tell people is, “I’m going to give you an offer that works for me. If it works for you, that’s great. If not, then we can part ways. No harm, no foul.”
How do you build trust with those sellers? I’m guessing a lot of these are mom-and-pops that might have one seller finance note that they ended up with. However, they’re not in the business. Maybe they don’t understand the whole concept of note selling at a discount to get a certain yield. When you come in as an unknown and you’re offering them something less, maybe a lot less than the principal balance, how do they normally react? How do you build rapport with them?
Honesty is the best policy. That’s, first and foremost, the place that I come from. Put yourself in their shoes. How would you like it if you were reaching out and somebody is telling you all the things you want to hear like, “We can get the best price. This is going to be super easy,” then you get into the reality of it? All of a sudden, they figure out your offer’s going to be lower than you said it was going to be. It’s going to take longer than you led them to believe it was going to take. They’re not going to be happy. You wouldn’t be happy.
The more friction you introduce, the less likely you are to close the deal. Click To TweetI come right out of the gate and I address, “This is probably going to take a little bit longer than you expect.” Closing an owner finance note is, give or take, 30 business days. There are a number of steps you go through. The pricing depends. It depends on how long their note is structured, how long they gave their borrower to pay them back, what the interest rate is, or how much of a down payment they got. All of those things will factor into, ultimately, the backend yield that I’m trying to achieve. That’s the price I’m able to offer them.
I’ve had a couple of people come to me and they’ve got 30-year interest notes. I’m like, “I’ve got news for you.” A) Why’d you do that? B) The pricing is not going to be great. If you’re happy with that and you want to hang on to it, that may be your best option rather than me making you an offer that you might either find insulting or you hanging up on me. I cover those things right up front. I say, “The pricing is going to be in this ballpark. It’s going to take about this long. Are you okay with that?” If they say, “Yes,” then I say, “That’s great,” and I’ll talk through the rest of it. If we get to that point, then they have two minutes to talk to me and we move on to the next person.
You were talking about this marketing funnel you have. When you make contact with sellers, it’s almost like this sub-funnel. It sounds like you’re screening as part of that process to see if they’re serious about selling a note. It seems like you could save yourself a lot of time by scrubbing them out or having them scrub themselves out pretty early. Otherwise, I could see you churning tons of hours on the phone with deals that go nowhere.
As I scaled things up and started having more people reach out to me, my time’s finite. I need to focus on the deals that I feel have the best chance of advancing. The ones that I get the sense, “You’re not serious. It’s not going to work for you,” we set those to the side and move on. Depending where they come in from a marketing perspective will dictate the knowledge level that they’re coming in the door with. I do direct mail. With direct mail, you buy lists of people from aggregators that have looked at the public record and they see an owner finance note get recorded that makes it into the list anyway. These people record these mortgages, and all of a sudden, they get ten letters saying, “I want to buy your note.” They’re like, “What is this thing? I didn’t even know I could sell a note.”
Way back, I started step one there. I was like, “This is how this works.” I walk them through a quick process of how a note sale is going to work, whereas somebody who comes to me through a digital channel has done some research. If you go to my website, there are 50 others like it out there that have a lead form that’s like, “Give me your name and email.” They’ve done that. They’re going from site to site. They’re much more price-focused. They’re much more, “Tell me what it’s worth.” We can cut right to the chase there. If it works, then that’s great.
I always say, “If you get another offer and I’m close, let me know. I can see if I can make the number work.” I try to come in close. I’m not giving them a price that’s way above what is possible. Over time, you figure, “Here’s where this is going to come in, plus or minus, $5,000.” Where they come in also dictates the context and the lens through which they’re going to view the transaction.
If you’re brokering, how does that work on the sales sites? You’ve talked a little bit about marketing and doing acquisitions. I know with one of my challenges, even if I’m buying a note or selling it, there are a lot of flaky counterparties. One of the reasons I personally never looked into brokering too hard is I don’t just have to make a deal with one counterparty, but I’ve got two. I feel like my probability of success is going down. How do you manage that?
The flow is you get a lead coming in and they give you some information. I’ve got good contacts with 3 or 4 funding sources that I know what they like. It’s an order of operations. I’ll go to my first person. If they say yes and they give me an offer, generally, I don’t bid it out anywhere else. Over time, they have shown me that they’re going to pretty much come in with the best pricing, a good close, and an established process. We’ve closed lots of deals together, so they’re reliable. We’ve got a healthy level of trust there.
I’ve got my situation together where I’m following up with the seller. I’m giving them the information they need or the funding source, so they know that I’m a professional. They can trust me and it’s not a waste of time. There are deals that don’t work for them. Maybe the borrower’s credit is bad. Then, I’ve got another person who has a whole other set of questions that I got to ask. If number one says zero, I’m like, “I got to go back and get all these other answers from the seller.”
The more friction you introduce, the less likely you are to close the deal. I try and keep it as easy as I can for that seller. Generally, to address your question about making two deals, the funding source will come back with the deal that works for them. What I do is subtract my fee and I come to the seller with the net offer. It is what it is. It’s worth what it’s worth. If it works, that’s great. If not, it wasn’t going to happen anyway.
I wanted to add something to your question about filtering time and filtering out the ones that aren’t going to go through. I can remember when I first started off. I started getting these leads in and I would chase every single one of them. I would try and make a deal out of something that wasn’t going to ever be a deal. I learned really quickly that you’re better off focusing on getting more people in the door and getting more responses. It all becomes a cost-per-inbound lead calculation. You want to get that cost per lead as low as you can because then, that’s going to maximize your success. You’re going to get the most amount of leads for the least amount of money.
It sounds like you can afford to do that, too. One of the classic mistakes people make with funnels is they pay for marketing, but then they’re paying money to push leads into a leaky funnel. You’ve got a pretty good, solid funnel on the backend with these acquirers that are reliable and they can close. That allows you to set your criteria and then up the volume of the input that’s going into the funnel.
One of the things I like about your process is you’ve got this form with all the details on the deal. Everything is right there. You make it easy for the buyer. They usually have a lot of background information that you’ve picked up. One of the mistakes, in general, that note sellers make in the market is they’re like, “I got this note. You go figure everything out. I’m not going to tell you anything.” To me, that’s a giant red flag. I’m like, “If you want to sell this, you would be making it easy for the buyer.”
You said two important things right there. One is I’m going to ask everybody to zoom out and look at the role a broker has. You got to put yourself in two places at the same time. Put yourself in the investor’s shoes. You’ve got this person bringing you a deal. What’s going to happen is you’re going to have to offer probably a little bit more than you normally would to compensate that broker. This is something you would get a feel for if you’re doing this all the time.
What’s going to happen then is that broker is going to get compensated between the delta of your offer and what they’re going to offer their seller to try and get the deal done. They’re incentivized not to go too low because then, the seller is not going to make the deal. They need to make the deal work. By definition, the broker is bringing value to the table because they’re going to get compensated. The value they bring is they’re bringing a well-organized package by knowing proactively what questions the investor’s going to want to answer. They’re also making it, to your point, easy for that investor to evaluate the deal and see, “Is this right or is it not?”
Also, it’s incumbent upon the broker to surface any issues that they might see. They’re like, “The borrow credit’s poor on this one. This guy’s got sub 500 credit.” If I know that’s a hot button for an investor, I’ll call that out. I would call it out anyway. I’ll say, “If this is going to shoot a hole in the deal, don’t even worry about it.” I’ve got other people that don’t look at credit so closely. Think about what you would want to know as an investor.
You’re going to discover it. If you’re a competent and experienced investor, it’s going to come up eventually. The question comes, like, “Why didn’t you tell me about this three weeks ago? I’ve spent time and money on this thing. Now, I’m upset because you knew this thing. Maybe you didn’t, but you should have.” That’s where you have to wear both hats.
It’s always been one of my big frustrations as a buyer. When I spend a lot of time, and sometimes, a lot of money on something, and then I find a problem and wasted all that. You can’t close. You bring up another good point, too. That’s such an important service. You mentioned if you’re going to buy something through a broker, you’re going to pay probably somewhat of a higher price than if you had gone out and found it yourself. That broker is performing an important function, which is they’re marketing and sourcing to find the deals.
As a buyer, I could do all that myself. I could do direct mail, get a hold of lists, and put together this process to find owners of seller finance notes and spend time with them and pull them. I don’t want to do that because, like you, I have a day job as well. I have my portfolio. I have enough jobs. If I’m buying through brokers, I’m outsourcing that marketing piece to someone else. When I get a deal, I’m paying a couple of percent more. For me, as the buyer, in the grand scheme of things, that makes a heck of a lot of sense.
You had somebody lay a deal at your feet. If they’ve done a good job, then it’s easy to look at it. They’re like, “Here’s the deal. Does this work?” You say, “Yes. Here’s how much I could pay.” Then, they go out and build these relationships. You can curate. I’ve got 4 or 5 people that I work with pretty regularly. That’s the role that I’ve played. I know what deals they like. I got one guy that hates stuff in New York. Another guy, weirdly, I get a bunch of church notes. I can take the church notes, but some people don’t want to touch church notes.
Honesty is the best policy, and transparency is the best way to be in this business. Click To TweetI’ve seen those, too, but I’ve never gone there or looked at them.
I’ve got a couple of folks, one of them that we know, that doesn’t care. He won’t take a look at anything. He doesn’t care about foreclosing on church notes. That’s the thing I would say. The other thing is you’ve got to show yourself as being a reliable source. What a lot of brokers will probably do, and it happened to me a little bit, are you reaching out to some of these funding sources? They get reached out to all the time with people saying, “I got deals.”
They have probably been burned or they have invested time in somebody only to find out that they’re off getting deals from exchanges, daisy chain deals, or pulling them off tapes. Maybe they’re being lazy. They’re not doing the work. The work that I’m doing is I am spending sending out thousands of letters every single month to people who have sold a piece of property. My deals are extra fresh.
The deals that you brought me in the past, I’ve never seen those anywhere else. You never brought me something and I’m like, “I’ve seen this.”
That’s a great way to shoot a hole in your credibility. As a broker, you go to a funding source and you send them a deal. They’re like, “I’ve seen this from 600 people.” It does happen. With one of my funding sources using an institution, I go to them and say, “Have you seen this deal?” They’ll be like, “We tried to buy this deal six months ago.” It happened that the person was going around trying to find another place to sell it. I love seeing those deals because then, I’m like, “This person’s tired. They have tried. They had an offer presented before and it didn’t work.” With my offer, they’re going to be more open to accepting the reality of the fact that maybe they’ve got a note that’s not worth what they thought it was.
It hasn’t happened to me for quite a while, but I have had people send me tapes with assets on them that I already owned. I felt like making an offer to see what would happen on the other end. I was curious.
Honesty is the best policy, and transparency is the best way to be in this business. You know and I know that it’s a small world. When I’m selling notes, I, more than once, come up against the same people that have offers on the table with sellers. Sometimes, I can come in and beat them. Sometimes, I say, “It’s not worth $500 to me right now,” if I’ve got better deals in the pipeline. I could probably count on one hand the people that I know I go up against regularly where I know they’re bidding on the other side of the asset.
To your point, developing that credibility and reliability is so huge. It feels like sometimes, it’s a world of flakes out there. There are a lot of them and some flat-out bad actors. It’s something I’m considering putting together some content on coming up. Being that reliable, go-to person is awesome. I bought two notes from someone who was a close friend. It makes the whole process so much easier when you know the other person. You know they’re reliable. You still have to do your due diligence, but you know if there’s something, they would have flagged that.
You mentioned the worksheet that I’ve put together. I stole that from somebody else. I adapted it to me, but I went and talked to my funding source. I said, “Show me the brokers that you like and that are successful.” Help me understand how they’re presenting deals to you. Show me what they do that you like that when you get a deal, you say, “This is good.”
I took pieces from different folks who told me what they like to see. Incidentally, it is information. They say, “Ask these three questions for me.” When I go out and I’m in the front of the video, I go ahead and get those answers from the seller. If I can’t get them or I don’t know, then I say as much. I’m also very big about not recreating the wheel. The other thing I’ll say is follow-up is huge in this business. If somebody is talking to three other people, the squeaky wheel is going to get the grease.
I’ll follow up with somebody until they tell me to go away. I’ll say, “If this isn’t working, let me know.” If they say, “I already got another offer. I’m already working on another deal.” I’ll be like, “Call me if it falls through,” and I’ll scratch them off and move to the next one. I’ve had deals closed where the person goes away and I ping them three weeks later, and they say, “I got so busy. I want to pick this thing back up,” and then it’ll move to close. If I hadn’t followed up, it would never have happened.
The other thing I’ve experienced is there are a lot of flaky buyers. I’ve had experiences where I’m trying to buy a note and I get outbid. They’re like, “I’m giving it to this person for this amount,” and they don’t necessarily close. I’ve acquired stuff after I initially lost, which is always fun. He’s not active anymore, but when John Keith was selling off all of the Window Rock CFDs, there was a handful of those where I would set a reminder to ping John in two weeks. I’d be like, “Did this close?” He’d be like, “The buyer flaked out.” I’d be like, “That’s cool,” and then I would pick it up.
Whether it’s notes, real estate, or whatever, there’s nothing that’s going to blow up your credibility faster than getting a deal to the closing table and being like, “I can’t do it.” That goes with sellers, too. If you are an investor and you are talking to brokers, you’re talking to the other side of the table. I’ve had guys that I’ve sent deals to and they do not fall into any of these categories. They’re too slow. They don’t respond. They’re too strict on their criteria. That’s another thing.
As an investor, I’ve had brokers approach me and say, “I’ve got deals. What kind of deals do what you like.” I’m like, “Not right now. I’m not in a position where I feel like I’m quick enough to offer good enough pricing that I can do a deal where you’re going to want to come back to me. I’m also not going to buy a deal a month. I’m not at that pace yet.” The brokering side allows me to control my flow in terms of how many opportunities I’ve got. If I want more, I can dial up my investment. If not, I can dial it back and stop.
That’s a pretty good stopping point. I want to have you on again to dive a little bit deeper into some of this stuff. Thanks so much for coming on. What’s the best way for people to get ahold of you? I have a feeling like you’ll get some pings from people.
My email is Derek@GardinerCapitalGroup.com. Reach out if you got questions. I’m happy to chat. Thanks for the time. It’s good talking to you.
Thank you. I appreciate it.
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About Derek Louden
Derek is the third in a long line of real estate investors from the Dallas area. His family has been investing in all aspects of real estate since the 1940’s (raw land, multi-family, single family houses, notes, etc.). He earned his B.A. and MBA from the University of Texas at Austin.
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