{"id":119147,"date":"2019-12-16T14:30:06","date_gmt":"2019-12-16T21:30:06","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=119147"},"modified":"2021-03-16T14:57:01","modified_gmt":"2021-03-16T20:57:01","slug":"universal-truth-only-buy-first-position-notes","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/universal-truth-only-buy-first-position-notes","title":{"rendered":"Setting the Record Straight: Should You Only Buy First Position Notes?"},"content":{"rendered":"

In the next few weeks, I’ll be writing about some universal truths\u2014that simply are not universal or true<\/strong>. Here’s the first post and a favorite of mine.<\/p>\n

Universal Truths? Not Freakin’ Likely.<\/h2>\n

False Universal Truth #1: When buying discounted notes secured by real estate, it’s always<\/em> best to buy first position.<\/h3>\n

This “universal truth,” at least in my experience, is anything but a truism. The key for readers is to understand WHY this statement is so horribly false most\u2014if not all\u2014of the time. Let’s take it step by step and look at the facts on the ground.<\/p>\n

I’ve been buying, selling, and brokering discounted notes for over 43 years, and these so-called known facts would be funny if they weren’t so often terribly injurious to those who believe them.<\/p>\n

Always buy first position notes? Really?<\/strong><\/p>\n

Let me state from the start\u2014there is no<\/strong> inherent<\/strong> safety due to the position<\/strong> of the note. From 1976 to 2015, I never<\/strong> owned a first position note. Period, end of sentence. Let’s look at some real-life evidence.<\/p>\n

Example #1<\/strong><\/p>\n

You have the chance to buy a discounted note in first position, secured by a single family residence. The note has a current balance of approximately $50,000, and you can buy it for a slight discount at $45,000. The value of the home securing said loan is around $65,000. (For the record, a few years ago, this same note woulda sold for far less. The market is the market, and it’s always changing.)<\/p>\n

Related:<\/em><\/strong> 6 Advantages Note Investing Has Over Hard Real Estate<\/a><\/em><\/p>\n

How I gauge the safety of that note?<\/strong><\/p>\n

I wouldn’t sell that note to my worst enemy, much less buy it myself. The reason is simple. The LTV (loan to value), the relationship between the note balance and the market value of the house, shows insufficient equity<\/strong> in the house, at least for me, at 76.9 percent. In fact, even with the discount, the LTV between the note price and the home’s value is too high at 69.2 percent\u2014oo slim in my experience.<\/p>\n

That leaves precious little room for any potentially\u2014read: likely<\/strong>\u2014required fix-up money, sales costs (such as broker’s commission and the like), and closing costs. Of course, that assumes you could sell it at all<\/strong>, at any price, once you’ve finished the foreclosure process<\/a>, which will add roughly $2,000 to $4,000<\/strong> to your costs. Know what I mean, Vern?<\/p>\n

OR you could buy this third position note and be infinitely safer.\u00a0<\/strong><\/p>\n

\"how_real_estate_notes_originate\"<\/p>\n

Current balance is $50,000. It can be bought for around $40,000. It’s behind a first loan of about $100,000\u00a0and a second loan of roughly $50,000. The home’s current market value is $325,000. That’s an LTV of 61.5 percent<\/strong>. If you must foreclose on this note, let’s explore the potential costs to see what you’d net.<\/p>\n

NOTE:<\/strong> Holding period at time of default notice was three years.<\/p>\n