Hello there!
I am considering investing in discounted notes and I need some advice and directions.
I got inspired by several articles written by Jeff Brown (AKA The Bawld Guy) where he explained in great details how notes are supposed to work while glossing over the most important topic: where to find them.
Hence my question to the notes investors out there: where do you get them from?
What I am looking for is a note with 50-60% LTV that pays 12% or more based on the price I would pay for it. For example, if the property has a FMV of 200K and outstanding loan of 200K at 6% APR, I'd like to buy it for 100K. This would satisfy my LTV requirement as well as interest rate (6% on 200K is 12% on 100K).
Is this example realistic? If not, what is a realistic one?
I signed up with the PPR Notes company hoping that they have a few notes to choose from but found out they sell 2nd position notes with almost no equity in them.
Thanks
Nick
A loan that trades for a discount has a discount for a reason. The discount sets off some characteristic of the loan such as paperwork defects or borrower performance defects or underlying collateral defects.
If the loan you want to target has a current LTV of 60% a performing loan may not have much to discount for. The equity already affords a mortgagee the ability to enforce the mortgage and collect what is owed. There are caveats to that but we will set that aside.
If your yield requirement is your driving force at 12%, you could be fine simply finding a loan written for 12% that has a current LTV of 60%. No discount needed. In a situation like that, there should be minimal defects.
A loan written at 12% has some inherent risks in it already though. Since the prevailing market rate is closer to 5%. So the borrower agreed to take on 12% instead of getting a better rate. That could be a Seller financed deal. Equity may not be as much in such a situation, where the borrower puts down very little unless the loan is seasoned for a long time.
Some hard money or private money lenders will achieve that type of rate and obtain equity close to what you are looking for. In some of those cases, the loan is based more heavily on the underlying collateral and less on the borrower. They also tend to be shorter term loans.
Trying to find more of a conventional loan can be done but the defects will be present and you will have to deal with them. A seller of a loan has no duty to sell you nor take a haircut. The deeper that discount is the more of a defect. What you end up with here is really the reality check of the idea of return that the investor wants. Just because you want a 12% return doesn't mean you will get into a trade since someone else is happier with 8%. Now, put that idea in contrast with where prime conventional loans trade which is around 4.5% in today's market. I know many guru teachers like to say you can just pick your yield and viola, but that is not reality. Competition in the market place, just like in real property puts downward presumes on those return ideas.
So can you get a 12% return? Sure. But you have to reconcile how active you want to be and how much risk you want to take. Neither of those are meant to push you into super high risk investments but there is a relatioship that must be recognized.
At this time, I have over 150 notes in the Dallas area where the borrower submitted fraudulent application information to obtain the loan, and I will file fraud charges if the borrower wanted to go that route, or I will give them a chance to walk away. I spoke to two judges who are very close friends of mind about a borrower submitting a fraudulent application, and both said any part through the application that has been misleading information or fraudulent information in order to defraud a lender is a felony, and both said the borrower does not want to appear in court.
It is not a grave train for the borrower by a long shot like some people think it is?
Joe Gore
Joe Gore
Joe, the ideas in the post are not very clear. We got that you own some files and it seems you believe they are all fraud by the process of guilty until proven innocent. It also seems like the charges you have an option to file for fraud, where you would seek some restitution, have already established the harm which the purported fraud has caused.
To presuppose that misinformation on an application is by way of the borrower without due investigation seems to universally not understand the origination process of a loan and is void of possibilities of 'clerical errors' which are not fraud, they are clerical errors.
I can't imagine a judge denying anyone their constitutional rights. I will simply leave that alone.
To imply that the solution to a fraudulent loan application which would include a likeliness of a fraudulent purchase and sale transaction is simply some surrender of the property seems to stand on the other side of reality and ignores all other implications of what you are suggesting in the first place.
There is a question mark at the end of the last set of words but you are going to have to do a better job of crafting your posts, use some grammar and spell checks, they are hard to read, understand and often times they diminish the integrity of what you might have been trying to say if it even had any real world truth or relevance.
I guess by your standards or clerical errors you call it is ok to use your child's SSN and give false employment info, and that will be ok with you. Sense you are very educated to point out my grammar. I think you are out of touch on what mortgage fraud means.
I guess by your standards or clerical errors you call it is ok to use your child's SSN and give false employment info, and that will be ok with you. Sense you are very educated to point out my grammar. I think you are out of touch on what mortgage fraud means.
Joe Gore
See what I mean?
"I guess by your standards or [of] clerical errors you call [claim?] it is ok ('call it is ok'... doesn't even go together in any grammatical situation) to use your child's SSN and give false employment info, and that will be ok (redundant) with you. Sense [Since] you are very educated to out my grammar. I think you are out of touch on what mortgage fraud means."
It is safe to assume I am in touch with the meanings of words more than it is safe to assume you read and comprehend what was written before you attempted to make an argument out of the content you seem to have not fully read and fully understood.
You should teach school. My grammar might be bad, but I have a lawyer who is well educated. You did not address the mortgage fraud which we were talking about.
Joe Gore
I have a bit of experience in looking for fraudulent loans, for one portfolio to hold 150 says something.
Tells me someone is looking for or trying to get such loans, it means too you'd need to look for them, that many won't walk through the door of any bank.
I suppose you could blackmail borrowers into giving a deed to a property if you convinced them they did something wrong and were about to go to jail. It also would not be a stretch of my imagination to think a Texas judge could be a crook.
Significant misrepresentations by a borrower do happen, fraud can be hard to prove, sometimes not. Often an error or mistake like the wrong SSN can be explained, the note may be modified to reflect any difference in risk that can be justified. Any block on an application that isn't correct doesn't constitute fraud, transposing numbers on an address of other real estate owned by a borrower isn't correct, but that isn't fraud. Listing other real estate as being owned that isn't owned could be. The information must be given intentionally and the information must be material to the lending decision as well. :)
You are not along I have looked at fraudulent applications so long that I see them in my sleep. Bill a wrong SSN can be explained if it is one number different but cannot be explained if the whole SSN wrong. I would never try to blackmail borrowers. I let them have their day in court.
I suspect that part of @Account Closed 's problem with his posts are that English is not or was not his primary language. The structure of his sentences and his inability to distinguish the spelling of a word based upon how it sounds strongly suggest this. Those are nuances that you learn over a lifetime. I would imagine it would be extremely hard to figure all of those out unless you grew up using English as a primary language. He is spelling phoneticly not by memory or rote.That might also explain some of his positions and responses as they are in part from a different culture. It would partially explain his views and understandings of some of our laws as they might be mixed with his views from an entirely different background. I wonder if he might enlighten us on that.
I agree with Bill. Such a large number of fraud mortgage files is a problem from many angles. Those are not sound investments. Some may be able to be resolved and others may be completely worthless. As I mentioned fraud loans can make for fraud real estate transactions. Loans with no collateral because the transaction is void have a very small likeliness to be collected on since these types of folks engaging in these types of practices usually do not hold assets to collect from.
Purposely buying many of those types of files is not a good strategy for preserving capital. Newbies should understand that idea as something not to do. Again back to my post about why something may be so cheap in price and a Seller knowing disaster is just over the hill when a buyer does not.
It is important we self-regulate. Most of the new draconian legislation passed has been because we do a very poor job self-regulating.
In that spirit, I have contacted Greg Abbott's office just in case this is not a case of just blowing semi-anonymous smoke on the internet.
Full disclosure here: I have a PAC and that PAC has contributed to Gregg Abbott's campaign.
@Account Closed the answer is no. To be more direct what is your native language and culture? I was simply trying to explain why your spelling was wrong so often, it is a cultural thing, not a lack of education. If I were to try to speak chinese or write it, my inability to do it would not be because of lack of education, it would be based on lack of experience. I was not insulting or denigrating you. If you would be more comfortable not stating your native language or culture that is perfectly fine. I went to college with many folks from different nations who despite being intelligent and educated had different sentence structure because their native language was so different.
Full disclosure here: I have a PAC and that PAC has contributed to Gregg Abbott's campaign.
I missed the class I guess, who is Greg Abbott and how does this relate to notes or Joe's issues?
Jerry, I think it's just the whiskey and the lack of a decent keyboard. :)
Edited, Joe posted, well I don't speak Spanish at all so he's doing better than I would! :)
If the last part was about me, I don't drink whiskey, I only drink Boone's farm apple wine.
Joe Gore
LOL! :)
@Dion DePaoli @Bill Gulley @Account Closed There seem to be too many pissing contests, talking down to people and worries about grammar instead of the goals of this forum, which is to help and educate others. It is unfortunate to see this so often from those that are so knowledgeable on this site
Pete, sorry you feel that way. Most of it is rooted in disagreeing with the ideas of the commentary as they seem fairly unsound and at times exaggerated or even simply not true. I suppose in the very nature of that disagreement it is a 'pissing contest'.
Meanwhile, back to the question of investing in notes...
@Account Closed", I don't worry too much about grammar with ESOL speakers and writers. I've traveled to many places where I was one with the grammar handicap when trying to communicate with the locals. As long as I can figure out the message, it is all good.
Now, I don't cut that kind of slack to the grammar challenged morons who were raised in this country. Just say'n. ;)
@Bill Gulley, Greg Abbott is the TX Attorney General
Yes, back to the notes.
Here is what I've gathered so for from this thread:
Have I missed anything?
BTW, is there such a thing as a "note insurance" similar to title insurance? It would protect note buyer from note defects that were unknown at the time of purchase.
Thanks
Nick
@Nick B.
Let's review:
I would not expressly say this is the conclusion. Risk is personal and some investors are comfortable with the risks for NPN's and some are not. Unfortunately we live in a world governed by Caveat Emptor ("Buyer Beware"), so due diligence is always required. Due diligence is your first line of defense against loosing money for various reasons. Just like any other asset class.
Any asset that is purchased correctly, based on the proper due diligence, a sound investment strategy and sound disposition strategy which then is managed properly will result in a higher likeliness of profitability. Certainly unforeseen expenses can occur which erode the profits. Predictability of events is knowledge gain from experience and advisory sources. Again, just like any other asset class.
A borrower can sue you and so can your neighbor. Don't do things improperly which create and increase this risk. This asset class is not different than normal life. Certainly, knowing what you don't know at this point helps to keep you away from risky situations which can cause harm.
Yes. However, this could also be a niche mentality for investors to work on. Just like REI rehabbers have specialties. A rehab guy needs to know his stuff just like a note guy. In my analogy here both can be pretty profitable since they take the less desired asset and turn it around to make it a winner. When you deal with things that everyone wants or desires the room is crowded and prices go up, the opposite is also true.
To some degree, investing in NPN's in and of itself is dealing with problems. So you have to have a knack for the ability no matter what. Borrowers do not go into default by making payments and everything proceeding to plan according the note.
Foreclosure can be complex or straight forward. Sort of is what it is. Not sure I would call it last resort since foreclosure is simply the remedy provided for in the documents. That said, the point of loaning money is to be paid back, not end up having to foreclose.
NPN's will cost more money than simply the purchase price. Sometimes unforeseen expenses and extended time can really drain capital. PN's do not have this same issue since the borrower is maintaining their obligation everything is being paid by them. Advances are not needed and legal maneuvers are not needed. As such, PN's will cost more and returns will be less as they are perceived as less risky investments than NPN's.
You do not buy notes from brokers per se. Just like you do not buy property from a listing agent in REI. Only an owner of something can sell you that something. Never buy through a broker with no direct contact with a Seller. Reputable brokers will transact in a proper manner. Always look out for your own interests no matter who you deal with.
Some ideas will mature. I would not refer to it as a big unknown since the rule is written and CFPB has commentary around it. Any loan investors needs to understand all regulations not just DF. Reg Z, Reg X. RESPA, list goes on. They are a part of the industry so you can't ignore them.
Sorry, missed the note insurance idea.
There is ownership endorsements you can get from a title insurance company which insures your chain of ownership. That doesn't deal with defects.
There can be provisions in the purchase and sale agreement you use which help safe guard against some types of defects. But again, the defect to some degree is innate in distressed loans sold at a discount. The PSA will call for the buyer to purchase based on their own due diligence and assume the risks for many defects.
Going too far down this specific topic would be a whole new thread.
Here is what I've gathered so for from this thread:
The defects you worry about in the NPN note can also occur in performing notes, it's just that the borrower is making their payments as agreed in the note.
Here is what I've gathered so for from this thread:
The defects you worry about in the NPN note can also occur in performing notes, it's just that the borrower is making their payments as agreed in the note.
I agree, if the note is performing the defects don't matter as long as the borrower pays.
BTW, I found this checklist on how to spot a fake note:
http://www.avvo.com/legal-guides/ugc/max-gardners-top-tips-for-fake-mortgage-documents