Still trying to wrap my head around the basics of note investing. It seems that to calculate actual returns, you need to of course factor in your acquisition costs, but also the servicing costs. FCI charges $15 per month to service, and an additional $15 per month for escrow accounts.
So for low value notes, with payments of only around $100-200 per month, doesn't this servicing fee represent a large amount of the actual interest received, to the point that the long term actual APR on investment is quite low or zero?
A note that has 100 bucks is pretty small, maybe 10K and probably won't be critical as a first mortgage. Weigh the risks of collecting your payment, there are exemptions for small note portfolios. But a payment of $450 a month, I'd spend the $15.00.
Yes, servicing is a cost of business and effects the ROI, the discounts I usually work at, $15.00 won't break my return.......it's all relevant.
But, if you collect on a small note, I suggest you let an attorney tackle notices of default or hints to modifications......if all goes well you should have no issue.
While you can hold a note long term, I'd rather see them pay it off as quickly as possible which increases your ROI and gets you ready for the next deal with money in hand. Good luck :)
@Bill Gulley Nailed it. I avoid getting into low P&I payment notes for this very reason. When I do modifications, I usually like to set up a tax escrow as part of it, but the additional servicing cost and the borrowers past performance in paying taxes without escrow has to be considered. It's a cost of doing business but the impact of the cost to investment yield can be mitigated by selecting the right notes.
I have one in the portfolio now which was recently purchased as part of a pool and is nearing it's maturity date. It was a small loan to begin with and the interest portion of the payment at this point is around $20. Subtract the 15 servicing fee and we are getting a whopping $5/month for this one. I would not have purchased this loan if it had not come as part of the pool due to the ratio of servicing cost to interest payment.
Thanks for the replies. Seems like this makes a lot of sense. Some of the lower priced loans seem to have allure, but the fixed costs are so high that they don't make as much sense.
@Michael L. You are right, even on a $300 - 350 a month payments an $18.50 servicing charge will take 1-1.5% off the return. If you buy a t a big enough discount like @Bill Gulley suggests it doesn't matter.
Bill, I am curious how you prefer to source notes with significant discounts and what the yield is based on the coupon and your discounted price. I see brokers pushing stuff at 11-13% but feel I can do better finding buyers directly, just have not had the time to launch that part of the business so I am curious what you do and what kind of results you are getting.
Oh, wow, what I do and did I don't think can be put in a box and explained in a forum post, even a long post. Running a mortgage company with servicing brought opportunities to me, I also appraised notes for the State of Missouri and after assessing value they agreed to allow me to make an offer. I doubt anyone is in that position to follow everything I was doing. Now, it's simply word of mouth with Realtors and a few bank officers.
I wouldn't deal at a 13% yield, too low, it takes 15/16% to get involved, sometimes a little less if it's a note that can be rolled over quickly, refinanced. Many notes ran in the 30% range.
Most of my business deals with seller financed notes, residential, commercial and other factoring of obligations. Notes originated for the secondary of institutional portfolios are not the main thrust, those come from distressed situations directly with the bank and borrower in unique situations, not tapes.
There are much better note opportunities from the note holder, not brokers. Individuals or concerns that provided funding, originated the obligation. They are in the best position to accept a deeper discount on a ho-hum note, a default or a slow pay as well as a performing note.
I'm pretty sure I was the only guy in the country that offered loan servicing with a guarantee to purchase at a stated price in the event of default and advanced payments to the note holder, then collected amounts due. It was a blend of servicing and PMI on seller financed transactions. That is a powerful advantage. I could also have notes assigned without buying them, but with the option to do so. I'm thinking of teaching this so that it can be replicated, later on.
Servicing of a large portfolio should be around an .125 to .375%, not a dollar amount of service charges, but a flat fee is the best way for single notes and it is high for small notes. I also stayed away from escrows as much as possible, it's a regulatory pain.
I'd say that even high is better than the down side in our new regulatory environment, some notes just shouldn't be purchased due to the fixed costs with them and the potential for them to blow up. To each his own.
The velocity of money plays on note investing, keep the money moving, so my plan was never to hold a note more than a couple three years, much less to term. The quicker I receive the discount the higher the yield on that investment.
Holding notes is fine for us retired folks, better than going to the bank or insurance agent, but business wise is to work and produce the highest return.
Your best deals will be by working directly with the lender who originated an obligation.
I have to say too, note investors really need to understand the new brokerage laws!
Hope that filled in some of the spaces. :)
@Bill Gulley thanks for your post there is a time of good information there. One other question, we are looking into starting a direct mail campaign to buy direct. Would you have any advice in this area?
I hate junk mail! I never used direct mail, but I know it must work as they sure use it.
If I want to "find" a note I do so locally, there is probably a half billion in notes within a 100 miles of me, I can't buy them all, at least at par. LOL
I did cover 7 states at one time, but not buying them so much, I like to know where my collateral is, I like to be able to see it if needed, won't be doing that buying in Colorado from here.
In a few situations I would use a personal letter and ask them to contact me concerning their note, left it open so they weren't really aware of the matter, no sales pitch. I talk to folks on the phone, I'm old fashioned. Usually, I'd call them......much easier for me and saves time. Good luck :)
Thanks @Bill Gulley I appreciate the input.
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