Hello everyone, this is Christophe from Madagascar the land of lemurs...
I have stumbled by accident on an ad from @Christopher Winkler advertising his business deals in Notes and shot him an email with half a million newbie questions...
My understanding is that his company buys back mortgages (from banks ?), gets an arrangement with the borrower and once the borrower starts paying on a regular basis (seems after 10 months), sells them back to investors...
The ROI and the fact that you dont actually own all of the hassles related to maintaining a real asset seem very interesting... almost too good to be true !!
So my questions to the community are:
- who has done business either with Silverwood or a similar company ? Who is a private lender and how is it working out ?
- what are the pros/cons and risks (SWAT analysis anyone ?) or such investments ?
- As this is not Real Estate per say (seems closer to banking business) and you never own a house, how is this taxed and what is the best set up for such an investment ?
- Are there any other question I should be asking that I dont know about ?
Many thanks everyone reading this and best regards from Lemurland !!
The person you are asking about I believe is also a member here on D&I. I have never done business with him or his company.
Purchasing a Note - or purchasing a mortgage or deed of trust (the security instruments which secure said note) - is not like purchasing real property at all. The interest secured by the security instrument limits the holder of the note to the amounts due under the note.
It is true, that as a Mortgagee (the holder of the note) property maintenance issues are to be born by the Borrower. That is, however, only if the Borrower is capable and willing to maintain those issues as agreed.
Purchasing loans that were acquired for the sole purpose of "re-positioning" them can be a risky enterprise. This is not judgement on Silverwood's business model, just an objective statement. The issues that I have seen arise include modifications of loans that really should not have been modified and modification terms which really do not improve the Borrower's capacity to pay or perpetuity of payment.
Often times the [Seller's] model promotes a resale of the loan after a set amount of periods have passed where the Borrower has made a payment. In the example given by the OP, that is 10 months. The fundamental question on the matter is does 10 months of payments support the idea that future payments will also be made on time in full? It certainly is not as easy to justify as the pitch may sound as clearly a Borrower enticed to make X on time payments say for the purpose of some principal forgiveness or interest rate relief might do so only as long as needed to avoid any immediate default remedies such as foreclosure. Once that threat is removed they may fall back into delinquency or default. Often times, the cycle will be repeated.
In the one example on the site I glanced at there is an offer to Joint Venture on a mortgage in Oak Knoll Texas. The post states the asset can be acquired for $23,900 and a 'profit' of $29,203 can be obtained after working with the Borrower and collecting 12 months payments through a resale. So right now the loan has a perceived value of 45% of Re Value and then after 12 months of payments the loan is worth 95% of Re Value?
Probably not. Maybe more like 65% (maybe and depending) or so but certainly 12 months payments are not going to make this loan jump all the way up close to par. The risk would not have been mitigated that much and at that level an investor has no equity insulation from future defaults. At the very least, that type claim on return raises many questions as to the likelihood of such an event. Questions that can not be addressed from the limited information posted on the site.
It is not clear what role the OP plays in the game. As a joint venture partner this story could be enticing. As a potential future counter-party (buyer) not sure that is all that exciting. Minimal upside and taking on all the risk.
Taxation will be dependent upon the structure of your investment. With no clear understanding of how that will go it is tough to comment on it. First you need to figure out how you are structuring the investment (JV, End Buyer, Beginning Buyer, etc) then a more relevant conversation can be held on the matter.
Investing in Notes or whole loan mortgage assets can indeed bring deed good returns. It has been done for many years and is sort of common.
This Forum on BP - Notes, Tax Liens, etc has many threads on the subject. Feel free to look around.
I have not done business with Chris Winkler, though I do know him personally as we run very similar businesses.
When you ask about a private lender, I believe are you speaking from the perspective of asking if anyone has done a Joint Venture deal with him as the funding source? I have not, though I have done many Joint Venture investments with other investors funding assets that I have sourced myself.
Note investing has a variety of Pros & Cons. The ROIs can be spectacular which is an obvious Pro. Depending upon your investment goals, note investing can also be a great way to acquire the physical real estate for well below market value, though this option isn’t for everyone as many people associate owning rental properties with the common headaches of toilets, trash and tenants.
You can also run into a variety of headaches from borrowers, to lawyers, to destroyed properties. Though you are investing by purchasing the "paper" i.e. mortgage, the physical real estate is very important when evaluating a potential investment in a non-performing mortgage. You don't have the opportunity to speak to borrowers prior to purchasing their mortgage and you won't be able to legally gain access to the property unless they had it listed on the MLS for sale in most cases. Depending on the state you have a variety of different laws that govern the purchase/sale of mortgage notes, as well as the foreclosure laws and timelines required if you are unsuccessful at working out a deal with the current homeowner.
The taxation is highly dependent upon the structure of your deal. It could be taxed as ordinary income; it could be taxed based on capital gains/interest income if you are a truly passive investor in the deal. This is worth consulting your accountant or tax attorney for a more in depth answer.
I would have you ask anyone proposing a Joint Venture deal with you for a reference of a current investor, an investor that they have completed an investment with and returned capital to, and to review a copy of their Joint Venture paperwork. When reviewing the paperwork I would also be on the lookout for how you are protected if the investment goes badly. Is there a “buy-out” clause or a way to return your initial investment if the asset they purchase turns out to be worthless? You’ll need to make sure that issues regarding additional capital are addressed up front as well, just in case a legal battle erupts and your attorney bills start to add up beyond what was initially budgeted for. There is a list of other questions, but I hope these get you started in the right direction.
thanks a lot for your replies.
My main ask in these kind of deals is how can one assess that paying 10 months rent can assure that the 230 next ones will be paid... nothing... and also, after asking a few questions, I understand that once the note is bought, you're basically on your own... so not really suited for an out of state investor, less alone a foreign investor...
The JV deals also seem a bit dodgy to me.. the investor puts 100% of the cash but the benefits are split in exchange for one putting down the cash and the other putting down the work.. seems like the investor has all the risks and the partner only has benefits...
Thanks a lot for your answers in any case ! see you soon :)
A fellow investor let me know Christophe had posted here, so I would like to chime in. Christophe and I have gone back and forth with email and skype correspondence for a while, and we have been discussing working together on a joint venture to acquire a first note, though I have not heard from him for a week or so.
He brings up a good point, though it is real estate related investing, though you are not buying properties off the MLS or from a seller, rehabbing and renting or flipping. You are buying the note the homeowner promised to pay back for the loan that paid the seller of the house they bought. The note is secured by the mortgage, and when you buy the note, that mortgage is assigned to the new owner, and the note is endorsed to the new owner, like when you endorse a check. Not sure if every Mortgage ever originated will allow, though the majority do allow all or part of the promissory note to be sold by the original lender. This has been done for ages, and allows the original lender to cash out their loan, so they can do it again. Not matter if its a one off seller carry back, land contract, or a large mortgage institution. The original lender has a right to sell the promissory note. If it is performing, many will keep it, as the amortized interest typically is 2-4 times the amount of the loan.
For the ones that the homeowner can't pay for whatever reason, and default, the banks try to get them to start paying again, though they typically give little if any assistance to the homeowner, as they want all the arrears with penalties, and if they wrote the loan on an overpriced home, and the values dropped, as did happen to millions of people, the banks still refuse to budge on reducing the overvalued loan.
So they sell them off by the truckload to hedge funds who work them out or sell them. Silverwood buys these toxic assets from the funds, and some small lenders when we see one that has a good value, our number one goal is to help the homeowner. We typically pay 20-50 cents on the dollar for these, and the UPB is usually twice the value of the property today. Since we are now the new bank, though we are not a lender or loan money, we are just the owner of the promissory note, entitled to collect those payments, and we want to work with the home owner, and can do things like drop the interest rate, drop penalties, or even reduce the UPB to a realistic level based on the current value of the house. We can also help them with assistance from Hardest Hit funds, or state programs designed to help homeowners.
There are risks, the biggest is we pay too much for a home that is not worth what the seller thinks its worth. That's why we have relationshipw with Realtors in the target cities to help us with putting a value on it. This is possibly the most important thing, as we have seen notes the Realtor goes to visit, and its just a vacant lot, and will loose the majority of an investment if you buy sight unseen.
We then have to peel back the onion, and hopefully not cry when we look at unpaid property taxes, city liens and fines, state tax liens, bankruptcy, and a couple dozen hazards that can effect the value of the note. The note has a value, and an amount, though its just a promissory note, its a promise to pay, and at any time in the 20-30 years of the loan, something might happen to the homeowner that forces them to stop paying. We are looking at a note now in Columbus where the homeowner only owes 1/2 of the value, and yet its vacant, he just walked away from over $30k in equity. Why? Who knows, we really can't find out much about their problems until we buy the note.
Other risks are minimized like getting insurance on a property, so if it burns, or has mold or whatever, you can use that to protect your asset/investment. No investment is entirely risk free, and these investments do have risk, though we do as much as we can to minimize it, but not eliminate it. We focus on markets that are appreciating. Buy buying them for 1/2 or less of the value, this is how we can get 50, 100, or sometimes even 200% return, though not every time. Sometimes you only make 5-10%, sometimes break even, and try not to loose money. When you buy at such a discount, its hard to loose money if you know what you are doing. There are 8-10 exit strategies depending on the property and occupancy, so we look at the ones that make sense.
To address Dion's points, if we look at a homeowners finances and see he really can't pay back the loan, or his debt to income ratio is so high it does not make sense, we will NOT pursue any modifications. If he can't pay it, he has to leave, its that simple. And we can do it the easy way by signing the deed over to us, or letting them do a short sale. If we do it the easy way, we won't go after deficiency judgements or report unpaid amounts to the IRS.
If they won't work with us, we will move right into foreclosure, report it on their credit report and to the IRS, and go after them in court for any balances owing after we sell the property. Though our first goal is to help them, but if they can't make the payments, they have to wake up to the fact they need to leave, they can't squat in the house forever.
If we can get them to start paying again, we will revisit at the 6 month and 12 month point. At 6 months that reperforming note has a value, and we can explore selling it, though we like to season for 12 months, and then look at what we can get for the note. A reperforming note has a value, depending on the property. I can not guarantee what it is, its really a matter of how much the buyer wants to pay and what yield they expect. Any time we quote any number, we only say potential for, we never, ever guarantee any amount of return. We might get somewhere between 65-85 cents on the dollar, though each resale will be different. You also have to take into consideration that year of payments is the cash flow, and that amount will also be added to the resulting sale of the note.
You are correct, it is toxic and will never go for par, though with a good borrower, with a high credit score, and payment history, low debt to income ration, are a part of a higher resale value. Actually the borrowers ability to reply is one of the main criteria the buyer of that note looks for, in addition to the terms of the note, the location, etc. So a great house, in a growing area, with a borrower making good income in a steady job, with little if any debt will garner those higher prices vs a guy who is getting by on the skin of his teeth, with a ton of debt, seasonal, unsteady job, and a high debt to income ration. That note might not even get 50 cents on the dollar. Each one is different and unique and we will never make any guarantees.
So we take our ROI calculator and plug in known numbers, and that is how we come up with the potential returns.
And as my friend and fellow note investing mastermind member Robert Woods states, you can also use this to pick up vacant, unadvertised, shadow inventory properties that are not on the MLS, that can be sold AS-IS to rehabbers, or homeowners that want to do their own fix up. Other options are low cost rehab like paint & carpets, or going all out and redoing the whole house. They can then be flipped, or rented out. Even selling a "loaded rental" at a higher price to investors is a very popular business model. And you are taking the neighborhood eyesore and making it a part of the community again.
We closed two vacant notes last month with two different JV partners, one a hard money lender that we intend to do just that. The price was right, and one we will sell as is, and we were able to go right back to foreclosure sale, as it did not sell the last time, saving us thousands of dollars and months of delay to get title. The other is a nicer vacant that we are going to attempt to get a deed in lieu, though if we need to, Michigan has fast foreclosure times on vacant properties. Once we get title, we can see if the benefit of putting in a buck will return two.
As Robert points out, we do offer those kinds of protections, a buy-out clause in our JV agreement. And depending on the level of funding, if the note is acquired with 100% of the investors money, we are doing all the work from start to finish and splitting profits. The note, assignment, and allonge are all recorded in investors name or entity name. On the ones we put skin in the game, its a percentage of how much we are putting in, then the assignment is recorded in that percentage. Other times the lender is loaning us the money and we pay it back with interest, they its also titled 100% in their name, so in the event I die tomorrow, the note is in their name and there is no risk of me taking it over.
And finally Christophe, as I addressed above, there is no guarantee they will continue making payments. Its a promissory note, and they promise to pay it, though if they loose a spouse, job, leg, arm, child, etc, get sick or any hundred of other reasons why they can't make the payments, then we go back to the exit strategies above, deed in lieu, short sale, etc. The only guarantee in life is you will die. We do as much as we can to limit the loss.
Christophe, if you feel its "dodgy" then it might not be for you. You can take your risks in the stock market, or buy homes to fix & flip or rent. Or put your money in a CD and make 1/2 a percent. As all three of us here have said, there are so many variables, that if you feel you do want to give it a shot, realize we are doing 100% of the work to finding them, peeling back the onion, getting them transferred to the new servicer, checking for missing assignments & such, starting and completing a workout process, selling the note or property, and ultimately making a profit. I have found getting into this business does have a high barrier to entry. I am glad there is, keeps out the masses. There is so much to it, and so many ways to loose.
Though I am not sure why you fell you are on your own. Acquiring the note is just the beginning. We are in constant contact with our JV Partners and always answer calls & emails. We are proactive and we will be more in touch with you, than you to us. We are with you all the way, from start to finish, so not sure why you feel you will be abandoned. Actually, a new JV Partner closing this week is a US citizen currently living in Australia is our JV Partner on that Houston note. Texas is hot and we don't see deals like all the time. We typically pay more than 50% for Texas and Florida, as its appreciating markets. You can be anywhere on earth, as long as you have a good local realtor, attorney, and if needed, rehabber & property manager.
One pending JV partner, a lender to rehabbers, wanted to test us out by giving me a 2nd NPN he bought a year ago. I rose to the challenge and started digging into it. I found he bought if off an exchange, and did nothing to it for one year. One week before he asked me to help work it out, the owner of the 1st sold it at foreclosure sale and he lost 100% of his investment. By not monitoring the note at a minimum of monthly, he could have foresaw the foreclosure, filed it first, making him senior lien holder, and could have then made payments on the first while he arranged for sale of the property.
All of our JV partners welcome us to do the work, and gladly will split profits with us, mostly because they are too busy with their life to learn this business, and want to work with someone who knows what they are doing, and is on the lookout to protect their investment. I have a fiduciary responsibility to my JV Partners to treat their money as my money. I want them to make money, my goal is not to loose money, and I treat it as if it was mine. I hope that helps, and I look forward to continuing our conversation.
Great post Chris. Good thoughts and a very open honest communication. Regardless if it's someone's cup of tea or not, the candidness of your post will be appreciated.
Great post Chris, I am understanding a lot more than in our email exchanges, thanks !!
Check up on Due Diligence involved in Note buying to get a feel the process that Chris goes through when buying a note. I would much rather get 50% return than 5% in the market. Even if it take longer than a year. I am working on a few NPN's right now and before we even make an offer there is a lot of due diligence involved. Still no guarantee I will get them to pay but I will roll the dice and take my shot. Good luck in your future endeavors!
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