Orlando, FL · Member since 2011 · 176 posts · 23 votes
Hi,
For a passive performing note investor buying from a professional note broker (found here or elsewhere), what is a reasonable projection to use for notes that turn into nonperformers? I am thinking of projecting a 20% nonperformance ratio, I'm not sure if that is wildly high or low for this industry.
I think what Dion is saying is that you need to apply the law of large numbers, the more valid statistical points of the population the more valid the analysis becomes.
I had a low default ratio, as low as 4% but I also had the ability to modify prior to trouble, seeing it coming is half the battle. For budgeting and reserves, I used 10%, and in servicing I was advancing payments then collecting, something much different than the average note investor.
Loan diversification is important as well, you can follow bond theories that apply to notes.
I'll say too that churning those notes purchased at a discount, refinanced at PAR quickly pushes your yield skyward and the tax issue is more irrelevant IMO, when your yield is 50% annually you can afford the taxes.
As Dion suggested, it's a function of yield over time, don't forget time and the velocity of your money.
The key to obtaining good notes is good underwriting and due diligence. This is also key for a NPN but only if you're going to roll it over or modify it, borrowers must be motivated. I don't suggest fooling with walk offs as you're locked into a circle of brokers and investors, the last guy holding often loses. And watch out for ponzi scheme mortgage brokers.
That percentage is completely dependent on the quality of note you are buying and your underwriting criteria. A loan with 18 months of seasoning and a 700+ credit score is a far different asset than a seller financed land contract with $500 down and 3 months of seasoning... If this is the question you are asking, you might consider getting a better education before investing in notes.
I have't been in the BPs in a bit... but always have it in mind... I have a simple question for those who are far more experience in note brokering... as I setup my buy, flix and hold project for the time being.. I am starting to think that brokering notes are drying out...
May be its my own skill set that's in question... but where are some of the best places (sites) that I can buy note