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.
Thank you for your post. Just to clarify, when I said "10 cents on a dollar" I meant 10% of the outstanding loan principal.
You call it "fairy tale" but this is where I got it from: http://www.pprnoteacademy.com/free-training/note-investing-101/find-deals/
They cite 0.055-0.125/UPB as the wholesale price of the defaulted mortgages.
I don't know how true or not true these numbers are but I thought that no one would put an outright misinformation on their website if they value their reputation.
If you know any negative info about this company, I would like to know it too. I may buy notes from them and so far I could only find positive reviews.
It would also help me tremendously if you posted stats on several notes that you own. We could then discuss them as real-world examples instead of reviewing some fictitious notes.
Thank you
Nick
Those are usually pool purchases and that is why Hedge Fund companies, for example buy these pools of notes at .10c on a dollar. As an investor buying notes on an individual level, there is no way you can get .10 cents on a dollar
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
Actually, defects do matter and very much. If you have a balloon payment the defect may prevent any future refinancing.
Another issue is future modifications, such are a new extension of credit and you need to ensure that the priority of the lien remains, so state law needs to be examined.
Future sales can be delayed, foreclosure may not solve all defects.
Defects in title or the note, DOT or mortgage may render the note unmarketable.
The 61 points listed (some may not be a concern and there are basically double entries of the same issue) may all be associated with performing or non-performing notes.
In seller financed notes, I can add to that list as those primarily pertain to conventional securitized notes.
In that list you'll see issues of self dealing, arm's length transactions and improperly executed documents, these issues are magnified with seller financed transactions.
Add property valuations at the time of sale, often over valued.
Incomplete or inappropriate servicing records.
Application of funds not properly made.
The loan is between related parties.
Notes in connection with installment contracts, CFD, Sub-To or Option financing improperly drafted, or identified with the contract.
Personally property was included in the transaction and financed, security not perfected and that security interest in the RE is overstated.
Now, these are some issues to ad to the list provided in the link, but just moving on:
Dodd-Frank,
Illegally originated
Non-compliant terms
Servicing is not compliant
The note doesn't have the seal of the MLO
Incomplete loan file
Borrower had possession of verifying documents during loan processing
Ability to pay not documented or computations incorrectly made
Broker/seller is not registered or in compliance, then revert to the "linked list"
MLO is the note holder, seller of the property secured
Note is originated by a Trust or closely held entity
Deed in lieu of foreclosure, executed by the borrower & originated by the note holder, (escrowed deed for default)
Financed options or credit leases with notes being disguised sales
Option agreements requiring any contract performance by the optionee.
Lease- with financed options having lease amounts under FMR
Notes assumed by assignment to a new buyer without lender's approval.
Non-recourse notes without asset based justifications or additional security.
Any prohibition against the ability to obtain future equity, such as a HELOC.
Notes that include cash advances together with equity.
Zero interest notes
Original married note holders divorced, died parties, incapacitated without proper assignments.
Tax liens or judgments against the note holder.
Notes held by entities not properly filed or in compliance, improper authorizations.
UCC filings on note seller's assets, note not released.
Okay, getting tired !
These are issues to consider, some effect marketing, some can lead to a note being worthless, some are illegal or issues of non-compliance that can present a loss.
That's not touching on broker issues and due diligence.
Hey, notes are simple, jump right in! :)
Notes are money makers if you buy direct from the originator.
Joe Gore
Hey Bill, what do you mean by this?
Processing a loan includes the collection of borrower information, income, employment, other loans owed and assets accounts. To obtain the information a lender obtains an authorization to obtain the information having the borrowers sign the verification forms for different aspects such as an employment verification or verification of asset accounts.
The reason we verify these aspects is to prevent fraudulent applications for loans, much of the reason for our bubble was due to loans being made with no verified borrower information or fraudulently prepared documents.
Accepted practice is to have the borrower sign the blank forms and hand it back to the lender. The lender sends the form directly to the authorized party who is to verify the information contained on the form or fill in the information requested. That party is to send the form directly back to the lender. This method ensures that the borrower does not have possession of the forms used to verify the basis of the loan.
If a borrower walked out with, say, an employment verification, this would allow the opportunity to commit fraud by completing the form. It would be easy for others to assist in providing false information as well. A borrower could give the form to a third party who may take it to work, put the form in an envelope of some business and mail it back to the lender.
Might take note here, that verifications of assets and cash accounts (verified funds) is part of the loan process. Having a third party provide verifications of available funds as funds held by or in the control of a borrower when such funds are to be borrowed constitutes fraud. (You may have seen my comments to a post yesterday concerning an offer to provide earnest money deposit funds and verified funds by someone, this is the basis for those comments.)
Most seller financed obligations of the past were not processed prior to being made. Brokers selling such notes may verify current borrower conditions, if so that information is then relied upon as a basis for the purchase of the note and that broker needs to guarantee the process was completed un accordance with accepted practice, if they do not, the information can not be relied upon. Today, for those notes subject to Dodd-Frank, this processing is required.
Commercial seller financed notes have a better track record of supporting documentation by a seller carrying back equity in a note, especially by business minded sellers.
Secondary market loans or notes originated by lending institutions will have or should have these forms of verified aspects in the loan file, especially if the note is being sold in a short term from origination.
If these verifications are not contained in a file then the seller of the note needs to make warranties in the note purchase agreement that such aspects were verified under prudent lending practices by accepted methods, if not, that is a red flag.
This topic is more applicable to newly originated notes, less than two years old, as the risk relating to verified aspects of the borrower are diminished over time by the payment history. Loan fraud is more of a concern within the first couple years as there is a higher rate of default related to the verified aspects of a borrower. The concerns apply to all notes. :)
I watched this thread meander quite a bit, however I'll bet the original poster, Nick B. and others would like to see some posts on whether his note buying expectations are realistic (or not).
Regarding PPR notes, I've never done done business with them however I have met it's CEO Dave Van Horn when he attended the NoteCamp event at my ranch in San Diego a couple of years ago. And yes, their model focuses primarily on trading non-performing 2nd's.
As Bill Gulley and others has stated, like most business, the paper business has a lot of moving parts and factors to consider. I've always focused on what I understand best, title and collateral equity as my roots come from the hard money business.
Most of my paper has come through origination of the specialized product that I offer in the probate world. I also buy from one broker, a competitor who I trust, is a friend and helped me during 2009 and 2010 while I was recovering from my heart surgery, stroke and re-learning how to walk, read, etc.
For servicing, I use FCI and Del Toro and I'm about to begin using a new company owned by Trustee Corps in Irvine, CA, Harmony. We service a small handful of notes in-house (less than 20) that require special handling or during foreclosure/loss mitigation.
Since most starter investors will probably not buy directly from banks, the question then becomes 'Where does the new note buyer investor source from?' Isn't that what the original post concerned?
Your farm area is in the Recorder's Office at the courthouse! Keep eye out for individual names, trusts and LLCs as note holders.
Trust administrators may hold notes in trust, better than RE for them, but they'd rather have other securities.
Nursing home administrators may have clients who hold notes, if those clients are to receive any state benefits they will need to sell marketable assets. Your State Social Services Department is a third party influence, they can't tell applicants to sell a note to you, they might give your name to contact you to assist them.
Through the social services network, check with hospitals as well, hospitals may reduce fees for lump some settlements by patients and they usually obtain financials, the social services folks will want notes liquidated.
Business transactions, sales, if you have the inclination for commercial loans, with or without RE, (UCC filings).
New home construction, builders may finance, usually involved in financed notes with their bank but you can also obtain partial interests, you might take the back end of what the bank doesn't loan on.
Estate planning attorneys. Heirs may sell property, finance it and distribute part or all of a note to beneficiaries.
Besides looking at the courthouse for existing notes, consider creating the situation to finance a transaction and buy the note. Deals can be made where a property sells at market value, cash is paid down and a seller will still discount the note or part of the note for additional cash.
Brokers, buy the note at settlement, provide funding at the table or purchase the equity note at closing.
There's a few thoughts :)
@Rick H. , listed quite a few ideas in his last post but they are largely an overkill for someone who plans to buy only one or two notes a year.
As for PPR, they sell one performing 2nd note every week. Most of the time these notes have no equity in them and I simply pass on them. Several weeks ago I finally saw a note that had plenty of equity. I decided to pull the trigger and submitted my buying request.
Guess what? Someone else bought it before I made up my mind.
I did not know these notes were so hot that people would buy them as soon as the email announcement comes out. I waited for 30 minutes and was lately notified that I was out of luck.
I tried again yesterday (another equity-backed note) and my request went in 15 minutes after the note was published. Let's see it I am the first in line this time.
Sorry there Nick, when you learn what the issues might be you can assess a note pretty quick, in fact a few minutes to know if you'll make an offer.
Making an offer needs to be done with contingencies for due diligence, time to check the over kill items.
I'd say do your due diligence on any broker. First issue, do they have funds available to repurchase any note they sell, I'd not fall for the old "we have investors" bit, you need to know that if it comes to suing them for breach of contract or fraudulently dealing or failure to disclose material facts that they can buy it back, not some investor as others aren't obligated to you, they are. Then comes reputation.
If the broker is good, many of the issues I pointed out above can be taken care of in the warranties made by the seller. When buying from an individual note holder those issues may not be covered so it's on you.
Overkill in due diligence, much of which can be determined at a glance, simply keeps your money safer. If you enjoy the craps tables, skip much of it and take your chances. :)
Most people jumping in on buying notes get bad info from uneducated brokers that does not have all the paperwork or working for a daisy chain trying to make a fast buck.
Joe Gore
Nick - I don't know anything about the quality of the paper that PPR sells.
I didn't look at the note you refer to however Dave sent it to me as well as you, and probably several thousand other close personal friends.
If you plan to buy a couple of notes per year, then you have to ask yourself how much time and effort that you want to devote to learning about notes, learning how and where to find them (direct from note holder, bank lender or broker, how to manage them, etc.).
You could buy from a private party who owns a note that was perhaps carried back from a property sale, or you can buy one at a time from a broker, or a hard money lender, or invest in a pool of notes. There's even the possibility of partnering with someone more knowledgeable or better connect to the deal.
In these days of an over-abundance loose, cheap investor capital, a couple of deals a year isn't going to get you much buying power or leverage. That's not to say your money isn't green. The problem is that brokers will not be as inclined to stretch for you as the investor who buys many notes throughout the year.
So, I think you best bet is to find a note broker licensed in your state and buy from them. Know what you're looking for in advance, be prepared to make decisions relatively quickly and don't agonize over unimportant details.
In 1996 I inherited a book of investors by way of my mentors passing. Of the 125+ names! several being well over $100MM guys in those days, within 18 months I fired every single investor except the one that I liked doing business with. He and I did business until about six years ago when I decided that I no longer needed or wanted investors.
Be realistic. Be easy to work with. Be the favorite guy that your broker likes to do business with, even if you're not a big client. And you can leverage your influence by bring other clients to you broker, too!
I always try and help new comers to the note business but most start out reading theses guru books that is misleading or explain just enough to get you hook or lose your money.
Joe Gore
@Bill: I did not say overkill on due diligence. I said overkill on trying to buy a single note by using techniques you outlined in your previous post.
@Joe: the broker here is PPR. So far I have not found anything bad about them. Have you?
@Rick: I have limited funds to invest and that limit is about $50K/year. I wish I had millions but I don't. Thus I am at the mercy of a broker - in this case PPR. The only reason I like them is their warranty on the notes they sell.
I have not heard anything bad about PPR.
Joe Gore
Nick - as stated, I have not heard any negative feedback about PPR, other than from other brokers who would like enough meat on the bone to squeeze a profit for yet another sale.
Also, as stated, it's CEO, Dave, flew out to San Diego a while back to spend a couple of says with my buddy Ellis San Jose and myself at our NoteCamp event held in the conference center at my ranch.
Got to know Dave and was, frankly, impressed. He not only knows his stuff but is exceptionally good at communicating what he does and his vision for his business.
Joe Gore - other than buying from brokers, where would you suggest Nick or another newer, low volume investor begin to source notes?
There's nothing like eating a few meals with someone to get to know them better.
@Nick B. - Have you tried becoming colleagues with @Dave Van Horn who happens to be with PPR? Try asking him for tips to get in on the action. Some people just jump in without due diligence because of the guarantee being offered ... that isn't what I suggest or recommend, but just saying. (BTW - I do not have any PPR notes.)
@Steve Babiak , I exchanged a few emails with Dave before I signed up with PPR. Asked him about warranties and such but never asked how to get in front of the line. Maybe I should :-)
BTW, some of his associates told me that warranty is better than having equity in the note. Nevertheless, I only try to buy equity backed notes from PPR.
Well, that's a sales pitch, a warranty better than equity. It's my understanding that PPR has a warranty that is reduced over time and covers your purchase amount, I can't really speak to it as I don't know the details. It's certainly a better angle than most brokers I've seen, but equity covers the UPB, the profit from doing the deal. No way a warranty on a discounted amount is better than equity covering the UPB and costs of collection. :)
We are marketing some first lien NPN and PN with smaller balances and RE Values so the barrier of entry might fit for you. (In other words they are not $200k investments, more like $45k to $80k) Feel free to PM me.
PPR's warranty structure is not going to be very common at all in the market place for single asset trades. As Is sales are more common, like in REI.
The rest of the general criteria if I remember without looking should be fine. Notes come in all shapes and sizes. The more flexible you are with your criteria (which does not always have to translate into more risk) the more trade opportunities you will find.
If you reach out, include your number and a time to setup a call with you. We can take if from there.
Het Nick, see what Dion has, I would, not an endorsement, and be careful getting on the phone with this guy, he may be very long winded..... LOL :)
Seriously see what he's got, you need to look at more than one broker.
Later, when you get you're feet wet, you can look to the original note holders, individuals where you get some much better discounts. :)
Seriously see what he's got, you need to look at more than one broker.
Later, when you get you're feet wet, you can look to the original note holders, individuals where you get some much better discounts. :)
I have started my amateur writing career here on BP. Truth be told, caffenee has a lot to do with it too.
@Steve Babiak @Dion DePaoli @Bill Gulley @Rick Harmon
WOW what a great thread ! (all 4 pages)
Heres my question - situation
While looking for vacant houses I came upon a house with an "as-is" value of 125,K I did a title search & found the 1st mortgage (UPB of $115,k ish) holder assigned their note to a hedge fund & the hedge fund then started foreclosure. 2nd lien holder is owed about 26,k I contacted the owner & inspect interior for repairs. Owner would QuitClaim to me for $1,500 to cover their moving expences back to their home state. If I was able to negotiate with 1st & 2nd lien holders - back taxes - utilitys - ect & get the property for $80,k should I put together a $1,500 Quit-claim option with the seller , payable just before I buy 1st & 2nd liens @ a discount or should I do a DIL after buying 1st & 2nd's ? I have read on BP posts that DILs are looked at as "Payment in Full" & there may be taxes due that would make the deal a "not so good deal" This property is located in a judishal state with 6 months from NoLP to Auction with a 6 month redemption period after auction.
( Sorry no spell check )
Any comments would be Great - Thanks Guys
Mark, forget the quit claim part, 1. you don't buy with a quit claim, 2. you'll have tax issues on both sides buying a property you have a note on, same as taking the property with a DIL, forgiveness of debt can be an issue, you'd need a closing HUD-1 or statement, tax reporting, you'd have a mess. Don't mix buying with lien interests. Use a QCD as a deed in lieu of foreclosure, you can give cash for keys, but your borrower really needs to institute the DIL process by making that offer, you can show that with a letter from the borrower to you. Obtain the second, get the DIL, then payoff the first, don't buy it, pay off other liens. :)