Buying Discounted Notes

5 Replies

I'm thinking of a scenario, and looking for opinions, for buying discounted mortgages.

My thought is to get a note under contract and then negotiate a deed in lieu(unless the seller already has one in place) with property owner before closing. I would then either rent back to owner or get rented if vacant. The next step would be to refinance my cash out and move on to another deal.

Is it realistic to find these with enough equity to refi and enough rent to carry a positive cash flow? Is it better to go thru brokers, or just partner with someone who has experience in these. My note buying experience is limited, but my real estate background is over 25 years working and investing in real estate. This is just a new thought as opposed to straight out flipping.

I have $110k in self-directed IRA, but would prefer doing deals at less than $50k. I'm also not area-bound, but the numbers really need to make sense.

Opinions will be greatly appreciated.


Jim, I don't think you can offer a DIL if you don't own the note since you're not in position to foreclose. If it's a nonperforming note in which the borrower has fallen way behind, you may be able to negotiate a good discount from the current note-holder and then move forward. 

It's risky to rent back to someone in default. If they're not making payments now, why would they be consistent with you? I've found that in many cases the rent in the neighborhood is actually more than what someone is paying for a mortgage. Check with once you have a particular property in mind.

With your IRA you may want to consider buying a partial. That way you can buy the next X number of payments without buying the whole note.

Hi Jim,

Well, you can't contact the borrower to negotiate a DIL until you own the note and are the actual lender. After that then yes, you could contact the borrower, do the DIL and put a tenant in the property or liquidate the home for capital gain. 

The issue you may have with using your SDIRA funds are two-fold:

First, you need non-recourse lending to refi the property since you cannot personally guarantee a loan to your SDIRA. Your IRA will also be responsible to pay UDFI tax on the leveraged portion of the net profit from the rental income. 

Secondly, there are only a few banks that will do non-recourse lending to SDIRAs and they typically will not loan at less than a $50K principal, usually at 60% LTV, so the underlying asset will have to be at >$90K in appraised value to qualify. (ask me how I know this ;^)

I've been successful buying notes at less than 50% of BPO value on homes in most states so you can probably find a note where a $50K investment on a >$100K asset is refinanceable with a non recourse lender. The pitfalls you will have are working with the borrower for DIL or foreclosure. Lots of twists and turns in this process, and that is AFTER you have done complete due diligence on the paper, and gotten the loan boarded with a licensed servicer. 

Feel free to connect with me off-board and I'm happy to set up a call to discuss further. I've done JV projects on notes both in and outside of my SDIRA as well as have a growing portfolio of reperforming notes in my SDIRA which are providing tax free monthly income.

Bob Malecki

Les - I was thinking in terms of non-performing.  As for partials, I really have not run numbers nor looked at strategy for  that, though i should. I would probably agree with you about rents being higher, but that is not always the case.

Bob - I am familiar with non-recourse. Though I have not talked to them about this particular scenario, Island View Mortgage states on their website that they do as low as $25k. Good point about UDFI, I forgot about that.  

Also throwing this in the discussion for any visitors who are looking for creative solutions-- Jim, if you get the note reperforming, you could hypothecate it by using it to collateralize a loan or just sell off a partial of the modified loan for a return of capital. This may be less hassle than the DIL/rental route, especially since you would not own the home, just the debt. Less operational overhead if you don't own the home and the hassles of being a landlord. 

Just a thought. 

@Jim Williams  I am coming in 7 months late, so I am curious what you ended up doing with your SDIRA and investing?  I like performing, or at least NOTES that I believe will be performing.  There are many situations where you can earn decent yield in a safe way, in a short period of time, and build your wealth.  

You have $50K to play with, so loaning your own money to flippers and rehabbers is a great way to get loans on cheap properties with lots of equity.  Flippers are also used to paying 10%+ in rate and 2-4 points, and have down payment money.  You can also buy short-term NOTES from other investors who loaned money to flippers, and now need that money or want out.  

I'll give you an example of a recent one. Similar numbers would apply to your $50,000 in less expensive areas of the USA. Flipper needed $200,000 on a $250,000 purchase. The home was in a nice area of Sacramento. The after improved value (ARV) was estimated at $350,000 by the flipper. I thought this was high, but I had a good equity position either way. This type of situation is very common on flips.

They borrowed $200K at 11% and 3 points.  The flip took about 90 days to complete and sell.  They sold for $330,000 to get rid of it quickly, because they also borrowed for the rehab, and it was a very short-term loan.  They made about $10,000 profit total and took much higher risk than me.

I collected $6,000 upfront in points, and $1,833 per month for 3 months = $5,499, totaling $11,499.  I made more than the flipper, and had much lower risk. I did not have to do any of the work, and never had any risk of property ownership, and had low market risk.  I can do that type of loan 3-4 times per year with the same money, yielding me more than 15% per year.  I do many other strategies and also create my own NOTES from homes I buy, but this is one example.

I hope you ended up getting into a good investment with your money!