Note purchasing thoughts - targeting specific properties

9 Replies

I recently listened to the @davevanhorn podcast and the notion of note buying is really intriguing to me.  I was curious about a specific strategy that popped into my brain while listening.  Does this make any sense? poke holes please.

If you are targeting a specific home, let's say driving for dollars and you find some nice homes that look abandoned but you want, you look it up and its had a notice of default, title search - clean.

Is there a play here to find out who holds the note to contact them and purchase it, then proceed with the foreclosure (assuming it doesn't get caught up). Will a note holder look at the market values and be more willing to let go at a bigger discount to dump it before having to proceed through foreclosure (depending on LTV perhaps?) and then you can proceed with the foreclosure and get a very specific property you're interested in at a deep discount? rather than waiting, dealing with foreclosure etc.

There's probably a sweet spot in there where you can get a deal even if its underwater.  Now I don't know much about how you go about foreclosing as a noteholder to own the property outright, 

Anyone ever heard of doing something like this to try to snatch up a specific abandoned house? I'm sure I'm missing some complication...but seems doable.  I guess it would have to fall in that sweet spot.  can't have too much equity I guess, and if it was way under water would they want to hear anything about buying a note close to value?

This note holding/private/HML asset backed area of investing is veddy veddy innanesting to me :)

Nope. Never thought about it ;-)

You aren't understanding the position of a lender or note holder, buying the note and foreclosing a cash funded note is not buying the property for your use, there are laws of equity that apply and you are seeking the money to pay the obligation, not move in. Forget the entire train of thought you have and understand the obligations of a lender and the purpose of collateral under state and federal laws.

You are not going to get an education on notes in podcasts, what you learn is how to buy from brokers mostly. Start at the beginning, can you tell me what a promissory note is, what collateral is and how it is perfected, how it is granted, how it secures an obligation and the rights a lender has in securing collateral in lieu of payment as agreed? ......No, most can't either. You can't get creative until you know the rules of the game or how the game is played. You can buy a note from a broker, rely on others to tell you what you need to know to earn the interest and how to get an attorney when you get in trouble, but you won't "know" the paper business until you know what it is you are really buying, how it is secured, your legal rights and obligations and the laws effecting the type of note you hold.

There are also crooks, shisters, scammers and low life's buying notes, dealing in predatory waters, but with the new rules of the game in some areas consumer financing, they will be having issues sooner than later. It takes attorneys awhile to catch on, but they will.   :)

That Rick, he's a sly devil.  I'm guessing he means, nope never "thought" about doing it...he actually Did it, or Tried to do it.  Yes, this has been discussed here a few hundred times.  I've tried/trying it on a few with a Very experienced, and connected, note guy...but no success yet.  Buying a particular note, from a large institution anyway, seems to be like finding the needle in the hay field.  Sounds good in theory, but reality begs to differ.

Let me restate a bit of my response as I was assuming, yes, you can buy a note prior to foreclosure, with a bank you'll need the borrower working with you. You can not simply select a note out of a portfolio to buy unless the note holder has offered the notes for sale, then you can be selective.

Again, an example as to why. About a hundred years ago, or so, the rail road used your ploy, land speculators used your ploy and other shisters.

Let's say I don't like some guy, I have the money so I go to his bank and buy his mortgage, now he owes me. I screw with him until I get him in default and foreclose on him (BTW, I could simply keep ripping up his payments by check and lower the boom on him).

The bank has a liability to that borrower, such a transaction makes the bank a party to the ploy of this note buyer and they can get their tail sued off.

Now, if the borrower writes a letter to the bank that says, please sell my note to this great guy as a means to settle my default or avoid foreclosure, then the bank can discuss it and even be motivated to do so since they have an opportunity to be indemnified, for them to continue to wreck the borrower's life and credit would create new liability issues for the bank.

So, yes, you can pick a note with the assistance of the borrower, that I have done too many times getting folks out of trouble.

If those notes fall under Dodd-Frank, the modification of an existing loan is a new extension of credit and you need to comply as if you were making a new loan. There can be servicing issues as well with such a note. If it's a secondary mortgage serviced by the bank, most likely, there will be other constraints and I doubt you'll be looking at a deep discount.

As Wayne mentioned, reality is different. :) 

Originally posted by @Bill Gulley:

You aren't understanding the position of a lender or note holder, buying the note and foreclosing a cash funded note is not buying the property for your use, there are laws of equity that apply and you are seeking the money to pay the obligation, not move in. Forget the entire train of thought you have and understand the obligations of a lender and the purpose of collateral under state and federal laws.

You are not going to get an education on notes in podcasts, what you learn is how to buy from brokers mostly. Start at the beginning, can you tell me what a promissory note is, what collateral is and how it is perfected, how it is granted, how it secures an obligation and the rights a lender has in securing collateral in lieu of payment as agreed? ......No, most can't either. You can't get creative until you know the rules of the game or how the game is played. You can buy a note from a broker, rely on others to tell you what you need to know to earn the interest and how to get an attorney when you get in trouble, but you won't "know" the paper business until you know what it is you are really buying, how it is secured, your legal rights and obligations and the laws effecting the type of note you hold.

There are also crooks, shisters, scammers and low life's buying notes, dealing in predatory waters, but with the new rules of the game in some areas consumer financing, they will be having issues sooner than later. It takes attorneys awhile to catch on, but they will.   :)

 The note scams are prolific.

See "scam ftc note education"

See http://www.shlaw.com/attorneys/jre_buslawnews.pdf for an attorney discussing "Perfecting and Enforcing a Security Interest in Realty Paper”

Overall I feel like note trading or dealing with note brokers on an institutional level is not for me, and the "plays" described can get a little hairy and then insuring them etc etc... that's all a little too much for my taste.

I had never really considered notes as a "thing" to trade in, but that podcast opened my eyes to it. Another interesting story from one of the podcasts was when a first time wholesaler tried to buy a fire damaged house via mail marketing, made a deal with the seller, tried to get a shortsale for 25k of a 65k note, and then the sellers got offended that the bank would take that offer and backed out of the deal.  Then the bank called them up and offered to sell the wholesaler the note for 25k anyways...then someone came and offered to do a 50k short sale before they had a chance to foreclose...but that story combined with the note trading podcast started the restless noodle machine a-crankin'

Bob - I've been in the note business since the 1980s. Mostly origination (lending) in my hyper-niche(s). I'm also a Bottomfeeding Opportunitist and do buy existing paper when there's an upside. Someone typically has to have died. That's a big sacrifice to make for a deal to work for me. 

Dave is an acquaintance of mine and flew out to my ranch for a gathering of other note investors (The NoteCamp). I've got some interviews of attendees on my website, link below. 

If you're new to buying paper, check out Gordon Moss' book, Performance Anxiety which is an introduction to the topic of buying non-performing paper.  He has a website somewhere, too.

The downside of first spotting the collateral (property) and trying to buy the paper next is that institutional lenders are really not set up to deal with a one-and-done note buyer. Is it possible? Yes. Is it likely? Ask Bill Gulley, however for my ADHD answer: No.

Here is my dumb luck story.  Cool abandon building.  I asked around and found the owner, well in arrears. The owner gave me the number to their contacts on the first and the second.  Through them I purchased the $50K first for $10,500 and the $75K second for $2K. I foreclosed, repaired and sat on  the property for 5 years!  Sold it 2 years ago for $125K and I am carrying a $105K first, 15 years at 8%.

It is amazing what you can do when you don't know that you can't!  I live by the rule do not buy it if you can't sell it tomorrow at a profit.  The key is your due diligence, with that you can be relatively certain if the property or note fits the rule.

My advise is to try.  Forget the big boys like B of A but check out the smaller local bank.  If you don't ask the answer is always no.

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