Is everyone note investing with 100% cash?

9 Replies

Having a very hard time finding a lender who will finance distressed note acquisitions. 

Has anyone been able to achieve this? Do you structure a line of credit or do they lend a percentage of your purchase price? Do you use a bank or private lender?

It seems that everyone in this business is paying 100% cash for deals. 

Hi Daniel,

You will need access to cash to purchase notes.

This can be your own cash or partners/investors. It is a cash business. It is very difficult to use leverage starting out, but once you have a portfolio of performing notes, there are numerous ways to leverage or borrow against it to buy more.

Starting out with little to no money is always the hardest. You may be best served partnering with someone who has the cash, in exchange for you bringing the deals or doing some of the grunt work initially.

- Josh

@Daniel E. I know that FCI was doing this a few years ago but not sure if they still do. They were charging 12% interest only.

We use 100% cash but eventually a line of credit would be nice and, hopefully, we can find a small bank that would do so on performing and re-performing notes.

I'd be careful with whatever leverage you use if you do find someone to lend on NPNs. Unlike fix and flip rehabs where you have a good idea of your timeline, NPN's are affected by the borrower's actions, which are outside of your control. You might expect to FC on a certain NPN in 3 months but the borrower can reinstate or file Ch 13 and you might end up holding that note for 1-3 years. That 12% interest will kill you...

Originally posted by @Andy Mirza :

@Daniel E. I know that FCI was doing this a few years ago but not sure if they still do. They were charging 12% interest only.

We use 100% cash but eventually a line of credit would be nice and, hopefully, we can find a small bank that would do so on performing and re-performing notes.

I'd be careful with whatever leverage you use if you do find someone to lend on NPNs. Unlike fix and flip rehabs where you have a good idea of your timeline, NPN's are affected by the borrower's actions, which are outside of your control. You might expect to FC on a certain NPN in 3 months but the borrower can reinstate or file Ch 13 and you might end up holding that note for 1-3 years. That 12% interest will kill you...

Financing distressed debt acquisitions is likely the riskiest way to invest, and could very quickly buy you an entrance to the funny farm. Particularly if you have limited experience. As Andy points out above, you could end up holding the note for far longer than you anticipated and that interest will eat you alive. Case in point, we purchased a $150K note over 12 months ago which was headed for foreclosure within 3 months. The day before, the borrower declared BK13....no problem I thought, as their arrearages are substantial, and their payment plan would be a great cashflow ROI, the main reason we bought this note. Not to mention substantial equity in the property.

However, fast forward 9 months after non payments, and us filing Motions to Dismiss and Relief, we finally received a prorated lump sum towards their arrearages along with their past regular mortgage post petition P&I, as they miraculously came up with a huge payment to save them from being dismissed.  Whether they make any further payments from here on in remains to be seen, but we can put them right back on notice if they don't.  

This was purchased using my own company's funds so can ride this out, however, if the money was borrowed at 12% would owe $18K in interest! This is in addition to the legal fees, servicing, FPI insurance, etc. We're still shooting for an IRR of 30%+, but this isn't something I would finance OR use OPM from investors as that could soon put you into a precarious position.

Generally, with a fix and flip rehabs, the value of your property goes up as you fix it up. If you had to sell it for some reason, you should be able to sell it for more than what you bought it.

That's not necessarily true of non-performing notes. Your note can become less valuable and more difficult to sell. @Chad U. 's example is a good one. If he had to take it out to market, it might sell for less than he paid for it. Sometimes you are forced to hold on to the note until it's in "better" condition if you want to make a profit by selling it. So, if you borrow at 12%, you might find yourself in a situation where your note is worth less than when you bought it and where you have to make a decision of holding on till it gets better if you have the means to do so or selling at a steep discount because you can't hold it. Not a position I want to get myself in....

There are two investors that I know of that have taken their note interests invested with us to the bank and obtained a 60% advance rate using their LLC interests in the notes as collateral. Both are financially strong ( all of our investors are accredited) and have other relationships with the banks. There are also some smallish private equity funds that will lend at interest rates in the 8-9% range on portfolios of notes, minimum loan size starts at $1,000,000 with 60% max LTV. In both instances the lenders want to see the quality and performance of the underlying notes being used as collateral. In other words NPNs would not qualify

Actually my first note deal was with a hard money lender, though we have not been able to do that again. For some reason they did not want to repeat. And we no longer go after those low dollar assets, though its a good way to start my note careear! Though as Chad says above, if things go wrong, it will get expensive.

NPN Case Study: Foreclosure 66% ROI in 4 Months

Hi, I was also curious about this but wonder if there are lenders who would finance performing notes? I see several private and hard money lenders but none that appear to specialize in notes. Am I searching with the wrong terms? any suggestions?

I receive messages almost daily from Hard money lenders looking to finance my deals but once I tell them that we could be in the deal 18+ months they quickly back out, You aren't always aware what strategy you will be exiting with and most banks/lenders would see this as too much a risk. There are too many variables. Notes are primarily both with cash. If you have a self-directed IRA you could utilize those funds or you can joint venture with an experienced note investor.