Note Deal Case Study

19 Replies

I see lots of people asking about notes and what happens in a note deal on this forum. It's a rather mysterious area of investing for a lot of real estate investors, and I wanted to shed some light into a deal our company, Seasoned Funding, LLC completed a while back. So here is the case study on the deal: I will be posting more of these over the next few months, (this was the first one I ever had made). Hope you find it helpful, and let me know if you have any questions!

This was completed with 2 joint venture partners, and worked out completely by us (Dennis Smith and Liz Brumer) 

Orlando_Note_Deal_Case_Summary3

We purchased the note from a fund and began the workout right away. What you don't see in the case summary is how challenging it was to find the borrower initially. She was living in Georgia but had "relatives" living in the property. Initially, they refused to give us the number, but then realized who we were and what we were trying to do and happily gave us the number to the home she was living in Georgia.

As you saw in the case study, the borrower had a judgement with a credit card company. This took quiet a while to resolve because it required an document signed by the borrower authorizing us to negotiate with the company. When we requested the letter from the borrower, she got scared and worried we were doing some sort of harm and went dark on us for an entire month. Finally, after numerous letters, calls, and pleas with her grandson - she refused to answer the phone, we helped he realize we were there to help and pay off the judgement, we just needed her consent.

It then took another month to receive the release of judgement from the credit card company and get it publicly filed so we had clear title to receive the DIL. This set us back about two and a half months into the work out. All in all it took about 6 months to successfully get the Deed In Lieu from the borrower and have it publicly recorded. From there we did repairs/minor renovations, and got the property on the market. While we got an offer on day 3 of being listed, it was FHA which required an appraisal that put the property $10,000 under what the buyer offered it for! We we're super bummed about having to lower the price, but still were happy with our ROI.

There were some issues with title when closing, apparently the legal description had been incorrectly recorded for multiple sales and no one had caught it until now. This took another month to rectify which pushed closing back! Talk about frustrating! This deal definitely took longer than expected at 10 months but that's exactly why you always over estimate timeline, costs, and potential issues that way you over deliver in both the time and results to your partners or lenders. All parties involved were very happy with the outcomes and results and are looking forward to doing more deals!

Thanks for sharing this case study of your first note deal, Liz!  It sound like you learned a lot from it.

@Liz Brumer

Great case study, seems like when dealing with Notes, knowledgeable RE Attorney is a must. Would love to see a case study where you lost money, if it ever happens. Hopefully not, but I always like seeing worst case scenarios as well. 

Great thing about case studies is that they provide you with a different challenge every time. 

Keep up the great work.

Damir 

@Damir Kamber thank you for the kind words. I will keep posting case studies along the way. As of yet, we haven't lost any money and hope it stays that way. We play close attention during the due diligence phase to make sure we're buying right. 

@Liz Brumer Great job! I'm glad it worked out for you. Your persistence made the difference but it appears that it could have easily gone a different route if the owner/heir decided once and for all to go dark and not cooperate with you.

Was your plan B to foreclose? How much time do you estimate that it would have added to your timeline?

@Andreas Mirza great question. Yes Plan B was foreclosure, although we wanted to avoid it as much as we possibly could. It would have put us back another 6 to 8 months easily. I do not believe she would have contested it as she did not want the property. 

@Liz Brumer

chalk this one up to some pretty lucky circumstances IE getting the Deed I Lui  good job doing that.. if you had not, foreclosures in FLA take forever and can easily be contested and would have added quite a bit of cost to your all in price.

For these deals you need this kind of spread to make them worth while in my opinion you could buy 2 or 3 regular fix and flips and not go through that drama and make the same money in the same time frame..

but hopefully this gives you the experience were you can start to move up were you can make some big dollars.

although big return APR wise still small dollars for all the time invested and risk is how I would personally look at this... Unless you have 5 to 10 going at anyone time.. but to do it one off Phew that's a lot of work risk and brain drain :) glad it worked out.

@Jay Hinrichs "if you had not, foreclosures in FLA take forever and can easily be contested and would have added quite a bit of cost to your all in price." - the borrower contacted us saying she tried to call every bank/company that bought her mortgage and even left messages saying she was leaving the house and keys and did not want the property. 

Her probate attorney had mentioned that she moved and no longer wanted the property, so we knew a DIL was a viable option and that she would not contest it. I actually have done foreclosures in FL and they honestly are not that bad. Typically 6 months. You are correct, if they contest it can drag it out, but it's not like it was two years ago when it took one year to one and a half years and most of the time their vacant or the borrowers have moved on. It's a pretty quick and seamless process.

I also want to add, that notes actually require very little "work". Most of the time it's sending a few letters, making some phone calls, and sending emails. My attorney's or servicing companies handle the rest. The profits are similar to a fix and flip but I hate rehabs, managing contractors, and all of the things involved with rehabs. To me, rehabs are drama and a LOT more work. I would much rather make the same ROI's, heck even slightly less while sitting on my couch or traveling. All I need is a computer and I can make money with notes! I guess, to each his own.

@Liz Brumer Great job!!!! Clear, direct, succinct. You make it look (sound) so seamless, and I know it was nothing like that. Great info,

Thanks

I am still going to do my rehab just to see what it's all about. Thanks for all this great info @Liz Brumer . I am slowly learning more about notes, but it's one step at a time for me. Trying not to over leverage my time. 

Like I said, keep us posted with other case studies. 

@Jay Hinrichs thank you for your very different and valid perspective. To each is own very much applies in this industry. 

@Liz Brumer

 Not sure your characterization of non performing notes is very accurate but I am glad you did this one fine.  My experience with non performing was not as keen as yours.. I made many performing notes in my day and in 08 they turned non performing that was no fun.

Any time I do DIL, I always purchase in separate entity rather than lender/assignee in case I must foreclose in order to avoid merger of interests.

There are a lot of ways to pickle a probate property but once a pickle, never again a cucumber.

Liz 

Why did u pay off the judgment instead of just foreclosing out your note and not paying them off?

hmmm

I just read your marketing sheet, you would have been better off foreclosing it out and opening the bidding at 49k.

just my 2 cents 

@Dennis Lanni , the judgement was a small amount and paying it off allowed us to gain title faster and cost less than a foreclosure would have. The investor price for buying it and fixing it was $5,000 under where we wanted to be for our ROI. We opted instead to do minor renovations (paint, update bathroom, new roof, clean) which obviously increased costs but gave us an even higher than desired/expected ROI.

@Jay Hinrichs you are right, there are headaches with any thing and definitely things that aren't fun, but it's our niche and serves us well. Thank you for your input. 

Originally posted by @Jay Hinrichs :

@Liz Brumer

 Not sure your characterization of non performing notes is very accurate but I am glad you did this one fine.  My experience with non performing was not as keen as yours.. I made many performing notes in my day and in 08 they turned non performing that was no fun.

Her characterization of NPNs is fine. The beauty of notes is how scaleable they are.

I have a friend (also on BP but don't know if he wants to be named) who manages 120 notes by himself, some from his portfolio and some for clients. I'm not even sure he has an assistant.

Compare that with managing 120 rehabs!

@Patrick Desjardins

  I have over 200 files most all rehabs going at anyone time and I manage them myself.. with my trusted partners on the ground..

Notes are a lot tougher though... lots of work. my point is that buying defaulted notes is not quite as easy as sitting in your couch punching your computer  LOL.. there is a lot of work and effort goes into these

I know other investors who are not doing well at all with NPN... especially one's who bought large pools in multiple states and now have 10 or 30 foreclosures simultainously going the legal fee's are eating them alive.. so its all money out until you get the asset back.. buying the note is just the start.

Originally posted by @Jay Hinrichs :

@Patrick D.

I know other investors who are not doing well at all with NPN... especially one's who bought large pools in multiple states and now have 10 or 30 foreclosures simultainously going the legal fee's are eating them alive.. so its all money out until you get the asset back.. buying the note is just the start.

 Can't argue there, it is very cash intensive and dealing with attorneys is annoying as hell. But I wouldn't consider spending your day sending emails hard work, or a hassle.

I did not follow your math but the idea.  How much did u pay for the judgment?

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