Bay Village, OH · Member since 2016 · 155 posts · 55 votes
Hello, pocket growers:
What are two things you wish you knew when getting into note purchasing that you didn't know when you first dove in? Thanks in advance!
Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
9y
That the 80/20 rule is a real thing. We are surrounded by absolute incompetence. Most of the companies we deal with have high turnover and most of the people we deal with are mediocre at best at their job. Most of them couldn't care less about your success, either.
It sounds harsh and kind of gloomy but it's what I've observed in the past few years.
Never trust that paperwork will be transferred correctly, never trust that your servicer will make the call, never trust that your attorney will have your foreclosure published, never trust that your contractor is going to do their job, never trust that the county is going to account for your payment right. You have to micro-manage every little details in every step of the process and it is extremely frustrating and annoying.
For someone in their 20s 30s 40s with average to high risk tolerance, does note investing make sense? Seems like there is little to no tax benefits, no appreciation, etc. So you are giving up several profit centers of owning real estate.
It's still a great investment vehicle, especially if you offset its weaker aspects with other investments. For example you mention owning real estate / rentals. Nothing stops you from getting the strong returns of notes while also owning rentals for its benefits. Aim for 30% on non-performing or 12% on performing, anything above that is gravy. Then you have your rentals for tax benefits etc.
They complement each other very well. For example a $300 note payment today might be nice but assuming they don't refinance, that same payment in 20 years will feel much smaller. It's the opposite with your rental - the current rent after paying the mortgage is going to be small, but assuming rents increase then in 20 years it'll feel much bigger.
I started over a decade ago, when it was a different time and place in the note industry but two things I wish I knew were:
1.) How to better vet and purchase assets from a note seller (especially from sellers that I didn't know or those who didn't have a reputation in the marketplace). A lot of it can only be learned along the way (much of which we learned on the buying side) and is nuanced based on the seller a bit, but having a screening process in place is key. And the bigger you get as a note buyer, the more important this screening process becomes. Some criteria to look for:
- are you being vetted as a buyer and what's that process? Is the seller selling to just anybody or do you have to complete a buyer application, do you have to provide proof of funds, etc?
- how professional is there outfit? What is there communication like, documentation like, etc?
2.) The thing I wish I knew was how to execute and monitor more efficiently. Sure, we know now how to execute on 1sts and 2nds (although we're still constantly learning), and how to complete surveillance on our servicers, attorneys, and other third parties etc. to @Patrick Desjardins' point. Again, a lot of that is learned from experience but you have to be on top of everyone to the point where it can turn into a full-time job if you're portfolio is big enough. This is more-so the case with NPN's than re-performing notes but no matter what the asset type, you still need to hold others you employ accountable.
Keep in mind, I had partners in my company (one in acquisitions and one in borrower management) starting out and still do. I can't tell you enough how helpful that has been with our business. The note space is vast and the knowledge required can be daunting, so having two partners that specialize in other key areas of the industry has definitely been a big plus and something I probably didn't even realize when starting out.
Bay Village, OH · Member since 2016 · 155 posts · 55 votes
9y
Thanks Dave Van Horn Great insight.
Any recommendations as far as finding a mentor or JV'er? Like with everything, I know the best way to learn is diving in and learning by doing, but if I can shed some mistakes with help, that's preferred.
My partners and I didn't really have a mentor or JV partner starting out, but I'd suggest joining some local note groups to find one. And if there's not a note group local to your area, start one. I've found that's always a great way to meet like minded investors.
You may also have luck finding others here on BP or at any of the multiple national note events (Note Expo, Paper Source, Distressed Debt conference, etc) interested in a JV partnership.
Bay Village, OH · Member since 2016 · 155 posts · 55 votes
9y
Good stuff Dave Van Horn
I understand that the one thing that long-time note investors don't need is access to funds with JVs, but I was thinking I could include the legal work without charge for any notes in Ohio as away to get a seasoned vet onboard for a partnership deal. Anyone think that may work? Was thinking of pitching that to potential targets. Also, me and my partner/brother are looking to expand our practice to a southern state, so we're looking to grow with a partner, too.
Again, thanks everybody. Your contributions are really appreciated.
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
9y
Hi @Paul Vincent due to the fairly strong response to my interview on podcast 211, I've created a JV program for first position NPLs, sort of a "learn as you earn" program for those who want to invest in a note and have play-by-play involvement. Feel free to reach out to me if you would like more info.
I understand that the one thing that long-time note investors don't need is access to funds with JVs,
I doubt that is correct. Recapitalizing is one of the most difficult aspect of note investing as a note investor. Pretty sure that applies to both note funds and individual guys operating out of their home office, perhaps not necessarily as a JV but access to funds for sure.
Note investing is very cash intensive. You have the purchase price, due diligence costs, the legal fees, insurance, licensing, servicing fees, reserves you have to keep, repairs and the list goes on.
So let's say you start with your own money, as most of us have. You start with 100k and you buy a 1st mortgage for 40k. You start foreclosing and in that state it takes a year and costs you a total of 5k in legal fees and various other fees. You've paid a year's worth of servicing at $85 a month. The house goes to auction and no one bids on it so you end up with it. It only takes 5k in various repairs to make it rentable.
Well in that very basic scenario, in one year you've spent 51k out of 100 before earning your first dollar. And now you don't even have enough money to buy a 2nd comparable note (or you stretch it, have no reserve and get in trouble).