All we ever hear is the good news. Brokers and gurus promoting 25%+ returns. Promises of quick turn arounds. No sweat, no strain.

Many times that’s true. I’ve built a portfolio of performing loans that more than pays my bills. But sometimes things don’t work out. And nobody ever talks about it. Why? Obviously sales folks don’t want to hurt their sales. Gurus want to get you into their high priced mastermind training programs. Plus, we all have a natural aversion to talking about losses.

Sharing the truth is about building trust and community. I’m telling you what’s happening with me to help and build a real community. 

Long story short, I bought a $21k note, paid tons of back taxes and legal fees. House was lovely on the outside and a disaster in. Sold it to a flipper because I have no boots on the ground today in Cleveland. If this had been in Florida or Indiana where I have trusted partners, maybe a different story. 

Same thing happened to me. Some have heard my story. My Pain in Painesville. I'm currently trying to donate the property to the land bank so I can get the county appraisal as a write-off.

@Adam Adams We were both in Marc Gold's conference. I never stumbled across you to say hi. Next time!

Well that's what you get for investing in Ohio  ;^)

Actually we bought 2 "promising" notes in Ohio and now we are in foreclosure on both of them. Definitely a challenging state, especially northern OH. 

Bob

I have purchased a lot of good assets in OH, however, I am in the process of taking it on the chin on one of them. I don't think one can play this game without an occasional loss as we are dealing with some unknowns, primarily collateral condition, and that is the reason we can buy them at a significant discount to value/UPB. As long as the wins greatly outnumber the losses, it's just a cost of doing business.

yes no one talks about. I am glad someone is addressing elephant in the area of buying notes. 

I will only buy notes in the area near me so I can inspect the property and evaluate market condition.  I have to think that one day I will own it. 

I know a lot of people don't do this due diligence and so long it looks good on paper they go for it. There is a lot of risk doing this and education cost money and it is sad when that education cost equals their investment.

@Roman M.   It's great that you are able to find and purchase notes in your area.  Florida has been a great market over the past few years with significant note inventory.  @Bob Malecki and I are out of luck for the most part finding notes in our area.  The strategy in that case is to develop strong teams in a handful of markets and purchase notes in those markets.  That's not as good as being there yourself, but it's workable.

@Mike Hartzog   this in my mind is a very advanced strategy... and one needs to be able to scale to be able to absorb the inevitable bad  deal.. I just cringe when I see these folks with limit experience and capital go out and buy one or two notes.. not sure the risk/reward component is there.. any one of us that has been doing this for any amount of time will get into a deal that does not work and loses money myself included.. no one is immune.

@Jay Hinrichs I fully agree.  Lots of folks overpaying for notes right now, not appreciating the collateral value risk.  It's a sellers market for notes, and we are at or near the top of the real estate market as well.  In addition, I have never been favorably surprised by the interior condition of a property I have taken back.  I'm sure it happens, but so far it has not happened for me.

@Mike Hartzog   as you know I bought many many court house steps properties in Oregon and Washington.. and I would say 9 out of 10 your are in poor shape when you get into them.  but I have had a few that were very tidy... but that is not the norm

I had one in Vancouver were they left a nice note with the garage door openers and keys all lined up.. and the home was broom clean.. but I have also had other were the house was stripped to the studs.. LOL...

And I fund a ton of mid west lower value assets in my day job... and I can only imagine what a non performing note  asset looks like by the time you get it back.. since most of the stuff I fund is that... ALL of them need major rehab.. so when buying those notes you must price them accordingly.. not that you could be pleasantly surprised.. that would be rare.

My favorite type of note is on brick ranches from the 60s. For me so far it's not so much people intentionally destroying them, it's mostly tons of deferred maintenance. 

I pretty much never look at those houses thinking the roof, HVAC, water heater are going to be functional/have more than a few years left. I assume it's going to need paint (duh), probably some flooring work, there's going to be some rotten siding or water leak in the house somewhere. The bathroom is going to have old 60s pink or blue tiles, the kitchen laminate countertops are going to be beat up..

Some people say to account 5k for repairs but that's just putting lipstick on it. It feels more like 15-20k to make them decently rentable or sellable. Which is why there is so little margin for error in lower value notes.

I'd love to get Steve's numbers on this one. You paid 21k for the note. Do you mind sharing how much those back taxes were, and what the house's BPO was? How much would you have needed to put into it to make it sellable close to market value?

@Jay Hinrichs   Yeah I have seen some crazy stuff too.  People living in properties when the utilities are turned off with drug usage evident.  Interiors in unbelievable condition.  Any time the borrowers reject all attempts to contact and make no attempt to stall or prevent a foreclosure action is a clear sign to me that the property has real issues.

I am a new real estate investor trying to find my way in note investment.Help me to understand what you could done differently in this deal ? 

1. Every note we buy no one knows what is inside will look. Specially in case of forclosure?

2. You knew you don't know anyone in Cleveland area who can fix that? 

3. As per my understanding selling to the flipper is also an exit strategy?I understand might not be the best one

4. Didn't you know at the time of buying a note how much back taxes you paid and how much you need to pay in process to avoid tax sale ?

i have a good knowledge of cleveland area  please let me know if I could be some help next time.





riginally posted by @Steve Hodgdon :

All we ever hear is the good news. Brokers and gurus promoting 25%+ returns. Promises of quick turn arounds. No sweat, no strain.

Many times that’s true. I’ve built a portfolio of performing loans that more than pays my bills. But sometimes things don’t work out. And nobody ever talks about it. Why? Obviously sales folks don’t want to hurt their sales. Gurus want to get you into their high priced mastermind training programs. Plus, we all have a natural aversion to talking about losses.

Sharing the truth is about building trust and community. I’m telling you what’s happening with me to help and build a real community. There's an event on BP that will take you to a you tube post “The One about Avondale”. Of you can find me there under stevehodgdon

Long story short, I bought a $21k note, paid tons of back taxes and legal fees. House was lovely on the outside and a disaster in. Sold it to a flipper because I have no boots on the ground today in Cleveland. If this had been in Florida or Indiana where I have trusted partners, maybe a different story. 

One of the things that we have implemented in our Due Diligence in Ohio and Michigan is to call the utility departments (gas, water, power, etc) to find out if they are paid up to date or even on, have a balance,, are on payment plan or are about to be turned off.  We've gotten a ton of info that has helped avoid ugly assets.  

We have done well in Ohio starting with NP notes. Now they are loaded rentals with great 3rd party mgmt; they are for sale now because we are not in the landlord business; we like holding the note. 

I would agree the key anywhere in the US is have a reliable 'boots on the ground contact'.  The key is make your money on the buy side. If you buy the NP note at a good enough discount the inside can be a wreck. Like all real estate you will lose some money from time to time. 

We bought an NPN earlier this year that went REO during interim servicing. I knew it was going to be bad but the interior was far worse than expected. Chewed up doors, dog feces and urine covering the 2nd floor, and homemade dog kennels in one of the rooms! We thought the previous occupants were raising fighting dogs but a neighbor later told us that a "crazy" lady lived there and took in all the neighborhood strays. We got the NPN for a good price, considering all of the risk, and did very well when we sold it in August.

(Sorry about the sideways pics, I couldn't figure out how to rotate them :))

These stories are very common.  We spoke about these types of issues in our webinar and how we do our best to avoid those issues.  

I've only done one NPN. I did it here in FL where I'm based with my team. Paid $16k for the note, about $2k in property preservation to fix some exterior code violations, clean up the yard and keep it mowed and about $2.5k in legal fees. Had 2 years of taxes owed but wasn't enough to be an issue so no reason to pay them off. Turned down a short sale offer that would have been $20k after commissions, liens and taxes. Let it go third party at the county foreclosure auction for $54k. Inside was a mess. Needed a roof, had termites, looked like there was a previous small kitchen fire and the kitchen had been removed. Someone else lost money on it, not me.

I would buy another if a deal came around but only somewhere that I'm familiar with where I can lay my eyes on it.    Takes any of the value I bring to the project out if I have no local knowledge.  

@Andreas Mirza  I bought a foreclosure at auction in Miami a few years ago with the exact same issue.  A dog breeder lived there and raising them all in the house.  We thought it would be a decent property having only being 10 years old, but man were we surprised!  What a disaster, took weeks to get rid of the smell.   Worst part was the former owner lived there along with his kids.  Terrible.  

@Andreas Mirza Were you at FIBI last night?

@Steve Hodgdon No, didn't make it. I took my wife out to dinner for her birthday :)

@Chad U. The saddest part on our REO/rehab was seeing the chewed through doors and scratch marks inside of the kennels. These dogs were locked up and trying desperately to get out.

Originally posted by @Andreas Mirza:

We bought an NPN earlier this year that went REO during interim servicing. I knew it was going to be bad but the interior was far worse than expected. Chewed up doors, dog feces and urine covering the 2nd floor, and homemade dog kennels in one of the rooms! We thought the previous occupants were raising fighting dogs but a neighbor later told us that a "crazy" lady lived there and took in all the neighborhood strays. We got the NPN for a good price, considering all of the risk, and did very well when we sold it in August.

(Sorry about the sideways pics, I couldn't figure out how to rotate them :))

 oh God.....

Is anyone besides @Bob Malecki buying notes in the Milwaukee WI market?  If so, care to share your experiences there?

I have a client who only buys none performing notes for this reason all the risk is factored in at the time of purchase.