Liabilites with Notes vs Real Estate

1 Reply

Many on BP feel that real estate investing has more pros than Note investing due to many factors including equity. I totally understand that.

From the perspective of liability and risk, which would you say has less risk? I'd imagine a 1st position note has less risk (example, Property Value: $100k, UPB: $140k, last paid: 10/14/14, P+I: $500/mo, Note Price: $50K) , when purchased between 50-60% below Property value. Even if you can foreclose and the occupant trashes the place, you can still come out making 10% or so by originating a new note and selling the property (example, selling it for 55k, at 12% interest, 10% down, 24-36 month term to a rehabber with an llc and  bad credit). Also, if the property is underwater, you could sell off the remaining UPB at a deep discount, 3-9 cents on the dollar, if you wanted to be scrooge about it.

This to me, seems profitable with very little risk if you get a matching BPO and clean title report with no violations, liens, scheduled demolition, etc.

If you have your attorney handle everything it's also hands free. You also have no responsibility to the property.

Worst case you can get a 20-30% return in about a year (provided you purchase in a state with a 12 month or less timeline). Best case, it re-performs and you make 60-90%.

This also doesn't count arrears which I can demand to be paid, or use as negotiation.

Also, if the property is in a state where I can do a Forebearance agreement with deed in lieu I can get cashed out faster and save some cost. If not, I'd imagine it'll cost 2k-4k to foreclose.

Am I missing something? Please correct me if I'm wrong if my perspective doesn't reflect the reality.

What are your thoughts?

Thanks in Advance

With notes, you are exposed to lawsuits by borrowers. On a performing loan which is professionally serviced, the exposure is minimal. In a foreclosure scenario, borrowers can get angry and bring a lawsuit against you. If you have done everything correctly a lawsuit can be successfully defended, but there are legal fees involved. Also, if you end up with an REO via foreclosure or DIL, you have the same type of liability as you would with any other real estate. You need liability insurance to protect you on these.

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