Mortgage Note Investing
Hi everyone, I'm currently in the market for performing institutional first position notes, but I'm not sure where to start. I have Dave Van Horn's book and have listened to it twice, but when it comes to actually taking that first step, I'm lost. I was considering using a broker, but if I do who should I use, and do they do the due diligence on the notes I buy or do I? I found a website that explains the process in detail here: https://notevestment.com/note-... , but again the info is like tying to drink from a fire hose. I would definitely need help doing the due diligence process as I've never had to do anything like it before. Thanks.
#1 All Forums Contributor
- Investor
- Virginia
@Mike Colucci
We see this question asked frequently. The recommendations I typically provide are to check posts here on BP for recommendations.
Books will teach you note investing from a very high level. YouTube videos and podcasts can go deeper into note investing.
Joining some affordable groups or affordable target focused trainings will also provide additional insight.
I would say most investors take 6+ months of learning before pulling the trigger. This may seem like a long time but it’s not.
Lastly a broker does not do due diligence. You will be responsible for all the due diligence and handling all aspects of the transaction
Hope this helps
#4 All Forums Contributor
- Lender
- The Woodlands, TX
Quote from @Mike Colucci:You may be best off investing a moderate amount in a note fund to get your feet wet.
Hi everyone, I'm currently in the market for performing institutional first position notes, but I'm not sure where to start. I have Dave Van Horn's book and have listened to it twice, but when it comes to actually taking that first step, I'm lost. I was considering using a broker, but if I do who should I use, and do they do the due diligence on the notes I buy or do I? I found a website that explains the process in detail here: https://notevestment.com/note-... , but again the info is like tying to drink from a fire hose. I would definitely need help doing the due diligence process as I've never had to do anything like it before. Thanks.
Quote from @Mike Colucci:
Hi everyone, I'm currently in the market for performing institutional first position notes, but I'm not sure where to start. I have Dave Van Horn's book and have listened to it twice, but when it comes to actually taking that first step, I'm lost. I was considering using a broker, but if I do who should I use, and do they do the due diligence on the notes I buy or do I? I found a website that explains the process in detail here: https://notevestment.com/note-... , but again the info is like tying to drink from a fire hose. I would definitely need help doing the due diligence process as I've never had to do anything like it before. Thanks.
Paperstac.com and NotesDirect.com list all types of notes for sale. Both are good places to practice due diligence. As you develop your network, you'll be able to compare findings on those assets with others and learn together.
For other free resources, I recommend the Note Inc podcast and the great webinars put out by Tracy Z and Fred Rewey.
@Don Konipol, It's funny you mentioned note funds; I actually looked into that briefly, and the ones I found were for accredited investors. I looked into MWM Fund which is out of Orlando, Florida, but I can't seem to reach their website anymore and when I call their 1-800 number, I get a busy signal. What other funds are there for regular investors like me?
@Marco Bario, I have looked at both those sites, and that seems to be the place where most investors go. One big hurdle I have is going through the due diligence process. I want to make sure the first time I do it, I do it right to give myself the best chance of securing a good note without any hidden "Red Flags". Whats the best way to learn this process? I'm a hands on learner, but I would definitely like some practice before pulling the trigger on an actual note. Any advice?
@Mike Colucci may I ask why you are interested in institutional notes?
For clarity, when you say institutional, do you mean consumer? Meaning you're interested in buying performing notes where the note is collateralized against a personal residence? If so there are several considerations you may want to consider...
#1: Depending on the state there may be licensing requirements. There are actually three types of licenses required in the note investing space. A lender's license, a broker's or loan originator's license and a "bankers" or servicers license. Each state has requirements and they can vary significantly. In some states, you are required to have a broker's lic but not a lender or a servicer lic. In some states, you may need a license long as the asset is a SFR while if the asset is commercial no license is required. In other states you need a lic, but not if the borrower is an entity (LLC or Corp for example). Knowing the lic. law is important. For your requested investment type you should look at a "bankers" lic or servicing lic. If you are investing in FL, you can service up to 10 loans secured to personal residences without a lic, but the law is very vague if that's at one time or over your entire investment time.
#2: Institutional loans are what we in the industry refer to bank or credit union loans. The problem with that is most banks/credit unions package their loans up and sell them on wall street as MBS or mortgage-backed securities. You cannot individually pick loans to invest in, you have to invest in the MBS as a whole.
#3: Especially in FL, should the performing note turn non-perfoming you would have to wait a VERY long time to foreclose and take the asset back, and that's if it's not contested. If the Homeowner hires an attorney you could be looking at years of litigation, which could very well eat away all your equity or assumed equity in the asset
#4: Speaking of equity, if you somehow do manage to purchase an institutional loan the amount of equity would be negligible, probably less than 20% maybe as low as 3%.
You should also be aware of your intended goals behind investing in notes. Is it cash-flow or is it with the hopes that your mortgagor will default and you will be able to get the property back at a discount and capture the equity? If it's an equity play then please refer to the concerns above. If it's cash flow then you may seriously consider investing or "originating" investment loans. Originating or creating the loan, specifically an investor loan offers several risk mitigation capabilities that are simply not available in the owner-occupied space.
#1: Originating investor loans, typically means you are lending to an investor, and savvy, experienced investors (like plenty found here on BP) buy properties and request loans for those properties using their LLC. In the eyes of the federal government and most states these types of loans are considered B2B or "commercial paper", and the rules are very relaxed. The assumption is you're a business making a loan to another business and therefore the owners are on the business owners to be sophisticated enough to determine the risk-to-reward of that obligation, your loan.
#2: In most states, there is no licensing requirement for making a loan to an entity, regardless of the asset type. This is NOT universal so you will have to do your own research.
#3: The ability to control risk yet generate a great return are phenomenal in this space, as most loans are interest only and short term. Meaning your capital is only exposed to the market for a very short period of time < 24 months, and the shorter the time the less risk you have to the housing market fluctuations. I typically make loans in the <12 month range and I'm very confident in my underwriting.
As to your question about brokers and working through brokers, you will have to be aware, very much aware, of the broker you may decide to work with. As @Chris Seveney pointed out a broker is NOT looking out for your best interest as the lender/ servicer. They are only pushing the deal to close because they will get paid points when it closes. If it doesn't close they get paid nothing. As a newer note investor you have to have the ability to sift through the BS and make your own determination on whether the deal is a good deal or not, ask me how I know .... smh.
At the end of the day there is an incredible world open to those who are willing to take up the task of studying and becoming a note investor/ private lender. Another option I recommend to any new note investor is to simply partner with an experienced lender and ask to participate in a fractional note. This is the way that I lend. Happy to have a conversation about some lessons learned and best practices if you would like. best wishes and much success.
i have been a private money lender for more then 30 years and would advise a great deal of caution. While you can make money and I have supported my family this way, I also have seen may, may crash and burn. I would start by co investing with someone who knows what they are doing and has done it for a long time. there are only a few companies that have done prior to the crash of 2008-2011. I would find one and coinvest with them to start with, you will see what they are doing and learn. You can take a fractionalized piece of a deal and that is a good way to start. Let me know if you have any questions, this is my area. I started @Geltfinancial in 1989 and we have done well over 11,000 deals for well over 1 Billion since then.
#2 All Forums Contributor
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#2 All Forums Contributor
- Real Estate Broker
- Lake Oswego OR Summerlin, NV
Quote from @Edwin Epperson:
@Mike Colucci may I ask why you are interested in institutional notes?
For clarity, when you say institutional, do you mean consumer? Meaning you're interested in buying performing notes where the note is collateralized against a personal residence? If so there are several considerations you may want to consider...
#1: Depending on the state there may be licensing requirements. There are actually three types of licenses required in the note investing space. A lender's license, a broker's or loan originator's license and a "bankers" or servicers license. Each state has requirements and they can vary significantly. In some states, you are required to have a broker's lic but not a lender or a servicer lic. In some states, you may need a license long as the asset is a SFR while if the asset is commercial no license is required. In other states you need a lic, but not if the borrower is an entity (LLC or Corp for example). Knowing the lic. law is important. For your requested investment type you should look at a "bankers" lic or servicing lic. If you are investing in FL, you can service up to 10 loans secured to personal residences without a lic, but the law is very vague if that's at one time or over your entire investment time.
#2: Institutional loans are what we in the industry refer to bank or credit union loans. The problem with that is most banks/credit unions package their loans up and sell them on wall street as MBS or mortgage-backed securities. You cannot individually pick loans to invest in, you have to invest in the MBS as a whole.
#3: Especially in FL, should the performing note turn non-perfoming you would have to wait a VERY long time to foreclose and take the asset back, and that's if it's not contested. If the Homeowner hires an attorney you could be looking at years of litigation, which could very well eat away all your equity or assumed equity in the asset
#4: Speaking of equity, if you somehow do manage to purchase an institutional loan the amount of equity would be negligible, probably less than 20% maybe as low as 3%.
You should also be aware of your intended goals behind investing in notes. Is it cash-flow or is it with the hopes that your mortgagor will default and you will be able to get the property back at a discount and capture the equity? If it's an equity play then please refer to the concerns above. If it's cash flow then you may seriously consider investing or "originating" investment loans. Originating or creating the loan, specifically an investor loan offers several risk mitigation capabilities that are simply not available in the owner-occupied space.
#1: Originating investor loans, typically means you are lending to an investor, and savvy, experienced investors (like plenty found here on BP) buy properties and request loans for those properties using their LLC. In the eyes of the federal government and most states these types of loans are considered B2B or "commercial paper", and the rules are very relaxed. The assumption is you're a business making a loan to another business and therefore the owners are on the business owners to be sophisticated enough to determine the risk-to-reward of that obligation, your loan.
#2: In most states, there is no licensing requirement for making a loan to an entity, regardless of the asset type. This is NOT universal so you will have to do your own research.
#3: The ability to control risk yet generate a great return are phenomenal in this space, as most loans are interest only and short term. Meaning your capital is only exposed to the market for a very short period of time < 24 months, and the shorter the time the less risk you have to the housing market fluctuations. I typically make loans in the <12 month range and I'm very confident in my underwriting.
As to your question about brokers and working through brokers, you will have to be aware, very much aware, of the broker you may decide to work with. As @Chris Seveney pointed out a broker is NOT looking out for your best interest as the lender/ servicer. They are only pushing the deal to close because they will get paid points when it closes. If it doesn't close they get paid nothing. As a newer note investor you have to have the ability to sift through the BS and make your own determination on whether the deal is a good deal or not, ask me how I know .... smh.
At the end of the day there is an incredible world open to those who are willing to take up the task of studying and becoming a note investor/ private lender. Another option I recommend to any new note investor is to simply partner with an experienced lender and ask to participate in a fractional note. This is the way that I lend. Happy to have a conversation about some lessons learned and best practices if you would like. best wishes and much success.
good advice I dont see how a one off person can buy and owner occ note that is performing ??? unless it was a non qm loan by someone like your company. but for sure most people looking for cash flow notes need just skip over the non performing and bad debt and or trying to find owner occ and just align with a good HML this business has been going on for decades I started in it in Oakland in the mid 80s and Jack Langer who owned it started in the late 40s.. tried and true business model return could be a tad lower but FAR safer than defaulted paper and much easier to manage and actaully scale.. then you can do your own loans in states that do no require licenses.. there are 12 states that require MLO and NMLS registration for 1 to 4 unit commercial loans the rest of the country is wide open.. Fractionalized notes you want to make sure you have very good documentation up front in the event of default. these can get harry if not all the fractionalized owners are cooperative this can be easily cleaned up with as I say documents at the start of the loan. Just google Jerry and Shaun Cohen they did 100 and some million of BAD fractionalized notes and the investors got wiped out.. WHen I mentored in Oakland with Mr. Langer virtually all our notes were fractionalized.
@Edwin Epperson thanks for the informative response. I'm looking for a cash flowing investment. I said institutional notes because that's what Dave Van Horn recommended in his book, but if it's not feasible to buy those then I could always try Paperstac and NotesDirect. I'm not planning on servicing the loan myself; I would use a servicing company. As far as fractionalized investing goes, I'm not really familiar with it. The only real knowledge I have is what I got from Dave's book.
@H. Jack Miller that's great advice, but what are the companies you are referring to? I'd be happy to check them out. To be honest, I really don't know much about this; I thought note investing was just purchasing a note, doing your due diligence, finding a servicing company, and collecting the payments, with the hopes that the borrower doesn't stop paying.
I recommend education with ongoing support and mentoring included. Names I trust in that arena include:
Tracy Z / Fred Rewey
Chris Seveney
Kimberly Banks Fawcett
Czarina Harris
I’ve been a member of Fred and Tracy’s mentoring group for a couple years and have been investing in notes for almost five years. Their group includes one on one sessions when needed. Just yesterday I sent a deal to Tracy to help me understand a few things I’d never seen before. There’s a steady stream of high level educational content, monthly mastermind sessions, and and huge archive available as well. Even as I become more seasoned in the space, I can’t recommended that level of support enough.
One more thing related to DD - having a knowledgeable attorney review the collateral file is valuable as well.
@Marco Bario Thanks for the recommendations. What is that mentoring group all about with Tracy Z?
Quote from @Mike Colucci:Fred and Tracy open membership to the mentoring group 2x per year. You’ll find some of their other resources and can contact them here: https://noteinvestor.com/
@Marco Bario Thanks for the recommendations. What is that mentoring group all about with Tracy Z?
Quote from @Mike Colucci:You’ll perform the same diligence as if you’re purchasing the whole note. Partials are a broad topic and I recommend some of the educational content I’ve recommended in this thread.
Another question I had: When you do a partial note investment, as some have recommended above, is it like partnering with someone on a note? And if so, do you review all the due diligence docs associated with the note? Is that how you begin to learn the process?
#2 All Forums Contributor
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- Lake Oswego OR Summerlin, NV
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#2 All Forums Contributor
- Real Estate Broker
- Lake Oswego OR Summerlin, NV
Quote from @Mike Colucci:
Another question I had: When you do a partial note investment, as some have recommended above, is it like partnering with someone on a note? And if so, do you review all the due diligence docs associated with the note? Is that how you begin to learn the process?
Look up fractionlized deed of trust this is another version of partials.. this is very common in CA HML scene it allows smaller investors to join in with others with out the risk of securities issues etc as CA RE brokers and mortgage Brokers are allowed to do these with 10 or less investors there is a clear cut state of CA disclosure document from the department of real estate that helps regulate these fractionalized or partial interest. Now this is specific for CA. in Oregon you may not fractionalize legally with out a full blown sec type disclosure document and partials would not be legal in that state either..
Another thought is to just pay cash for a home and then sell it on terms all you need to do is sell it for what you have in it then then the interest is your return on cash.. and in this market seller carry back can easily be 6 to 8% gives you a ton of control and if you can buy a little under market or sell for a tad of a premium then you yield goes up.
@Marco Bario thanks for the link, I'll check it and maybe reach out to them through their website.
@Jay Hinrichs the whole reason I'm getting into notes is because I can't find any properties to buy with the money I have. I'd like to invest outside of my area, but I would rather do it with notes rather than owning the property and trying to sell it. I read a post somewhere on BP that partials are like note investing with "training wheels"; if that has any relevance, that may be the path I need to take. Thanks again.
Has anyone here done any kind of education or training with Scott Carson at We Close Notes .com? Any recommendations with that site?
#2 All Forums Contributor
- Real Estate Broker
- Lake Oswego OR Summerlin, NV
- 58,829
- Votes |
- 39,937
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#2 All Forums Contributor
- Real Estate Broker
- Lake Oswego OR Summerlin, NV
Quote from @Mike Colucci:
Has anyone here done any kind of education or training with Scott Carson at We Close Notes .com? Any recommendations with that site?
@Chris Seveney I beleive Chris knows alot about Scott Carson.. and there are very long threads on this individual doing partials and investors getting wiped out and lawsuits filed and I think i read judgements being rendered against him..
try to find the threads on BP before you jump into that bath tub..
#1 All Forums Contributor
- Investor
- Virginia
@Mike Colucci
First rule of note investing - do due diligence on EVERYONE including who you learn from.
It’s a small industry.
Simplest way is to google the name, check here on BP….
Quote from @Mike Colucci:Gelt financial the only I founded is one of them.
@H. Jack Miller that's great advice, but what are the companies you are referring to? I'd be happy to check them out. To be honest, I really don't know much about this; I thought note investing was just purchasing a note, doing your due diligence, finding a servicing company, and collecting the payments, with the hopes that the borrower doesn't stop paying.
Quote from @Mike Colucci:
Has anyone here done any kind of education or training with Scott Carson at We Close Notes .com? Any recommendations with that site?
Hey Mike. Please search BP for his name and his company. Google will probably also bring up other websites about him too. If you want to DM me, I can point you in the right direction.
#4 All Forums Contributor
- Lender
- The Woodlands, TX
Quote from @Mike Colucci:Some of the best properties I purchased were properties I first financed. We financed a retail/warehouse in which the owner ran into some trouble the third or fourth month into our loan. Apparently, he mis estimated the amount he would have to either spend on tenant buildouts or the amount of free rent he’d have to give tenants if they did their own buildouts. While he had negotiated a great purchase price, he lacked the financial acumen to make the property truly profitable.
@Jay Hinrichs the whole reason I'm getting into notes is because I can't find any properties to buy with the money I have. I'd like to invest outside of my area, but I would rather do it with notes rather than owning the property and trying to sell it. I read a post somewhere on BP that partials are like note investing with "training wheels"; if that has any relevance, that may be the path I need to take. Thanks again.
we purchased 60% ownership from him, and as a result he was able to pay off $200,000 in credit card, personal loans, and family loans he incurred. Further, we provided $180,000 for further improvements, and restructured the leasing effort to have fewer, but more stable tenants in larger spaces. Finally, we refinanced the note we held at 12% interest with a bank mortgage at 4.25% for 20 years. We just had an offer at twice the price we paid, which we turned down.
I don’t know if you can find deals like this in todays market when looking for a property to buy; certainly not on the sites like Loopnet, etc.