How to learn about Non-Performing Notes and buy my first one?

18 Replies

Hi all,

I have followed Bigger Pockets for a few years now, starting out with my first SFR rental in 2014 (5 hours drive from my location, which is VERY expensive to invest in) then moving on to some Multifamily properties, then managing them all by myself (again - 5 hours away), then learning to apply the BRRR strategy (which is Genius by itself! - Thanks Brandon..:)) .. So after a few years of being a hands on investor and property manager, I got tired of low income tenant damages (in some of the properties) , and losses, not to talk about the headaches, and have decided to screen through my properties and sell the ones that are taking too much of my time and attention (forgot to mention that I am also a mother to 3 school age kids..), while keeping the best operating ones.

I have been listening to podcasts about Note investing and enjoyed the financing aspect of the deals I have done before, and I feel it should be my next step, as I have learned to deal with the RE investment risks and losses, but not sure where to start.. I have read the "Note investing made easier" book by Martin Saenz, which is Awesome! but for the next step, I'm not looking for expensive seminars.. Any other recommendations on books, or resources that can help me buy my first note?

Looking forward to hearing your feedback,

Thanks!

Scott Carson has tons of free info videos,  WeCloseNotes.tv 

Partnering with an experienced investor is a good way to go, learn the ropes with someone showing you the way. 

@Annabelle Rozen If you can find note deals there are many investors that will work with you to buy the deal.  You can either earn a referral fee to start or partner in the deal.  You could also create your own notes by owner financing some of the properties you want to sell.  Lots of great information here on Bigger Pockets and on various blogs/podcasts.  Feel free to connect if you have any questions.

Thanks Tim, I'll look into it .

Tracy - Thanks for your response,

Hello Annabelle 

The learning curve on notes can seem daunting at first so you should try to narrow down your focus to begin. A good place to get a good overview would be the Distressed Mortgage Expo is coming up in just a few weeks at the Hilton Newark Airport. ( closer to LI than the properties you've invested in ) There will be a lot of great, knowledgable speaker there. The price is reasonable for 2 full days of education and networking without the seminar upselling. 

From what I've seen so far they will be covering 1st, 2nd, NPN, Performers, re-performers, CFDs, DD, Joint Ventures, entity structure, SD IRA investing etc.

Anthony Uva, Real Estate Agent in NJ (#1537742)

Good suggestion on DME above. Not sure which podcasts you're listening to buy Note Inc, NoteMBA and Note Closers Show are the ones I frequent. There are also a few solid Facebook groups and meetup groups as well as a number of good investors you could JV with (and no I don't mean me) to get your feet wet. PM me if you're looking for more details and maybe I could point you in the right direction depending on what you want.

Great to know Anthony Uva, the NJ Expo looks very interesting, Thanks!

Hey @Annabelle Rozen , have you considered turning your current free-and-clear properties into notes? Maybe none of them are free and clear but, to talk about the concept - I'm a non-performing note investor but I'm also creating notes by buying properties and selling them on land contracts to create my own performing notes. Which can then be sold after seasoning for a windfall. Typical example - buy a house for $20K including closing costs, put $5K into fixing it up a bit (not full renovation, obviously, but make it safe and functional), sell on land contract for around $50K with a $3000 down payment. PI payment varies by term, but we generally structure to get it in the $400-500 range. You can make the term such that PITI is a bit less than your buyer is currently spending on rent. If the PI payment is $450/month - very affordable to most buyers - and, say, the term is 20 years, you can sell that note after seasoning for around $40K if you're giving a 12% return or $34K if you're giving a 15% return. You will get....
  $1000   Down payment (it's $3000 but deduct $1500 realtor commission and $500 MLO)
  $5400   12 payments of $450
$15000   Profit on the sale of the $40,000 - 25,000 in purchase and expenses

$21,400  Total profit on the deal

$21,400/$25,000 gives you 86% cash-on-cash return on your investment of $25,000

The other thing to say about this is - although the sales price to the buyer is high - my buyers are so happy to be given the chance to own homes at any price. Many are in their 40s and never thought anyone would give them the opportunity. I have been thanked 100 times by some of them. It's very gratifying.

@Gail Greenberg   your talking about sub prime owner occ  have we not already gone down that road and it just about took America down.. ???  I have seen this over the years in many markets and the default rate for the note buyer is sky high.. not sustainable in my mind.. at least from the investor stand point..   I  like it if the buyer of the home though is a very solid investor and they are going to use the homes as rentals.. in your description you need to adhere to dodd frank which is tough in these sub prime deals.. and you only have one source of repayment... a sub prime borrower..  which to the next note buyer who wants to buy your now defaulted note will offer a massive discount..

@Jay Hinrichs we carefully screen our home-buyers through a full and rigorous qualifying process with a licensed Mortgage Loan Originator and we do not sell to anyone who's income or anything else is marginal in any respect. We set home buyers up for success, not failure. And all this borrower qualification paperwork is available for review by any potential note-buyer. I understand that you have a different model, but I don't appreciate you implying without any basis that any notes I create using my process are somehow doomed to fail.  There are many people with lower incomes than yours who are excellent, stable borrowers who deserve a chance to own too. Considering I see defaulted notes all the time where the borrowers have great income but run their lives poorly, I don't see why a well-screened borrower with a lower income is a bad bet.

@Gail Greenberg   we can agree to disagree..

the reality is low down payment marginal credit ( because if they had great credit they would go to the bank and get a conventional or FHA loan... as those are only 3.5% down.. is on its face sub prime.. that's the definition of it when I take my NMLS CRE every year.

I base my comments on 3 plus decades of seeing this paper.. can they work sure they can.. do they default absolutely..

I am not pitching my model you are pitching yours.. Notes are 1/10th of what I do.. so I could careless about pitching my model as you call it..  LOL...

Reality is this is a beginner website for the majority and there are two sides to all of these deals.

that's why we are here to talk about all aspects.. don't take it personally.. its for discussion purposes.

When you think about it, all the defaulted bank notes originated since "the crash" are the excellent bank-screened borrowers you speak of. And there's plenty of them. If anyone could really tell who is and is not going to default in time, they'd be rich beyond imagining. It really doesn't matter ultimately because if one of my borrowers defaults, you just take back the house and do it again which is cheap and simple in most of the states I buy.

@Gail Greenberg   actually the banks know exactly who is going to default and where..

one of my business partners works with a firm that does analytics for big servicers and banks to figure out  this exact thing so they can set aside reserves for the inevitable.

How we can sit here and think that lending practices prior to 08 are the same as todays though not sure how you make that jump... its well known that there were liar loans all over the place sub prime led by Ocwen had MASSIVE loss's.  The loan originations of the last 7 or 8 years are super solid.. and as the years go on you will see no where near the amount of defaulted paper ..

There will always be some no doubt.. Americans simply don't manage their personal credit as well as many other countries. and we are one of the few countries that allow such leverage in buying real estate.

Owner carry mortgages have been and will always be there.. no question about that.. but there are realities ..we have to admit to .. and yes you can just take it back.. but in some states if you recorded the mortgage especially upper east coast just taking it back is a looooong expensive process.

its not like in GA were you can file a foreclosure and be done in 90 days start to finish or MS you can do it in 60 days.. in Oregon 5 months in CA 6 to 7 months..

So we do need to caution folks on this scenario and they need to look at the default mechanisms in their particular state we just cant make a blanket statement we will just take it back.

the home owner can and will go at long lengths to stay in the home.. and I some states this can be YEARS and your equity goes bye bye..

So  lets look at all aspects.  

1. Risk-assessment - deciding what percentage of buyers in what regions are going to default - is not what I meant and I think you know that.

What I WAS saying is that banks don't know which specific borrowers who look good at application time are going to default.

2. I already said we sell on land contracts in states where it's cheap and fast to get a forfeiture.  So no foreclosures, no heavy cost and no looong timelines.

3. If there is going to be a dramatic decrease in defaulted paper in the future, I'd say my model is one people will need to learn and adopt if they want to be note investors in the future.

4. I think we should stop now, as I don't see that there's any new value being created in this discussion for the new people.  And we hijacked Annabelle's thread. Sorry @Annabelle Rozen

I'm explaining my model for the benefit of anyone who would like to use it.  In my view, BP delivers the most value when it's specific, actionable information and sharing actual experiences, not broad generalizations. And, BP does a very good job of policing its own forums for violations of their rules - you don't need to do it.  Now please stop commenting and I will do the same - for real this time.

@Gail Greenberg and @Jay Hinrichs ,

Ladies,

This is exactly the basic discussion I have been having with myself about this issue, just in more simple terms..

So - Thank you(!!) so much for all the information; it's great to hear both sides of the coin from the 'real world' transactions that you have been involved in. These open discussions are truly the best thing about Bigger Pockets!

Since I know the buy and fix process well - I have just been thinking about the difference between selling the note and simply selling (flipping) the house.. but if I understand you correctly - you are actually fixing up the house - selling it with seller financing, and then - in case the note does not perform - then you sell it? I mean - if you sell the note as a performing note - then what's the point of doing seller financing to begin with? why not just sell the house for profit and get it done with? Just making sure I understand you correctly - @Gail Greenberg.. also - how exactly does a Land Contract work?

TIA!

@Annabelle Rozen   those are great questions..  and your exactly right in a strong market there is NO reason to do seller financing.. this is a very old and tired model.. that has been used in the low value tough to sell sub prime markets in the US.. think Detroit.. Parts of Texas were they prey on Hispanics with no credit.. its glorified renting and every few years folks come up with it like its a new model. LOL.

But you hit the nail on the head in areas of economic stability with real homeowners with real credit and a job and a few dollars in the bank there is no reason.. they get a FHA loan with 3.5% down and cash you out. simple as that.

that's why my statement of sub prime all over again its exactly what that model is.. its not picking on anyone person its the model.. there was a guy down in San Antionio that came on BP and spouting about how he bought these homes and never touched them then sold them on contract to Hispanics for about double what they were worth.. then sold the paper to unsuspecting CA investor touting it as performing paper.. lots of money lost in that deal.. that thread went on for 400 posts about how bad that model truly is.

Granted in some areas that can be the only or best way to maximize gross sales amount.. But GENERALLY speaking those that do this are doing it in areas as I described.. I mean take our market here in portlandia just try to buy a home on contract.. just about impossible,  why Sellers don't need to, the  market is to strong to sell on contract..

this was also more viable coming out of the deep dark recession.. Vegas and PHX you could get higher end homes to go on contract but not today.. just check MLS listings no need to.

At the end of the day low down payment to people that don't qualify for FHA is on its face according to Dodd Frank SUB PRIME lending and Sub Prime lending was one of the greatest reasons we went into a tail spin.. that's my point.

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