Purchasing Out-of-State Notes
Attorney · United Kingdom · Member since 2017 · 41 posts · 16 votes
Purchasing Out-of-State Notes
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Real Estate Coach · DE · Member since 2013 · 64 posts · 85 votes
8y@Zach Bollman without taking over this post and rambling on a ton of Info your seeing already, the one thing I preach at every event I speak at or anyone I try to educate is to understand your true goal for note investing. Why are you investing in notes? Why I ask and with that said it will back out on the note you acquire and your exit strategy.
For example: I’ve been at real estate investing for 27 years and lending/notes for about 18 years. About 7 years ago I changed my vision. My vision now is to truly live passively off my model which I do I believe better than most. It’s not toninpres but to impress upon that I stay focused on my vision of true passive wealth.
I have 8-9 exit strategies. Most people have 1-2 and neither will get them to their goals if they say they want what we do. The one box I MUST check every time or I don’t buy the note is that I must be willing to hold that house as a rental in my portfolio. Do you really want properties or CFDs worth 20-30k in class D neighborhoods in your so called “Passive” portfolio???? Is it really going to be passive???
When I ask this question to some potential students or attendees at events I'm a speaker at most are terrified and say no but then buy notes valued at 20-30k ARV should they need to take them back as an REO. I know many say I'm not in this to be a landlord. That's great but what happens when you have no choice. Being a landlord is great if done on the right asset in the right emerging market. Ask anyone who has purchased a turn key rental of mine. Yes I even said a turn key rental I sold for cash or on a "Seller Financed" note. So now you created your own note that's clean and you Keep For true passive wealth or feel free to sell as a performer or partial. Think long term first and back out from there and your business will flourish rather than buying a low end note that has vvery few long term strategies. With that I wish you all the best
49 Replies
- Attorney · United Kingdom · Member since 2017 · 41 posts · 16 votes8y
@Chad U. How would you suggest finding partners for a JV? Local meet ups and the like?
- Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes8y
@Zach Bollman there are a lot of heavy hitters on this thread responding to you, congrats! Just a couple of things (forgive me if there's overlap I skimmed through some of the posts):
1) I don't generally, believe in the theory of buying performing as a stepstool to non-performing. A lot of very intelligent investors will tell you to do so and I wholeheartedly would not blame you for taking their word over mine, however, the way I see it is let's say you buy a blue chip stock and it goes along its projected path...I don't see that as a good preparation to suddenly buying stock in riskier companies. Maybe you get experience in how to purchase a stock and utilize the software required to do so, but I don't think it will necessarily prepare you for the issues you'll deal with in analyzing a smaller, riskier company. I think performing and non-performing are just two different animals and if you want to buy non-performing I think that's where you should start. That said, I think you should start with training wheels, not with a performing note, but with a mentor, experienced JV partner, or some useful training (highlight on the useful).
2) @Dan Zitofsky mentioned this, but I think minimally if you opt to buy non-performing you should at least consider what you would do if it goes non-performing. That could be as simple as saying "I'm not going to deal with it and sell at a discount" (though if that's your stance make sure you know what note buyers look for to ensure that you have a sellable note) or a strategy whereby you are fine with holding it as a rental or flipping it if you have to foreclose.
3) It also sounds like you may potentially have an interest in lending. Lending is also part of the note arena, but allows you to be on the origination side. If the process of seeking out and purchasing pre-existing notes is a little more than you wish to deal with, lending is another route to take that may be of interest to you.
- Attorney · United Kingdom · Member since 2017 · 41 posts · 16 votes8y
@Odie Ayaga Thank you for the comment. I'm certainly interested in lending for the same reason I'm interested in notes -- I used to work for a lender and now represent borrowers and lenders in commercial transactions.
By lending, I assume you're referring to hard money lending? I haven't fully browsed the forums to see if there is a hard money lending subforum, but please let me know if there is a BP group that focuses on hard money lending or where to find opportunities more generally. Thanks again!
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Zach Bollman:
@Odie Ayaga Thank you for the comment. I'm certainly interested in lending for the same reason I'm interested in notes -- I used to work for a lender and now represent borrowers and lenders in commercial transactions.
By lending, I assume you're referring to hard money lending? I haven't fully browsed the forums to see if there is a hard money lending subforum, but please let me know if there is a BP group that focuses on hard money lending or where to find opportunities more generally. Thanks again!
you will have local ST Louis hard money lenders I bet many will accept private funds.. and with the low value collateral there you can probably own a whole loan there.. Every city of that size has the local guys..
When I owned Langer Mortgage in Oakland back in the late 80s we had over 250 local investors .. that represented just under 50 million out.. Now I cant take credit for it.. Mr. Langer started the company in early 50s and these folks had been with him for decades. I did my apprenticing with Mr. Langer and he had no heirs and no succession so I ended up with the company :) but I learned from one of the best lenders on the planet.. tough but fair.. And his clients LOVED HIM>
- Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes8y
@Zach Bollman it doesn't have to necessarily be hard money lending. It can be private money lending as well. As an attorney you may have or have access to people who you can trust that would be interested in loans from you. In any event, as I'm sure you know as an attorney, be sure to know what you're getting into before you lend anyone any money of yours.
- Attorney · United Kingdom · Member since 2017 · 41 posts · 16 votes8y
@Jay Hinrichs and @Odie Ayaga: Thank you again for the great information.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Zach Bollman:
@Jay Hinrichs and @Odie Ayaga: Thank you again for the great information.
I know many lawyers that are lenders !!!
- Investor · Wellington, CO · Member since 2017 · 79 posts · 30 votes8y
@Jay Hinrichs, you mentioned "dual form of repayment and many exits.. ". What did you mean by dual form of repayment?
- Attorney · United Kingdom · Member since 2017 · 41 posts · 16 votes8y
@Marshall Easlick I'll take a crack, but @Jay Hinrichs will certainly be able to better explain what he meant. My understanding is that dual form of payment relates to holding notes for non-owner-occupied properties ("commercial notes") -- you are the creditor to a real estate investor who is the debtor. As a result, you have payment from the debtor and potentially payment from the tenant if you need to foreclose on the note and repossess the property. An added benefit of commercial notes over owner-occupied notes is that you will continue to have positive cash flow as a note holder despite a vacancy because the debtor is the landlord who will ideally continue to make payments required by the note.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Zach Bollman:
@Marshall Easlick I'll take a crack, but @Jay Hinrichs will certainly be able to better explain what he meant. My understanding is that dual form of payment relates to holding notes for non-owner-occupied properties ("commercial notes") -- you are the creditor to a real estate investor who is the debtor. As a result, you have payment from the debtor and potentially payment from the tenant if you need to foreclose on the note and repossess the property. An added benefit of commercial notes over owner-occupied notes is that you will continue to have positive cash flow as a note holder despite a vacancy because the debtor is the landlord who will ideally continue to make payments required by the note.
yes with a well positioned note on a rental property our experience is that when we do ours our DCR is 2X or better .. so the owner of the property is making nice positive cash flow above our note payment.. so even if they have a vacancy and since the notes are placed at an LTV below market value compared to buying the asset at market value.. the owner is not going to pay on their rental.. just like if you bought a rental and had it vacant one month your not going to stop paying right ???
HOwver when your buying NPN owner occ notes.. which is what most of the notes that are available non payment Is pretty standard at some point.. and re performing many times stop paying 1 to 3 years down the track as well.. these owner occs have far more tools to squat in the house than a commercial note.. they are far more apt to BK and other things..
Again you cant just do any ole note its got to be well positioned and selected.. but once they are done they are pretty bullet proof.
at least in our experience.. and I have a ton of it LOL.
- Investor · Wellington, CO · Member since 2017 · 79 posts · 30 votes8y
Ok, that's what I understood from the conversation up until that point, I guess I was thinking that one note would generate two different income streams somehow. I knew that sounded too good to be true but I was hopeful. Thanks for the clarification, guys.
So, on that note (pun intended), how much more capital intensive are commercial notes versus residential notes?
- Attorney · United Kingdom · Member since 2017 · 41 posts · 16 votes8y
@Marshall Easlick Take my thoughts with skepticism as I haven’t jumped into the note game. However, my understanding is that the notes require the same capital — you’re just limiting the notes to investor-owned rather than owner-occupied. So, if you’re buying a note for $80,000 secured by a property valued at $120,000, the only difference is whether it’s investor-owned or owner-occupied. This is my understanding. However, certain characteristics of investment properties and the original loans may cause a divergence in cost between a commercial notes and regular owner-occupied notes.
- Investor · Wellington, CO · Member since 2017 · 79 posts · 30 votes8y
I was traveling all day, so I have been out of touch. I have been looking at performing, second position notes for around $20,000. So when I asked how much more capital intensive commercial notes are, I guess I was asking a question from my current perspective, which is obviously different from yours. In my mind, commercial real estate is more expensive than residential, so that's more what I was asking. However, I think you answered it with the $80K comment.
- Attorney · United Kingdom · Member since 2017 · 41 posts · 16 votes8y
@Marshall Easlick I believe the “commercial” part can be a bit misleading as my reference is not to notes backed by commercial properties, but notes backed by non-owner-occupied propetties (investment properties). However, if you’re looking at notes backed by commercial properties, then I imagine you would need quite a bit more capital as those properties are going to be significantly more expensive than a single-family home or duplex.
- Specialist · Frederick, MD · Member since 2017 · 474 posts · 454 votes8y
@Jay Hinrichs - The thesis behind 2x forms of payment makes sense. In fact I own one loan which I purchased from a turnkey operator who provides seller financing then sells his loans to recapitalize. I couldn't tell you if the house is rented or not on a particular month, but I can tell you that my payment arrives via ACH on the first. Love that! To dive deeper into what's already been explained - I have an assignment of rents from the borrower which memorializes my right to incoming rent payments should the borrower default. Of course the borrower may very well have defaulted because there are no rent payments coming in.
On the flip side - I also now invest in non-performing owner occupied loans, with a view that a family who has lived in their home for years and other indicators which suggest a bond to that particular house works in my favor too.
I'll also add that I invest retirement money differently from non-retirement money. Different goals, different timeline, different restrictions - and I suppose different appetite for risk.
I love these forms and this conversation in particular because I love the exchange of ideas and the many topics that make me go "hmmm."
Thanks and happy investing to all.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Marco Bario:
@Jay Hinrichs - The thesis behind 2x forms of payment makes sense. In fact I own one loan which I purchased from a turnkey operator who provides seller financing then sells his loans to recapitalize. I couldn't tell you if the house is rented or not on a particular month, but I can tell you that my payment arrives via ACH on the first. Love that! To dive deeper into what's already been explained - I have an assignment of rents from the borrower which memorializes my right to incoming rent payments should the borrower default. Of course the borrower may very well have defaulted because there are no rent payments coming in.
On the flip side - I also now invest in non-performing owner occupied loans, with a view that a family who has lived in their home for years and other indicators which suggest a bond to that particular house works in my favor too.
I'll also add that I invest retirement money differently from non-retirement money. Different goals, different timeline, different restrictions - and I suppose different appetite for risk.
I love these forms and this conversation in particular because I love the exchange of ideas and the many topics that make me go "hmmm."
Thanks and happy investing to all.
Early on in my foreclosure rescue and NPN days I also thought home owners would step up.. some do many don't.. the altruistic person In me thought Heck why would they not pay its less than rent.. the realist in me realized that once people go down the bad debt route its an easy route for them to go down again.. and bad behavior starts all over.. what I like about the commercial notes is you take the family drama out of the picture.. and then they lawyer up and squat.. investors simply don't do that.. in the rare instance they don't pay its pretty cut and dry.. we have done about 60 million in this investor paper over the last 6 or so years and less than 500k has had a problem
you just don't have that success rate with owner occ NPN .. not sure what the ratios are but they are no where near that. And my folks that invest with us simply want their payment .. they want NO drama.. the last thing they want is a whiff of a bad payer.. so to go into a NPN and already know you have a bad payer.. that's simply not what our folks want .. so we just don't fill that niche.
- Specialist · Frederick, MD · Member since 2017 · 474 posts · 454 votes8y
Thanks the color on that @Jay Hinrichs. I used to work in the Entertainment Industry. I was well conditioned on handling drama ;).
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Marco Bario:
Thanks the color on that @Jay Hinrichs. I used to work in the Entertainment Industry. I was well conditioned on handling drama ;).
Yup me I have had my fill. and I am just not a tough enough B@@@stard to just hand it over to the attorneys and boot the people
I remember one couple here in Oregon I am doing a rescue for them.. they sit there and look at me and say.. we make enough money we just cant figure out how we can be 6 months late on our mortgage.. ( this in the day were it was legal to do this it not longer is IE rescue buy it and lease it back)..
but then I am thinking what about the camper the boat and the two vehicles in the drive way could that be a reason.. LOL INvestors understand their debt better.. and what it takes to keep things moving.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes8y
Originally posted by @Zach Bollman:
Hello all,I have been investigating notes available from MLS and other sources, but am a bit reluctant to purchase a note that is outside my state. My concern is working with the borrower should the note become non-performing.
Is there anything that I should be aware of, such as certain states to avoid? Additionally, does anyone have advice relating to purchasing notes from different states?
Thanks in advance!
Word of caution with out of state note investing.
Every month or so I get some knucklehead off of Bigger Pockets who reaches out to me to get some eyes on the house of a note he bought. 9 times out of 10 the investor bought the note in the ghetto for far more than the home is worth. This doesn't even factor in the cost to foreclose on the property.
I am not in the note business nor do I care to be but just want everyone to know that you need to underwrite the house the note is on just like you would if you were buying said house.
- Minneapolis, MN · Member since 2016 · 60 posts · 18 votes8y
Great thread here. You have all been advised by a few of the top game-changers in NPN investing. You would be wise to join a few of the note investment groups out there on Facebook. I believe I am at or near 10 of them myself. I've found the tendency to make an original post only in groups that are *not* public. I have many well-meaning family members who poke their noses in when I make some comments in public group settings. With a closed group, they can't see my posts or comments unless they join a particular group that I'm in.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @James Wise:
Originally posted by @Zach Bollman:
Hello all,I have been investigating notes available from MLS and other sources, but am a bit reluctant to purchase a note that is outside my state. My concern is working with the borrower should the note become non-performing.
Is there anything that I should be aware of, such as certain states to avoid? Additionally, does anyone have advice relating to purchasing notes from different states?
Thanks in advance!
Word of caution with out of state note investing.
Every month or so I get some knucklehead off of Bigger Pockets who reaches out to me to get some eyes on the house of a note he bought. 9 times out of 10 the investor bought the note in the ghetto for far more than the home is worth. This doesn't even factor in the cost to foreclose on the property.
I am not in the note business nor do I care to be but just want everyone to know that you need to underwrite the house the note is on just like you would if you were buying said house.
yup this is where most of your NPN product occurs.. and the reasons I personally dont go there .. IE NPN.. risk is high work out is tough
but they are so cheap people give them a go.. :)
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes8yJames Wise It’s not only in your area. I see a lot of notes I research where they provide a realtor BPO and the price is based on comps of renovated houses and the person who bought the note doesn’t look at the BPO they only look at the bottom number. But from the exterior pics the house needs to be painted, new windows and a new roof and if the outside needs work do you think the inside is updated ? Had one they had a price of $60k, sent a contractor/agent by who came back with a price of $20k. Person had bought the note for $33k and used someone else’s $ in the deal and was going to continue to try and find some sucker to buy it and get their $ back.
7e investments53 Reviews - Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes8y
Originally posted by @Chris Seveney:
James Wise
It’s not only in your area. I see a lot of notes I research where they provide a realtor BPO and the price is based on comps of renovated houses and the person who bought the note doesn’t look at the BPO they only look at the bottom number. But from the exterior pics the house needs to be painted, new windows and a new roof and if the outside needs work do you think the inside is updated ? Had one they had a price of $60k, sent a contractor/agent by who came back with a price of $20k. Person had bought the note for $33k and used someone else’s $ in the deal and was going to continue to try and find some sucker to buy it and get their $ back.lol, sounds pretty typical.
- 8ySteve HodgdonPro MemberInvestor · Novato, CA · Member since 2015 · 432 posts · 321 votes
@Dan Zitofsky Amen, amen I say! working through 30+ owner occ notes. Doing fine, but some duds. All lots more work than I thought at the beginning.
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