Notes?

Question

I figured I would place this here instead of a more specific topic, since its  more of an overview question.

I came across a seller who has a note for $37k he picked up for $0. He wants $5k for it and is liquidating his inventory. House probably needs 35k.

Can I put an option on a note and wholesale it/ assign it?

What is the best way I can go about making some money from this. Comps are in the 75k to 95k range.

I have no experience with notes, and and all experience is helpful

Michael Dorgan · Answer

Not nearly enough information.  Notes are a little different than real estate.  The Payor is a large factor in the note's value.

Anyways, we also need to know:
* What's the interest rate on the note
* How many payments have been made and if they have been on time.
* How many payments remain (seasoning)
* Is it currently deliquent and how much.
* Are there any other senior encumberences against the property (is this a 1st or 2nd position note and are there taxes due.)
* How much value is in the collateral which you've stated is around 40-50k after repairs.
* What is the general credit worthiness of the payor?

All of the above can make the note worth anywhere from 0 to above par (37k).

For instance, if the payor has good credit, has paid for a year on time and currently is up to date, and if the note yield were in the 10-12% range or so with a loan to value of under say 65%, then you'd probably get close to par if not more for the note.

If, on the other hand, the note is delinquent, has almost no equity to back it (which it sounds like this note has), and has any other senior liens ahead of it, then it is worth just about 0.

Anyways, without the rest of the info, we can only guess.  And yes, you can reassign notes to other people.  Banks due it all the time when they sell mortgages.

Terry Royce · Answer

couldn't there be value, even if the person is behind in payments. The new buyer could foreclose for 5k, plus around 3k in lawyer etc. and put 20k, for rental or 35k for resale, and have built in equity?

Michael Dorgan · Answer

Depending on what state this is in, foreclosure can take forever.  Some states have a redemption period which further draws out the process and all the while, the property withers further taking more deglect damage.  People generally buy notes as income instruments, not as back-door purchases.  Though if the price was right, it can work.  Especially if some idiot overpays you at auction.

Then there's the other half of the problem - how many other senior liens are above your note?  Those directly compete against your bottom line.  There's a reason that 2nd above 80% LTV are called throw-aways.

Let's pretend you buy the note for 5k, then spend whatever it costs to foreclose (not sure on this as I've never had to go thorugh with one.)  If it indeed only costs 3k, then there might be some value if the foreclosure process isn't too long.  If it is, then it could take 3-4 months to foreclose and another year to take possesion.  Then a few months and a few k to fix, then and only then can it start making you money.  That is a long time to wait for your return with many potential pitfalls in the way (payor BKs for delay, gets offers on the property that fall through, but delay the process, etc.)  Oh, and in a falling value market, that's 18 months of value depreciation to factor in as well.

This is probably why the note seller is just happy to make a buck and run.  Why in gods name would someone have given it to him otherwise?

If it is a quick foreclosure state, then you might be able to turn and burn the place in under 6 months if the stars align perfectly.  That would, of course, increase the resell value of the note.

I'm sure there are other note buyers on here that can give you a much firmer value of the note than me and can go further into the nitty-gritty of foreclosure.  I try to specialize in Mobile Home where note no-pays are repos and go much quicker. :)