An Investor Answers: “I Just Came Across a Note Deal. What Should I Do?”

An Investor Answers: “I Just Came Across a Note Deal. What Should I Do?”

4 min read
Dave Van Horn

Dave Van Horn is a veteran real estate investor and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, real estate investor, and private lender.

Experience
Beginning his career in construction and as a Realtor, Dave bought his first investment property in 1989. After years of managing his own construction business, Dave became a full-time real estate investor, specializing in fix and flips, buy and holds, and eventually commercial projects, before moving into note investing in 2007.

Over the past decade, Dave has also invested his time into becoming a connector and educator, who helps others achieve success. He focuses jointly on helping accredited investors build and preserve wealth with his group Strategic Investor Alliance and with general audiences through the annual MidAtlantic Real Estate Investor Summit.

Dave has also shared his strategies and experiences with real estate and note investing via hundreds of articles published on the BiggerPockets Blog and with his acclaimed book Real Estate Note Investing.

Press
Dave has been featured on the BiggerPockets Podcast twice (shows 28 and 273), as well as episodes of familiar podcasts, including Joe Fairless’ Best Ever Show, Invest Like a Boss, Cashflow Ninja, and many others. He also has been a guest of Herb Cohen’s on Executive Leaders Radio, which airs nationwide.

Accreditations
Dave is a licensed Realtor with eXp Realty with CRS and GRI designations.

Follow
Dave’s LinkedIn
PPR on LinkedIn
PPR on Facebook
Twitter @DAVIDAVANHORN

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If someone were to approach you with a new deal, would you know what to do? What if you were suddenly to inherit a note? I guess the answer would really depend on you, your situation, and your overall level of experience.

This exact scenario just happened to two different people I know. One was actually a fellow BiggerPockets member, who was inquiring about what to do in this situation.

The other was the daughter of a note investor who passed away. Her mother, who I sold the note to, was pretty familiar with non-performing notes, but the daughter really didn’t have much experience at all. It was pretty easy to help her out since I had a lot more information on the note, and we were actually able to buy it back from her.

What Do You Have and What is it Worth?

As my partner Bob says, “You are where you are.” The note is only worth what the note is worth at a particular point in time.

If it’s a performing note, it’s relatively easy to determine the note’s value once you establish the type of lien(i.e. first liens, second liens, commercial liens, etc.), the pay history, the balance owed, interest rate, and payment amount.

Also, what’s the present value of the future money stream? Jimmy Napier’s book Invest in Debt is a good tool for learning how to determine this.

If it’s a nonperforming first lien, it’s pretty straightforward. The most common exits are through the property, so what you really need to know in order to make a decision is occupancy status, FMV (Fair Market Value of the property), UPB (Unpaid Principal Balance), and the status of any back taxes, liens, or encumbrances. For example, if the property has delinquent taxes and is headed towards a tax sale, this could jeopardize your investment if you aren’t monitoring it.

Related: Diversifying into Real Estate Notes? Better Choose a Strategy! Here’s How.

On the other hand, if it’s a nonperforming second lien, it’s a little more advanced. There’s more that you would need to get clear on in order to make a qualified decision.

How to Get Clear on Your Note Deal

Administration

First of all, you would need to get clear on the administrative part of managing the note, including documentation and accounting. It’s important to make sure you have all of the necessary documents in your collateral file. Typically, this includes the note, mortgage, assignments, and allonges.

There are also a few other considerations. For example, is your assignment recorded? If this is a note that you did inherit, do you have all the proper paperwork and titling in place to settle the estate, such as a short certificate? On the accounting side, you need at least the unpaid principal balance and the last payment date applied to calculate any type of billing statement or payoff.

Risk Management

Next, there are certain things you would want to monitor as the second lien holder in order to protect your positon, the biggest one being the senior lien status. Some of the other potential risks are left more for the senior lien to monitor, including municipal liens, homeowner associations, taxes, insurance, and any other liens.

Property & Borrower Status

Finally, you may want to get clear on both the status of the property and the borrower’s situation. In regard to the property, what is it, where is it, what’s it worth, and what condition is it in? Also, is the property vacant or is the borrower still occupying the premises?

With the borrower, mainly you want to know what their intent is. For example, do they want to stay in the property and possibly create a new payment plan, or would they rather move on from it? Is the homeowner underground, as in he/she will not respond or engage in a dialogue at all?

Once you’re as clear as possible on many of these things, it’s much easier to make an informed business decision.

Exit Strategies

Although with delinquent second mortgages the most common exits are through communication with the borrower (i.e. payment plan, short sale, discounted payoff, deed in lieu, seller assist, etc.), if you have little or no experience with non-performing notes, things could become quite difficult.

That being said, here are a few options people consider:

  1. You could hire a licensed servicer, who also has a specialty servicing capability. In other words, they’ll legally collect on a delinquent asset in a compliant manner. (For example, companies like Madison Management or FCI provide these types of services.)
  2. Some folks hire or partner with someone who is familiar with collecting on nonperforming second liens. (FYI, there are people on Bigger Pockets who do this.)
  3. Others may have their attorney provide any legal services or new work out agreements with the borrower.

Of course, I’m not trying to give out legal or accounting advice nor am I telling anyone what to do. These are just some of the options available. Personally, I’d lean towards utilizing the licensed servicer in this heavily regulated environment.

Related: How to Get Started in Real Estate Notes: A Primer for Investor Newbies

So, if I were to inherit a note and I didn’t know what to do, one option would be to keep the note, follow the legal process, and hopefully come to an agreement with the homeowner. If an agreement is not possible, there’s also the option to foreclose and rent it out, recouping whatever you can or keeping it as a rental until you can sell it.

Another option is to just sell the note. Some folks market notes on places like LinkedIn groups, Facebook groups, Auction.com, Note MLS, eBay, FCI exchange, and more. It may pay you to research some of these sites to see what assets are selling for, and don’t be afraid to ask around. After all, a note deal will only take place if there’s a motivated buyer and seller.

So, would you know what kind of deal you had if a note came your way?

Be sure to leave a comment below!