I am just starting to invest in owner finance "small" notes, priced at $50K and less. Since these notes are mostly out of TX where I live, what is the best way to perform "due diligence?"
I receive a list of notes from a reliable broker. This is what I normally do:
1. Pick a note or two, that has a high yield first, then working backwards to see the loan-to-value ratio, then the actual discount, and then the terms (10,15,20, or 30 years).
2. Then, after receiving more info from the broker, I research the value of the property on Zillow, Homes.com, Realtor.com.
3. I try the local county appraisal district website also for an appraised value but sometimes the property address is just not listed.
4. Listen to the broker giving me a background of why the owner wants to sell, if there is one.
I have contacted local realtors for a "drive by" to check the condition of the property but most told me it is against their brokers' rules, to receive a small check from me (about $75) for their effort. Can the broker provide a BPO (broker's price opinion) legally? Has this ever been done? I really do not want to hire someone to do a full blown appraisal?
Can a seasoned notes investor/s please help? Much thanks.
You never said if you are buying 1st or 2nd non performing or performing notes and what %% the broker wanted of the UPB.
Nice of you to reply. Sorry, I am a newbie at these kind of deals. It is a first lien performing note. The owner of the owner financed note just wants to cash out of it. The property is owner occupied or if commercial, is like a small grocery store with day to day operation. I am not understanding what UPB is. I know the broker gets a flat fee from the wholesaler, about $2K but that does not affect my profit.
Great question. Getting an out of state BPO is definitely part of an investor's note due diligence. However, property value is just one factor to consider when purchasing notes. More important is note terms & interest rate, how the note underwriting was done, did underwriting comply with the new Federal regulations put in place earlier this year, the lender's LTV, does the investor have a good mortgage servicer to service the note & to keep the investor in compliance, what the specifics of the property are (brick vs frame, bed/bath/garage, etc), is the property in a declining or appreciating neighborhood, is the note originated in a lender friendly State, in the event of default what is the foreclosure process in the State where the property is located and do those foreclosure laws favor the note owner or the borrower, etc. Getting answers to all these questions will help you make better note buying decisions.
The UPB stands for Unpaid Balance.
I would also get a title report, verify any other liens on the property and where they fall in relation to your loan. Verify 1st position, Taxes paid, HOA current. For the HOA, if there is one, I would recommend calling direct.
You have a problem there in Texas. Non disclosure State. There are about 10 of them.
Must have access to MLS, Realtors have these States locked up tight. You can't get comps even from paid sites. Zillow just spits out numbers but has no idea. Even my Cash Buyer Data Base draws a blank (non-disclosed.)
Note market is hot, you can look in any State, you don't have to go see a note. One good thing about Notes, you can legally collect a finders fee as Realtors don't do notes, so you are not infringing on their territory. That's what a Texas Attorney told me. My Transactional funder will even fund a note, if you can't assign. Long as I have a buyer on board.
Thanks for all responses. Very much appreciated. Always nice to learn from people "in the know" already.
Just ask a realtor to run the comps for you.
@Audrey C. you can establish a relationship with a realtor and use gift cards to "pay" them for their services
Originally posted by @Audrey Cheong:
It is a first lien performing note. The property is owner occupied or if commercial, is like a small grocery store with day to day operation.
So, this is a first lien secured against property, where the owner is using the property as a grocery store.
As a newbie I would not suggest this be the type of collateral you cut your teeth on.
A commercial BPO will cost you a couple hundred bucks.
What is the rest of the story here with the borrower?
When was the loan made?
How much was originally loaned?
Is the property just retail or is it mixed?
Does the borrower reside or just work on property?
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