Note Investing (NPNs) in 2019

7 Replies

My sweat spot with note investing is buying 2nd non-performing mortgage notes on properties with over 150k FMV. For me, it usually equates to a better caliber borrower, higher quality property, nicer neighborhood, etc. Since my company formed in 2013, my motto has been, ‘helping homeowners stay in their homes with payments they can afford.' Hence, I always work towards modifying their loan so they can resume making payments that work within their budget while earning me a living (i.e. I do this full time)

In the past 30 days I’ve ran through a combined 800+ 2nd non-performing mortgage notes and I have to say it's been a very real experience seeing how pricing has gone up drastically in 2019. However, it's equally nice to see recent FMV spikes on properties and how that justifies some of the hike in price. Early on, I used to buy a ton of 2nd’s that had no equity and modified the notes just the same (along with getting burnt on some here and there). Overall, it’s easier to work with fully covered 2nd’s but boy do you have to pay more for them at this point in time. Just rambling on this post, but as of today I’m convinced more than ever I need to focus more time and energy on OUT OF THE BOX sourcing strategies to drum up deal flow if I’m going to maintain my parameters and motto.

Out of my last 20 2nd Mortgage purchases over the last year and a half, 15 have been Re-performing 2nds for that reason. I'm getting better deals on Re-Performing 2nds, than Non-Performing 2nds.

Interesting. everybody i talk to also keeps telling me prices are up. I only got into investing in notes in recent months so i only know current prices. Martin, how would you say the prices now compare to last year, how much is drastically gone up? 

800 notes in 30 days is an eye popping number. I guess that goes to show you if you take the business seriously there is product out there to be had. 

I am curious, would you put a greater emphasis on having an equity cover or on the asking price as a % of unpaid balance, especially in a changing market?

@Martin Saenz

Hey guys, it all supply and demand - basic economics 101. Over the last 5 years, interest rates have reached 75 year lows. Alternative investments have become more readily available, accepted and even desired. Defaulted loans have decreased. So, of course the price has increased.

I operate in the commercial mortgage space, about 60% of my business is originating notes, 40% is purchasing notes, with the majority of purchases being in default, but the same forces are at play.

I look at many more notes than I did five years ago to find the few that meet my criteria for risk vs return, and with a decreased return target from 5 years ago. But once in a while we do find that note that becomes a home run.

As a practical matter, here’s how we have reacted to the changing market conditions

1. We look at more potential investments.

2. We have increased our marketing budget and time and hence our deal flow

3. We have used technology especially in social media to vastly expand our industry contacts.

4. We have gotten VERY creative, which is a lot more doable in the commercial mortgage space.

5. We have decreased our targeted return

6. We have more aligned our targeted returns with each investments risk assessment.

7. We began investing in real estate equity as well as real estate debt.

8. We have begun doing joint venture investments with other private real estate investment funds, allowing us to increase our maximum size loan from $3 million to $7 million, thereby significantly increasing deal flow.

I’m sure much of this can be applied to the residential note space.

@Don Konipol

Agree 💯 %. The market is ever changing and I have found pricing to have gone down since last fall. I look at a good amount of CFD's and notes on a regular basis and can still find 3-5 deals out of every pool that Meet my investment criteria

I also see people in two buckets- those who have been in the space for 5+ years when pricing was absurdly low because of supply and those who are newer who are noting pricing is high but never pull the trigger. I still believe that 80% of people looking in notes are not serious buyers as they are looking for “the perfect deal” where they want a heavily discounted note with no hair and no risk and will never end up pulling the trigger and will move on from notes to stock options, Bitcoin or the next big thing in the next 12-24 months.

Originally posted by @Don Konipol :

@Martin Saenz

Hey guys, it all supply and demand - basic economics 101. Over the last 5 years, interest rates have reached 75 year lows. Alternative investments have become more readily available, accepted and even desired. Defaulted loans have decreased. So, of course the price has increased.

I operate in the commercial mortgage space, about 60% of my business is originating notes, 40% is purchasing notes, with the majority of purchases being in default, but the same forces are at play.

I look at many more notes than I did five years ago to find the few that meet my criteria for risk vs return, and with a decreased return target from 5 years ago. But once in a while we do find that note that becomes a home run.

As a practical matter, here’s how we have reacted to the changing market conditions

1. We look at more potential investments.

2. We have increased our marketing budget and time and hence our deal flow

3. We have used technology especially in social media to vastly expand our industry contacts.

4. We have gotten VERY creative, which is a lot more doable in the commercial mortgage space.

5. We have decreased our targeted return

6. We have more aligned our targeted returns with each investments risk assessment.

7. We began investing in real estate equity as well as real estate debt.

8. We have begun doing joint venture investments with other private real estate investment funds, allowing us to increase our maximum size loan from $3 million to $7 million, thereby significantly increasing deal flow.

I’m sure much of this can be applied to the residential note space.

 This is wonderful insight, Don.  Thank you.  I've placed a lot more focus on casting a wider net through relationship building which has allowed me to continue to receive deal flow.  I agree with all your comments and appreciate the thoughts.  All the best!