Non-Performing Mortgage Notes

28 Replies

Hi Martin -

I was about to post a reply sharing that I’m reading a very good book on note investing where the author targets 30% from non-performing notes. Then I realized that author is you. Funny... I read that chapter just last night.

I wondered if that’s an annual return target - understanding it could take a year to begin to see any return from a non-performing note, or overall ROI.

Thanks so much Martin. I’m learning a lot from the book.

- Marco

Marco, 

You are very welcome.  I've been a single note investor since 2013 and usually work out of Starbucks with my headphones on.  I received a spiritual calling this January to share what I do with those interested.  I never anticipated the amount of attention.  I feel blessed as a result and am enjoying teaching people the industry as much as I am modifying notes.  

With that said, my mission is to help homeowners stay in their homes with payments they can afford while making a nice profit for myself.  It's that simple.  I normally don't buy a note unless it can show me a 1st year return (that is 1st year of cash flowing which is normally year 2 as you pointed out) of 30% and 20% thereafter.  Normally, most of my notes are modified for 30 year term periods.  

I don't buy notes to foreclose and flip the property.  I always recommend ironing out your mission before you start buying and building your parameters around your mission.  

Martin, I love the mission and the book - which is very real world from a person who actually does the work. I appreciate that. I'm sure those who you help to stay in their homes appreciate it too. Capitalism and making money have a mixed reputation these days. I argue back that because there are bad Capitalists doesn't itself make capitalism bad. 

Almost done with the book. Nice to make contact with you and I will probably be back in touch soon.

Best,

Marco

Hi Martin,
I’ve read a few of your posts and really appreciate your positive attitude and mission to help people stay in their homes. My husband and I are new to REI and also draw to notes because it’s a way to help others while, as you said, making a nice profit. This is something we can really get excited about.

I’ll check out your training course and buy your book. Look forward to learning more and staying in touch!
Anya

415-717-5776

@Martin Saenz I try and target a 30% IRR for non performers. In today’s environment that has become a lot tougher to do as I see people bidding on assets that the winning bid will provide single digit returns. Not sure if it’s inexperience on buyer or someone with real cheap $ and no JV partners

Anya, thank you for the nice words.  Whatever direction you take with notes, I wish you the very best and hope we connect at some point.  I also hope you enjoy the book.  My positive outlook is due to the note space providing such an awesome lifestyle for my family.  We have true freedom and my heart hopes that for others stuck in a day to day grind.  Thank you again

Hey Chris, I've been buying since 2013 and each year prices have been going up each year.  I agree with that sentiment.  With that said, I just ran across a 5 note opportunity whereby the seller bought 2nd's and never got around to working them.  He just wanted to dump the notes....this is within the past 21 days.  Also, bought some performers this year paying me 15% to 20% returns over 25+ years.  The deals are out there still, but you need to have a strong seller network in place.

@Martin Saenz
I agree deals are still out there. I got connected with a hedge fund who was closing out the fund and was heavily discounting the notes which worked out well for me. I also have been buying some performing notes as well to balance the portfolio. We should get together sometime for coffee since we are local to each other

@Chris Seveney   in the last 5  years we moved over 1200 notes to investors all performers.. rates are no where near 30% but the defaults are non existent  as well.. less than 10 gone upside down.  I find the gamblers take on the high risk.. the same folks that want quality rentals in a passive mode buy the performers..   its a nice niche , most of our folks use their solo K's and Ira's for the performers.

@Jay Hinrichs those are what I target for non performers. Correct will not see them on performers -I try and get 12% on my performers. 

@Jay Hinrichs makes sense - we should talk offline as I will take a Lower rate  with less risk.

Most of the notes we see as “performing” need further review as some sellers think making 9/12 payments a year is considered performing.  They also were typically non performing at some point in time and do have higher chance of becoming a non performer again. 

Originally posted by @Martin Saenz :

For those currently investing in non-performing mortgage notes, what is your target ROI 1st year and beyond?

Fellow Northern Virginian, and George Mason alum myself. It seems that your niche (based on your website) and the whole premise of the book seems to be 2nd mortgages (NPN) on distressed properties. Is that correct?

Do you also focus on 1st mortgages.  I would think that would be more lucrative from POV of foreclosing on the property, although the interest rate would be somewhat low, but so would be the risk..No? 

Just trying to understand your perspective on that. 

@Chinmay J.
There is a big difference between 1sts and 2nd’s. With 1sts (what I invest in) your main focus is on property value. When you mention 1sts are less risk there is different risks in both 1sts and 2nd’s.

What people who want to invest in notes has to realize is these are not your low crime highly rated school areas with values of $250k+. He majority of notes are on properties under $75k.
With that being said, your also picking the notes up for 50 cents on the dollar +/- and have multiple exit strategies

Originally posted by @Chris Seveney :

Chinmay J.
There is a big difference between 1sts and 2nd’s. With 1sts (what I invest in) your main focus is on property value. When you mention 1sts are less risk there is different risks in both 1sts and 2nd’s.

What people who want to invest in notes has to realize is these are not your low crime highly rated school areas with values of $250k+. He majority of notes are on properties under $75k.
With that being said, your also picking the notes up for 50 cents on the dollar +/- and have multiple exit strategies

Correct me if I am wrong, but at least with 1st position you have the underlying property as a security so you can actually foreclose on the property, and eventually rent it out or fix and flip it. My understanding is that you can't foreclose from 2nd position.  

I am ok with the property not being in Class A area. I do own real estate in less than favorable neighborhoods, so I have the understanding of how to work that angle. 

As a newbie in this area, I would like to learn and develop an understanding of notes. What would be a good place to start?

@Chinmay J.
You are correct about firsts. With seconds you can foreclose but you have to payoff the first.

If your looking for education in notes I recommend @Scott Carson who has a virtual workshop course that is 3 days long and worth the cost as well as tons of free content and podcasts online.

Feel free to shoot me a message online and I can provide you with more info

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Originally posted by @Chris Seveney :

Chinmay J.
You are correct about firsts. With seconds you can foreclose but you have to payoff the first.

 Who told you this? You don't have to pay off the first any more or less than someone who buys rentals subject-to.

You didn't take the loan. The loan is attached to the house. You might want to pay it if you get foreclosed on, but you're never responsible for it.

@Patrick Desjardins

I dont invest in 2nds but If you foreclose from the 2nd position and you want to take the property, you would need to payoff the first loan - correct.  Why else would someone foreclose from the 2nd position?

Chris, you don't need to pay off the first when you foreclose from second position. You can just continue to make the payments on the 1st until you can sell the property or refinance it out, or you can let the first start foreclosing and liquidate the property before they go to auction. 

Thefirst is attached to the property and can theoretically remain so through the end of its term as long as it's being paid by someone. 

Originally posted by @Chris Seveney :

@Patrick Desjardins

I dont invest in 2nds but If you foreclose from the 2nd position and you want to take the property, you would need to payoff the first loan - correct.  Why else would someone foreclose from the 2nd position?

Bob explained it pretty well. If there is little equity on the note and you bought it cheap, you could just rent it and pocket the money every month. It wouldn't make a ton of sense to pay off a 100k first on a 105k house, otherwise we would just buy a similar house on MLS.

Obviously these are backup scenarios and not your preferred exit strategy, but it's good to know so you can turn bad notes into break evens or slight winners.

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