Note Investing - What's Your Biggest Fear

31 Replies

Typically I hear from other investors about their biggest fears in Note Investing. Do you have one? The most frequent I hear are:

1. You are investing out of state

2. You cannot see the inside of the property

3. A borrower will find you and come after you

4. You may have to foreclose and kick someone out of their house

1.That someone will scam me by selling paper that they no longer own or there is a gap in assignment 

2. Principal amount and interest is not accurate and is substantially lower than presented. Or loan was modified but never disclosed as such.

3. Misrepresentation and fraud. Wire fraud. 

4. Not getting original note  documents after payment 

Originally posted by @Don Konipol :

That I'll die and the administrator of my estate won't be able to maximize the value of my note portfolio

Leave detailed instructions.  

I suspect that this was a tongue-in-cheek comment by you, though. 

Originally posted by @Chris Seveney :

Typically I hear from other investors about their biggest fears in Note Investing. Do you have one? The most frequent I hear are:

1. You are investing out of state

2. You cannot see the inside of the property

3. A borrower will find you and come after you

4. You may have to foreclose and kick someone out of their house

That the city will condemn the property due to its unsanitary condition that the borrower was living in, and won't release it back to you as the rightful owner until you jump through a million hoops and needlessly spend an exorbitant amount of money on their "city approved" contractors.  Even though you have foreclosed on the borrower and had them evicted.  

Originally posted by @Chad Urbshott :
Originally posted by @Chris Seveney:

Typically I hear from other investors about their biggest fears in Note Investing. Do you have one? The most frequent I hear are:

1. You are investing out of state

2. You cannot see the inside of the property

3. A borrower will find you and come after you

4. You may have to foreclose and kick someone out of their house

That the city will condemn the property due to its unsanitary condition that the borrower was living in, and won't release it back to you as the rightful owner until you jump through a million hoops and needlessly spend an exorbitant amount of money on their "city approved" contractors.  Even though you have foreclosed on the borrower and had them evicted.  

or you drive down the street come to your address and its a vacant lot.. city has already demo'd it..  been there done that a few times.. you just have to do a big belly laugh when that one happens

Originally posted by @Jay Hinrichs :
Originally posted by @Chad Urbshott:
Originally posted by @Chris Seveney:

Typically I hear from other investors about their biggest fears in Note Investing. Do you have one? The most frequent I hear are:

1. You are investing out of state

2. You cannot see the inside of the property

3. A borrower will find you and come after you

4. You may have to foreclose and kick someone out of their house

That the city will condemn the property due to its unsanitary condition that the borrower was living in, and won't release it back to you as the rightful owner until you jump through a million hoops and needlessly spend an exorbitant amount of money on their "city approved" contractors.  Even though you have foreclosed on the borrower and had them evicted.  

or you drive down the street come to your address and its a vacant lot.. city has already demo'd it..  been there done that a few times.. you just have to do a big belly laugh when that one happens

I was being facetious above as this is actually happening to me right now.  Kind of an inside joke, as I shared the story with Chris on his podcast.   

Haha, yes Jay that's why it's imperative to get a driveby done PRIOR to purchasing the note!  I even try to get my local contacts to do a walk around the entire property to make sure there's still a wall on the back.  Saved my bacon once.  

Well most of the fears listed here so far would be a result of poor due diligence and lack of precautions when funding the deal. My biggest concern is the growing lack of good domestic NPL inventory.

@Bob Malecki

Very good point, Bob. Most, but not all these bad outcomes can be mitigated with better due diligence. Since our average note purchase is about $1.2 million, it gets our attention. After you have one nightmare, you pay closer attention. As Judge Roy Beam said “Nothing focuses the mind like a good hanging”.

Originally posted by @Bob Malecki :

Well most of the fears listed here so far would be a result of poor due diligence and lack of precautions when funding the deal. My biggest concern is the growing lack of good domestic NPL inventory.

I would think with the strengthening of the mortgage requirements that its inevitable that inventory goes down.. however you can always count on a certain amount of bad paper for various reasons.. it will be regional of course.. there is still more homes than people to live in them in some markets so you will have folks just walking away.

@Ned Carey

Legislation is getting tougher and tougher. States are making everything even more restrictive which I believe will end up continuing the economic divide. These jurisdictions think they are protecting homeowners (most of who don’t pay) from predatory lending but what it will end up doing is not giving potential borrowers any chance of home ownership.

Private lenders in the past have filled a whole (for example under $50k properties) where banks would not lend due to the cost of underwriting the loan and Dodd frank.

Now this market will turn into a rental market as the added restrictions states are imposing will have those who own rentals continue to flourish and middle to low income Americans almost no chance or owning a home between the coasts

I agree completely. In certain areas you can get an owner financed home for less than rent and allow the borrower to take tax deduction and build equity. Now these jurisdictions essentially want to eliminate owner financing by stipulating high risk terms. Who would owner finance a note on a $50k property where your max rate is 5% and it costs $6k to foreclose and over a year. This is what Ohio is doing with land contracts which the reason they are done in Ohio is because of the excessive cost and time to foreclose. Now those homes will go to investors and used as rentals as you would be a fool to lend based on those terms.

@Chris Seveney I agree that most of the risks which were said prior can all be mitigated by proper due diligence.

I really stick to the concept that if I wouldn't invest my own money into it, I wouldn't ask a JV partner to fund such a deal.

I usually try to get opinions from two attorneys for State foreclosure laws and two realtors for CMA's to ensure the investment has a reliable collateral on it to cover the investment with good returns.

As you mentioned, I would say the biggest fear is that we can’t see the inside of the house prior to purchasing the note. Still, I think that’s why it’s important to only buy Occupied notes rather than vacant.

Sometimes it’s tough to tell a funding partner that the deal fell through because it failed our due diligence, but I think it also builds a trusting relationship when you tell them that and be fully transparent.

Golden rule for me is: Stick To Your Numbers!

@Chris Seveney

As an investor thinking about starting a note investing business my biggest fear is how much inventory is there to find? I don’t want to spend thousands of dollars and my precious little spare time if the numbers of viable notes is so low I cannot find AND close deals. I have gotten some good education , have note investing contacts and yet I am unable to pull the trigger on buying a list and marketing because I am just not sure how many are really out there!

What do you all say? My focus is seller financed performing notes so I can learn the business first with lower risk investments. Are these a needle in a haystack or do more like a Starbucks, there is one on every corner?

Hi @Sarah Dawson , if you are focusing on seller carrybacks then yes it's marketing intensive for sure. My companies focus on distressed assets which are primarily acquired from asset managers so the scope of our acquisition process is much less complicated. Do you plan to attend the Papersource conference next month? That event is heavily weighted to seller carryback investing rather than NPL investing. 

Bob 

@Bob Malecki Thank you for the reply. I see great possibilities in the note investing strategy for my goals.

I am all for networking and conferences. Before I go head long into the strategy with time and money, I would like some information that my plan is viable.

Is there a way (or a company) that can estimate the volume in the market for the seller carry back notes?

For housing I can see inventory on the MLS and in my area. I can hunt and peck at addresses on my county website and stumble on what looks like a private mortgage but it's not much to go on to draw a conclusion on the inventory.

I would be thrilled to hear any and all advice from the BP community!

@Sarah Dawson this is why attending conferences and networking is so important in the mortgage note space. By attending the conferences you have exposure to presentations and you can have discussions with asset managers and investors in large companies that have data and can give you a better feel for the market.

By investing in yourself and attending in these conferences you force yourself out of your comfort zone and help mitigate paralysis of analysis. Probably 90% of the asset managers from which my companies acquire notes were met by networking at conferences oh, the same goes for selecting vendors.

@Sarah Dawson

The note market is not a clearly defined and measured market like residential real property. Although a few companies have attempted to create note resale market places, in truth these haven’t been very successful.

Sellers of residential properties who have taken back owner financing are constantly contacted via snail mail by both buyers and brokers wanting them to sell the note - at a discount. Or, they can google " note buyer" and find hundreds of websites. On the commercial end, where I operate, deals are brought to us by brokers or lending institutions wanting to get rid of a note either in default or one that no longer fits their portfolio. For lending institutions holding residential notes they want to sell, the action is mostly in the NPN arena.

Because of the difficulty for the average investor to find a good note and buy it, many have invested money in funds or in partnerships that originate private or hard money loans, which is a second cousin to the discount note business.

For someone who has $50,000 or $1,000,000 to invest and is satisfied with 8%, achieving this is quite simple and quick. The same investment seeking 12% requires a lot more work, some more risk, and more time to put together a portfolio of notes.

For someone who wants to enter the note BUSINESS as opposed to just investing their own funds in notes, the learning curve, time, effort and knowledge needed is much greater. This is a business where ones success is almost totally dependent on the individual.

Originally posted by @Don Konipol :

@Sarah Dawson

The note market is not a clearly defined and measured market like residential real property. Although a few companies have attempted to create note resale market places, in truth these haven’t been very successful.

Sellers of residential properties who have taken back owner financing are constantly contacted via snail mail by both buyers and brokers wanting them to sell the note - at a discount. Or, they can google " note buyer" and find hundreds of websites. On the commercial end, where I operate, deals are brought to us by brokers or lending institutions wanting to get rid of a note either in default or one that no longer fits their portfolio. For lending institutions holding residential notes they want to sell, the action is mostly in the NPN arena.

Because of the difficulty for the average investor to find a good note and buy it, many have invested money in funds or in partnerships that originate private or hard money loans, which is a second cousin to the discount note business.

For someone who has $50,000 or $1,000,000 to invest and is satisfied with 8%, achieving this is quite simple and quick. The same investment seeking 12% requires a lot more work, some more risk, and more time to put together a portfolio of notes.

For someone who wants to enter the note BUSINESS as opposed to just investing their own funds in notes, the learning curve, time, effort and knowledge needed is much greater. This is a business where ones success is almost totally dependent on the individual.

 In other words it's a job. 

@Bob Malecki

Great comment about investing in yourself. I wonder how many people have a budget for training/self improvement. My first few years in notes I took profits to reinvest in my company / myself.

Don is absolutely correct, note investing is a job and those who think it’s passive - its only passive if your investing your $ in a fund

@Chris Seveney

Yes good point, it is a job. I am thinking of the note business as a career change. I am also seeing note investing for myself as a better option than expanding the current buy and hold portfolio.

I really had no idea how long it would take to ramp up my knowledge, network and at some point actual skills!

Thank you for all of your replies. Now it’s time for me to take some action!