5 Areas to Study to Know if You Bought a Good Real Estate Note Deal

5 Areas to Study to Know if You Bought a Good Real Estate Note Deal

3 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.

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.

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.

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

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If you could do all the due diligence in the world, it still may be tough to know the true quality of a note deal, especially before you’ve reached any type of outcome or exit.

There are four major reasons I can think of for why it’s so hard to tell, and these are also the four main reasons people default on their loans in the first place:

  1. Death,
  2. Divorce,
  3. Job Loss, and
  4. Medical Issues.

Let’s face it. Bad things can happen to the best of folks, especially with most people living paycheck to paycheck.

Even so, it still makes sense to do due diligence and try to limit our risk as the investor.

Due Diligence

So, here are a few things to look at to increase your likelihood of getting a good deal.

1. The Note Seller

First, let’s take a look at what the note seller is selling. This is definitely a trust but verify scenario.

The old saying “know your note seller” is critical. We learned this lesson the hard way within a year or so of starting our note company. We purchased a pool of loans from an outfit in Texas, but we didn’t know this note seller very well. Then, they didn’t deliver a third of the assets we purchased.

Related: So, You Just Bought a Real Estate Note? Here’s What to Expect Next.

So, if you want a good deal, make sure you have a good relationship with a trustworthy source.


2. Collateral

Does everything appear to be intact? Do the contracts have reps and warrants (especially for when something is missing)? As you and your custodian run through the document management process, make sure to check if the note, mortgage, assignments, and allonges are all there.

The presence of your collateral or lack thereof could have a huge impact on your note deal, especially when it comes to your ability to foreclose.

3. The Status of the Asset

What stage is the loan in? Is it current or delinquent? What are the regulatory and legal requirements, and timelines in the jurisdiction of the asset?

With some deals, you may be able to pick up where the note seller left off in the legal process, which could save you time and money. Of course, you’ll also want to make sure that it’s in the lien position disclosed, as well as verify things like equity, senior lien status, etc.

4. Borrower Intent

What does the homeowner want to do, and is the property still occupied?

Borrower intent often determines the possible exits for you deal, especially if it’s a non-performing note.

5. Risk Management

The biggest risks to your note deal really depend on what type of asset it is, especially with regard to lien position.

If it’s a first lien, you’ll likely have a higher probability of exiting through the property, especially if it’s vacant. So you may want to look at the fair market value of the property (FMV) by getting a broker’s price opinion (BPO), and to determine occupancy, you may want to get an ownership and encumbrance (O&E) report. If the property is vacant, you may even want to determine an after repaired value (ARV) with boots on the ground, as this could give you an estimate as to the scope of the cleanup.

That being said, the biggest things to monitor as a first lien holder are back taxes, homeowner’s association fees (HOAs), and municipality or utility liens.

Second liens, on the other hand, are more likely to be exited through the borrower. So, senior lien status is a better indicator of a favorable outcome statistically than even equity is. With things like escrows (for taxes and insurance), we usually let the senior lien worry about them, and we focus more on other things like checking the borrower’s credit to verify the senior lien’s status.


Do You Always Make Money on the Buy?

It’s probably more true that you would make money on the buy in down market when assets are cheap and flooding the marketplace.

Related: The 8 Non-Negotiable Habits of a Successful Note Investor

As equity comes back, the asset price increases, and there are fewer assets to go around, so it’s much harder to make money on the buy.

The real money is then made with the creativity that goes into the modification and exit. Efficiency becomes much more important, especially internally, not only with your own systems and processes, but also in how you drive your attorneys’ processes.

Sometimes, your partial equity deal becomes more valuable when real estate values increase, and it is now fully covered. Or, maybe your note is worth more now that it has a 12 or 24-month pay history. Maybe it’s the creative way you recapitalize by selling a partial or by borrowing money out through a collateral assignment of note and mortgage in order to go do another note or real estate deal.

Either way, you never really know what you’re going to make on a note unto you actually exit the deal. So, experience may become your best indicator of favorable outcomes in the future.

So, let me ask you on BP, “How do you know you bought a good note deal?”

Let’s talk in the comments section below!