Buying mortgage notes can be a funny business. Like most sales jobs (I consider note buying to require even more sales skills than real estate or finance knowledge), there are lots of ups and downs in the business. Some deals go fairly smoothly while others require tons of time and effort, only to blow up and not close at the end. The latter frequently have missing documentation, unresponsive note holders, low property values, late property taxes, or some combination of several of those. The bad deals are painful but are made up for over time by the good ones.
My Favorite Deal In Buying Mortgage Notes
When thinking back on the hundreds of deals that I have closed as either an investor or as a broker, one stands out as my favorite. It was a high-end property in a town of about 20,000 people in Southern California. In fact, this was the most expensive property in town, with an 8000 square foot house on nearly 15 acres that also included a large, separate RV garage and numerous amenities. The seller was a personable and straight-forward guy who had all of the documents in perfect working order, a recent full appraisal, and a mortgagee title policy that was clear of any liens. He was responsive to all of my questions and wanted to close quickly.
The payers, one of whom was an orthopedic surgeon, had credit scores of over 700 and had put in a 30% down payment. The only down side of the note was that only one payment had been received, but there was little doubt that this would be a performing note and an excellent investment for the investor that purchased it (because this was a high-priced note, I served as the broker).
This note purchase closed in less than three weeks. That is, from the time that the note holder sent to me a signed agreement until he had the promised funds in hand was only 14 working days. Usually, a note purchase takes 3-5 weeks, and some notes and properties with “hair on them” can take even longer.
This note had all of the properties of being clean and nearly perfectly done. I wish that one of these would come along even more often, as they are highly profitable and relatively stress-free for the note investor or broker.
The Take Away
The lesson from this is that, if you are creating notes, try to mimic the fundamentals of the note described above. Rarely will you get everything that you need due to the nature of the business, but try to get a large down payment, work with creditworthy buyers, ensure that the documentation is created by a competent attorney or title company, check that the sales price of the property is close to its actual appraised value, and build a good working relationship with your buyer. If you decide to keep the note, you will be better protected and have a safer investment. If you decide to sell the note to a note buyer, your transaction will close more quickly and you will get more money by having done things right the first time.