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The Sweet Spot in Mortgage Notes

by Alan Noblitt on December 16, 2011 · 5 comments

  
bad mortgage note deals

Yesterday, I was contacted by a person wanting to sell a real estate note with a face value of $9700.  That’s right, nine-thousand seven-hundred dollars.  The sales price was also $9700, as there was no down payment and no seasoning (payment history).  This was supposedly for a house in the Midwest, though at that price, I have to think that something is terribly wrong with the property.

The note holder went on and on about what a great deal this would be for any mortgage note buyer, and the huge rate of return.  In this guy’s mind, he may very well think that this is a strong note.  However, to any note buyer, this is a horrible note, and I doubt that anyone would ever buy it.

Most note buyers have a required minimum balance on any note that they are considering.  Typically, this minimum is around $30,000, though some investors start at $50,000.  Similarly, most note buyers have a maximum balance requirement, above which they will not go.  For small note investors, this could be only $100,000, while larger companies may consider notes up to $1 million or higher.

The Midwest note above had serious deficiencies beyond just the low note balance.  There was zero down payment, no monthly payments had been received, and the payer’s credit was probably rotten.  If a mortgage buyer did purchase a note like this and it went into default, the buyer would almost certainly lose money from just foreclosure and rehab expenses alone.

If you are considering carrying a note with a balance of less than $30,000 or more than $1 million, be aware that you will have difficulty finding a buyer for the note, even if everything else about the note is wonderful.  The same applies if you are holding a junior lien or if the property is located outside of the U.S. (though there are note buyers in Canada).

Before you agree to carry a note (offer owner financing), talk with an experienced note buyer first.  Even if you don’t expect to ever sell the note, a knowledgeable note buyer can give you tips to protect yourself and to make the note more marketable in case you later decide to sell it.

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{ 5 comments… read them below or add one }

Bethany December 16, 2011 at 7:52 am

You are right on target with this one, that seems like way too low of a price for any type of worthwhile investment.

Reply

Alan Noblitt December 16, 2011 at 10:14 am

Bethany,

Exactly. It was a good reminder though that what seems obvious to those of us in the business is not always so clear to others. Thanks for your comment.

Alan

Reply

J. Sylvester December 30, 2011 at 3:10 am

You mentioned that there are mortgage note buyers in Canada. Do you know of any that operate in BC?
I have second mortgage notes that were created 2 years ago and mature in 3 years. The catch is there are no monthly payments or interest payable, only a future value totaling about $60,000 at term in December 2014.
any comments or suggestion welcomed.
Thanks!

Reply

Alan Noblitt December 30, 2011 at 7:50 am

Sorry, but I don’t know of any investors in either the U.S. or Canada who will buy 2nd liens, especially with no monthly payments. There is just too much risk in such notes.

Alan

Reply

Marc Faulkner February 3, 2012 at 4:46 pm

I agree on the 0 down but, we don’t mind small balance notes as long as there is a lot of real equity. We will look at notes with balances of less than $10,000.

Reply

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