Why do experienced investors JV on notes?

Tax Liens & Mortgage Notes
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Why do experienced investors JV on notes?

Leighann Davis
Lakeland, FL · Member since 2017 · 23 posts · 13 votes

Hi all - 

I see forum posts referencing JVs frequently as a good place to start for new note investors. 

My question is this - At what point is it "worth it" for veteran note investors to JV with a newbie? How much of those JVs are actually worthwhile from a business standpoint versus the veteran taking on a JV to "give back"? Is it worthwhile for the experienced investor simply because they're getting "free" funding?

I'm fairly new to note investing (and real estate investing in general) and am not accredited, however I have worked in investments (stocks, bonds, mutual funds, etc) for 6 years and actively invest in those arenas and am a CPA, so I'm pretty comfortable with financials/investments/risk/etc. (though I know note investing is a different game). My preference would be to "learn the ropes" from someone for my first couple notes but I would still want to provide value in some way and would want the transaction to be worth it to them as well. 

I would consider providing the capital for a couple notes and allowing the other investor to keep a chunk of the profit in exchange for being able to really learn the process. But is this something that experienced investors are actually interested in? Or would it probably not be worth their time from a business standpoint because of the time required to teach and relatively low volume involved? Or is it worth it to the experienced investor simply because they're getting "free" capital? What's the motivation for the experienced investor to JV?

(And yes, I've seen posts on the forums about the standard setup of the newbie providing the funding, the experienced investor finds/manages the deal, and then splitting profits 50/50.... but I've also read where some newbies were not very involved in the process and therefore didn't feel like they were prepared to do it on their own after that JV, which is what I would want to avoid. Learning/experience would be my priority.)

Sorry for the long post - just trying to understand the motivation from both sides. 

Leighann

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Patrick Desjardins
Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
8y
Originally posted by @Leighann Davis:

Hi all - 

I see forum posts referencing JVs frequently as a good place to start for new note investors. 

My question is this - At what point is it "worth it" for veteran note investors to JV with a newbie? How much of those JVs are actually worthwhile from a business standpoint versus the veteran taking on a JV to "give back"? Is it worthwhile for the experienced investor simply because they're getting "free" funding?

I'm fairly new to note investing (and real estate investing in general) and am not accredited, however I have worked in investments (stocks, bonds, mutual funds, etc) for 6 years and actively invest in those arenas and am a CPA, so I'm pretty comfortable with financials/investments/risk/etc. (though I know note investing is a different game). My preference would be to "learn the ropes" from someone for my first couple notes but I would still want to provide value in some way and would want the transaction to be worth it to them as well. 

I would consider providing the capital for a couple notes and allowing the other investor to keep a chunk of the profit in exchange for being able to really learn the process. But is this something that experienced investors are actually interested in? Or would it probably not be worth their time from a business standpoint because of the time required to teach and relatively low volume involved? Or is it worth it to the experienced investor simply because they're getting "free" capital? What's the motivation for the experienced investor to JV?

(And yes, I've seen posts on the forums about the standard setup of the newbie providing the funding, the experienced investor finds/manages the deal, and then splitting profits 50/50.... but I've also read where some newbies were not very involved in the process and therefore didn't feel like they were prepared to do it on their own after that JV, which is what I would want to avoid. Learning/experience would be my priority.)

Sorry for the long post - just trying to understand the motivation from both sides. 

Leighann

 Good question. The simple answer is that it is almost impossible to buy notes without running out of your own money, even when you're somewhat successful.

Let's use an hypothetical scenario. You start with 100k. There are a few options but let's say you decide to buy 2 notes for 45k each, one in Florida and the other in South Carolina. 

You get into a workout agreement where the people will pay you 5,000 upfront and then XYZ a month for 25 years. I would have to calculate the numbers but let's assume it gives a 20% just for argument's sake. So you're successful, but now you have $5,000 in your account plus whatever is left of your reserves. You spent a year working on this note, got a successful agreement, and yet you don't even have enough money to go buy another one. Now the only thing you can do is wait 6-12 months and then sell it to another investor. All in all you just spent 18 months+ on a single note.

This is how I started, using only our own money. It's good in some ways because there isn't as much pressure. But it is very slow.

On the other hand if you do JVs, you could keep buying for as long as you find partners. 5 deals at 50% is worth more than 1 deal at 100% ownership.

So.. this is why JVs exist and why experienced investors want to do them. Notes are a bit different from house flippers because there are no easy way to get loans.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    8y

    @Andy Mirza

    Yes, you have correctly summarized the issue.  Thanks.

    @Mark Sewell IRS rules prohibit you from benefiting from the IRA and also from providing benefit to the IRA. While you may administer investments, the time and energy and perhaps legal resources that go into resolving non-performing notes would go beyond the allowable threshold of activity. Your time and efforts have value, and if you gift such value to the IRA by performing services, you are effectively making un-documented contributions to the IRA and artificially magnifying the tax sheltering, which is why this is prohibited.

    The alternatives in the NPN space are to joint venture with other parties or use some kind of a note broker who is doing the workouts.

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  • Mark Sewell
    Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
    8y

    I am pretty clear on the IRA part but I'm just starting to learn about NPN. Now I see what he means, thanks. I guess this would be equivalent to spending post tax dollars on an investment property that your IRA purchased... big no-no. I get it (I think).

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  • David Wurzel
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 252 posts · 132 votes
    8y

    Found this interesting:

    by Don Konipol, MBA

    For investors considering investing in non-performing notes (NPNs), a.k.a. non-performing loans (NPLs), that are residential and owner-occupied, here is how a typical situation plays out.

    A bank, bank holding company or asset management and disposition company puts together a package of, say, 1,000 NPNs and asks for bids. The qualified bidders are the major hedge funds, private investment partnerships and private equity funds able to pay $25M cash and more. Their analysts are usually MBAs in finance who graduated at top of their class and have been trained to use and understand the most sophisticated financial modeling theories and techniques.

    The winning bidder pays for and gets ownership of these 1,000 NPNs. Their analysts then drill down and do a deeper and more thorough analysis of each note to determine which ones will yield a risk-adjusted profit above their particular profit threshold.

    Say they determine that they will keep 800 notes. The next step is to offer the 200 notes they do not want to another hedge fund or private equity fund with a different risk return profile.

    The high bidder in this second round buys the 200 remaining notes. After their expert analysts examine each one, let’s say they determine that 150 notes meet their risk-adjusted return criteria. This fund now asks for bids from retail asset disposers.

    The winning bidder purchases the last 50 notes and does their analysis to determine if ANY of those leftover notes are worth holding. Say they find five notes that happened to be overlooked or misanalysed by the previous two funds. They then take those notes and package them with others from similar purchases and sell them along with their analysis to private investment funds.

    This leaves 45 notes from a package of 1,000 that three professional investment funds, doing intensive analysis by highly trained MBAs, have determined cannot yield even a minimal investment return.

    These are then offered to the individual investor, who according to those in the industry “with something to sell” (the leftover NPNs and/or “training”) can profit enormously by (1) making them re-performing notes or (2) foreclosing and selling the property for large profits.

    The pitch from those “with something to sell” is twofold: (1) “There is plenty of meat left on the bone” (actual quote), and (2) if you send the borrower a complete package of all docs, weighing, say, five pounds you will “shock and awe” him into paying on the note.

    I highly doubt either of these claims have even a micron of validity.

    The parties with a financial interest in you buying into this will cite isolated instances of great success, never mentioning the all-more-frequent instances of total failure.

    So at the end of the day the training promoters have collected up to $30,000 per person for their NPN "mentoring"/"coaching" program, the retail asset disposer has made 50% to 100% profit on their inventory, private middlemen have turned a $2,500 investment in a note into $16,000, and my sister-in-law who purchased 5 NPNs over three years ago and has spent large amounts on attorneys, taxes, and brokers has yet to see a penny in return.

    To paraphrase, if you don’t know who the sucker is in any ultra-high profit promise situation, it’s you.

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