Notes Servicing (Sierra Crest Capital)

11 Replies

 A friend of mine has purchased a 1st lien position performing note from https://sierracrestcapital.com. Has anyone heard of this company? and also what is their incentive to service notes. Basically my friend said Sierra will find the asset for you and they collect 5% of the monthly as a fee. Sierra does a contract for a one year or a few years and after the term is over you get your initial investment back (principal) and that's it. I am trying to figure out what the angle here is. and what is Sierra Crest Capitals incentive. Any feedback I would appreciate thanks.

Personally I would NEVER trust someone else to select a note for me, that tells me they don't know what they are looking at.  

Also, what is their monthly servicing charge?  I have Allied Servicing handle my notes and they charge $18.50 a month.  I think FCI charges @ $25 plus a little more if they escrow for Taxes and Insurance.  A small change in servicing fees can result in a big change in profitability.  Do they charge more to handle non performing notes?

To me this sounds like a heads they win tails they lose proposition.  Does the seller have a relationship with the note originator or current note holder?  Are they marking it up?  Lots of ways this can go wrong.

@Jay Hinrichs any thoughts?

Originally posted by @Bob E. :

Personally I would NEVER trust someone else to select a note for me, that tells me they don't know what they are looking at.  

Also, what is their monthly servicing charge?  I have Allied Servicing handle my notes and they charge $18.50 a month.  I think FCI charges @ $25 plus a little more if they escrow for Taxes and Insurance.  A small change in servicing fees can result in a big change in profitability.  Do they charge more to handle non performing notes?

To me this sounds like a heads they win tails they lose proposition.  Does the seller have a relationship with the note originator or current note holder?  Are they marking it up?  Lots of ways this can go wrong.

@Jay Hinrichs any thoughts?

sounds like they make loans to new clients  flippers etc.. then investors buy the notes  ( probably a lot of fractionlized notes) and therefor you need a servicing company.. they are DRE licensed according to the website and the CA DRE has pretty substantial guidances on the brokers doing these loans..  5% for that type of servicing just probably covers the cost to actually do fractionalized loan servicing. 

I would rather invest in a fund or if I was buying fractionalized make sure I am in the first position on that fraction and make sure plenty of equity. 5% servicing fee can be pretty stiff as mentioned above others charge much less, just make sure you are using a licensed loan servicer.

My only other comment on servicing is understand ALL the costs, some have very low monthly costs but nickel and dime you for EVERYTHING or have extremely high boarding fees. You want to do a comparison across the board of what it would cost over X years. 

What types of returns are they providing?

@Jay Hinrichs

I’m wondering what happens if the borrower defaults? And also what’s happening to the 80k the client paid to buy the note, does that get held as collateral in a holding account until the term of the contract between client and sierra is over and they get the 80k back? So the client doesn’t really own the note then. 

Originally posted by @Chris Seveney :

I would rather invest in a fund or if I was buying fractionalized make sure I am in the first position on that fraction and make sure plenty of equity. 5% servicing fee can be pretty stiff as mentioned above others charge much less, just make sure you are using a licensed loan servicer.

My only other comment on servicing is understand ALL the costs, some have very low monthly costs but nickel and dime you for EVERYTHING or have extremely high boarding fees. You want to do a comparison across the board of what it would cost over X years. 

What types of returns are they providing?

Chris I think we are talking apples and Oranges here. the company that the OP is talking about is originating their own loans and it appears in CA based. and is running under a CA RE broker's license (just like I did/do when I did HML in CA).

And again, I suspect what's happening is the company will have a loan for sale Just like Peer st. this is a loan they are going to originate. They put it out to investors. B/C in CA HML are generally 400 to 2 mil or more its rare one investor buys a whole note. Ergo you have the ability to fractionalize the note. ALL the note investors are in first position if it's a first position note it's like taking title as a tenant in common.

You need the originator of the note to service it. since they are splitting the monthly payments out to the individual fractionalized portions / investors.  So these again I am guessing from reading the company website for about 60 seconds are non owner occ commercial purpose loans and as U know the rules for servicing these are quite a bit different than buying owner occ defaulted or even performing loans that were originated through a mortgage broker / bank. 

Originally posted by @Varinder Kumar :

@Jay Hinrichs

I’m wondering what happens if the borrower defaults? And also what’s happening to the 80k the client paid to buy the note, does that get held as collateral in a holding account until the term of the contract between client and sierra is over and they get the 80k back? So the client doesn’t really own the note then. 

If the note / mortgage or deed of trust is actaully only 80k  then they own the entire note and it should be vested with them either through an assignment or a fresh origination where your buddy is the solo bene on the debt instrument.

so if they dont pay U foreclose and own the property.  But like I said above my guess is these are fractionalized Deeds of Trust and most likley all first position.. So you need that company to service these for you to split the payments between each investor who owns a portion of the note.. 5% might be a tad high.. I know when i did these in the 80s and 90s in CA my fee was 2 to 3% to service them which basically paid the over head to do the collections and split the payments out..  This company makes money on origination points.. and of course the delta between the note rate ( service fee) and what they offer the investor.  So they might be writing 12% paper ( common) and taking 5% to service it all and giving investors 8% return.  YOu dont want individual investors who dont know each other trying to service a fractionalized note.. Matter of fact I think the CA DRE frowns upon that.

PS spell check is all wonky right now on BP so excuse my spelling and grammer as I pound this stuff out.. its the thought that counts :)

Agreed. I did not go through their entire site but if they are commercial completely different animal. As with anything, the devil is in the details (ie. the contract) - things you want to know:

1. If they are fractionalizing, is it only one lender they are getting funds from? If not this could be problemmatic to see how they have structured it (Reg A, Reg D - type of offering)

2. What occurs during a default? Do they keep paying you? 

3. If they default, what is your remedy?

Originally posted by @Chris Seveney :

Agreed. I did not go through their entire site but if they are commercial completely different animal. As with anything, the devil is in the details (ie. the contract) - things you want to know:

1. If they are fractionalizing, is it only one lender they are getting funds from? If not this could be problemmatic to see how they have structured it (Reg A, Reg D - type of offering)

2. What occurs during a default? Do they keep paying you? 

3. If they default, what is your remedy?

Chris in CA and with a current RE Broker license you May bring in up to 10 parties to a fractionlized DT / mortgage / note WITHOUT any PPM reg A reg D. the broker uses the CA real estate agencies disclosures for these transactions over 10 and yes you need to then move to some sort of PPM Reg A B C D or what have you.. this is HML i started in back in the early 80s every loan we made was fractionlized. So each investor got their ownership interest either through an assignment or if they were an original bene.. So when you look at the vesting deed it will say Jay to 5% Chris to 20% John to 30 % Mrs. Jones IRA to 5% what ever it takes to get to 100% and be under 10 different bene's.

In Practice the company will fund the whole loan then go to selling up to 10 fractionlized peices off via an assignment same assignment you use when you buy your notes.. in the old days we had to pay for a 104.1 endorsement for the title insurance to follow us.. now it does automatically with the way the notes and policies are written.

In a default situation again the CA disclosures also include a document that lets the servicer/who is a RE broker act for the group and start the foreclosure before these agreements were made its was a cluster believe me I lived it as you need 100% of the bene's to agree to foreclose .

The only way that the servicer or company can pay in a default scenario is they have to disclose they are paying and or buy you out.. other wise its just like any other note NO pay you foreclose simple as that.  Again default the remedy is foreclosure.

PS so other reading this dont think these are national rules.. Like in Oregon you May NOT fractionlize a debt obligation without doing a specialized disclosure doc through the office of corporate securities and that doc cost about 10 to 15k to create.   So like everything on BP its very state specific. 

Originally posted by @Chris Seveney :

@Jay Hinrichs

This is great info and people reading this yes note fractionalizing like this is typically not allowed in other states so know your state laws

Ya I learned the Hardway.  I just assumed ( wrong) that since it was done in CA this way I could do it in Oregon. Well the state had something to say about it LOL. my only blemish vis a vi a state agency in 47 years of doing this stuff.  Its why Generic advice on BP needs to be verified in the jurisdiction your working in.