The president of my local REIA advised newbie note investors to read Invest in Debt by Jim Napier. It was extremely helpful for me & very interesting IMO...in fact I just got it last night and have already read through it! I would definitely recommend it!!
Can anyone in the BP community provide another recommendation for a good book on note investing? I heard Smart Trust Deed Investment by George Coats is also very good (and I will definitely pick that one up eventually), but I would like something a little more contemporary. I know there are a ton of great books out there (I'm sure many have been recommended on these forums already), but I respect the opinion of the BP community more than random reviewers on Amazon for example...
I am not overly familiar with the books but I have certainly ran into many folks who have read them. I also not a fan of any gurus but I have ran in to a ton of folks who have paid for their service. My take on the lessons the folks walk away with from both sources, IMO, seem to point to a lack of proper understanding of the asset class in general. I think that is because most of these courses and books are modeled after the real estate (real property) guru genre and while indirectly related you simply have to know and understand much more to be good with notes.
I think you can see this if you take a step back and look at how notes in general are discussed, as if they are homogenous assets. They are not and that is the first key to understanding the asset class. The lack of homogeneity amongst notes is also what helped spawn securitzation and might be fuel for their exemption as a security. That is probably a topic for a different thread though. Back to my point, the discussion and request seem to be very broad in nature opposed to specific, which I think also illustrates a lack of acute understanding of those attempting to engage in a discussion about notes.
So can a book from 1999 do some good? Sure, some knowledge is better than none but many very influencing things have changed. Regulations have changed, investor participation has changed, origination has changed, mortgage products have changed....the list goes on and on. So from that type of publication or course if you can walk away and define an area of interest in more detail, I think that is a win. Then you need to follow up on that area specifically. That will take more specific topics and inquires and frankly research.
Just amongst the folks that Bill named in the above thread you have several different business models and market functions. We do not all seek the same note nor favor the same disposition strategies. Some of us have more exposure to first liens opposed to second liens or more institutional opposed to private or even specific collateral variations.
So when I see the question, what is a good book to read on notes, I sort of always want to say what type of notes, on what type of collateral, dealing with what type of borrower or origination source? A book written on commercial loans will be different than a book on residential loans. The learning curves are different due to the difference in collateral and borrower sophistication. Additionally, certain legal aspects are different. I know these are all things most people understand but it seems to never makes its way into these inquires.
Bill speaks to this and I agree when he says that some of these gurus 'sell' the foreclosure disposition as a path to riches or some magic short pay strategy, etc. Rightfully so, when he sees this he corrects it, as I do I. That is the dumb down marketing version of what they are selling which is only a small segment of the asset class and often times the take away is not entirely correct. People understand real estate investing in general so they lach onto that understanding and go to market with the book/course selling to some extent, what folks want to hear. "You can make money too this way....!" I always like to say there is no magic in mortgages. That is because it is true. There is no new disposition or strategy floating around on the street which has not been around for a long time nor pursued thousands if not millions of times.
As an investor do you HAVE to have this in depth knowledge of the asset class? No, I guess not, as suggested above you can subcontract it out. That said, not all brokers and advisors are made the same either, so one needs to be careful not be led by the inexperienced simply because they are more experienced than the pack of folks following them.
So what are good books to read? Well if you want to learn about the financial aspects of notes pick up a book on finance. You should learn to understand the time value of money and the math behind it. If you want to gain more knowledge about specifically investing in foreclosures, pick up some papers written on current foreclosure situaitons, perhaps even state specific to your desire. Additionally, reading some literature on contract law, as that is what the security instrument and note conform to will also help. After that, I would also suggest reading up on the more major headline events such as the Robo Signing and the MERs debate, I even suggest reading up on the Dobb Frank Act effect on the mortgage secondary market. That will start to prep you a bit for what the institutional climate looks like or at least expose you to may possible tangents of further learning.
The other problem that you run into, is reading up on it all is fine. Heck, I read a ton but in my very own opinion, experience is going to be the best source of education. The first question I tend to see from a new investor when I show them a loan or even a loan pool is, "Ok, where do I start?". There is a lot of data when it comes to loans and many fields have their own thesis to understand such as foreclosure events and bankruptcy events. I think having a supporting mentor, trainer or group will work wonders to help evolve skill sets. Make no bones about it, there is a lot to learn. Another good thing to remember, is everyone has an answer, but not all answers are right.
And with that, I will plug BP as probably one of the better sources of current in depth information on whole loans that I know of currently. And I think it's great. There are real folks here with real experience who participate often on topics. However, with as much interest as notes have started to garner and in tandem with the multiple times I have seen this exact question come up over the past months, it seems nobody wants to use the resource they are currently using. Which I suppose is slightly humorous. So there in lies the conundrum, for those newbies who want to learn more, where are your questions? I know I am happy to type a thesis on whole loan topics as many of the other guys are as well, but it seems we have to build the body of what information is being sought in order to get it out. In that sense, if we get more specific questions on the topic we can give specific answers or have valued in depth discussion on various legitimate topics.
Ramble, over.
Dion is right, George, you have to have a license in GA to even buy a note that is owner-oc residential. I personally had a long chat with the GA Dept of Banking and Finance when we contemplated entering that market. That's why we don't do resi notes in GA. Sorry to break the bad news, but if you want to buy in your home State of GA, you'll need a license.
Say you were a new bank employee and that they sent you to the lending department. You will usually start out in processing documents, learning the aspects of the various documents required. You'll likely be in an area of unsecured lending. Signature loans, small amounts, fewer documents involved, qualifications of borrowers pretty well carved in stone without much leeway by the loan officer. Loan collections is very much a related issue but is usually another department as collections can be involved as is specialized as well as highly regulated.
After that you'll move to secured lending activities. Auto loans for example, everything you learned in unsecured lending applies and now you add aspects of taking collateral. Title examination, perfecting liens, assessing the book value of the collateral. A loan officer will want to see the collateral, part of the due diligence in knowing it isn't a pile of junk and actually runs. Factors are considered, ability to pay, value of collateral, time and terms, credit evaluations of the borrower and ability to secure the collateral, dispose of it and receive amounts to payoff the outstanding amounts due. For car loans, you'll have a lender's blue book with a stated value for collateral, that value may be adjusted slightly due to the condition and the inspection by the lender. Other lending factors may allow some leeway in making the loan, credit, customer experience and relationships with the borrower. You need to see that the vehicle is insured. Things are a little more grey than in unsecured lending where it's black and white.
Now, after a few years in the auto loan area, the bank needs a trainee in the real estate department. New issues, there is no book value for lenders for real estate loans. The documents used are also different but are built upon the same or similar legal basis for any secured loan. The documents necessary come in thick loan files, all having a purpose to the loan qualification process, borrower's ability to pay, regulatory issues, collateral values, verifications of equity and title examinations which are much more involved. Now you also get into title insurance, hazard insurance and deductibles and flood insurance issues. Property legal descriptions need to be understood and due diligence becomes more complicated. Lien priorities become a concern. How will the collateral be secured in the event of default and under what circumstances. Is the appraisal good, there is a difference between an appraisal being compliant with acceptable methods of analysis and being a good picture of the collateral valuation. The note holder now must be familiar with real estate market issues, property conditions, marketable areas, value fluctuations expected over time.
A good loan officer needs a commanding grasp of several areas of real estate. They need to understand title examinations and insurance. They must be familiar with liens, encumbrances and encroachments being able to understand survey issues. They need to be familiar with the market and trends. A good loan officer will have a good grasp of construction issues, how repairs can and will be made, regulatory issues in zoning, building permits and risks involved in having work accomplished. The loan officer doesn't need to be an attorney but they need to understand contracts and applicable laws and local customs. They need to understand collection issues and bankruptcy matters, estate matters, tax obligations and other legal actions that may effect collateral.
Banks and real estate lenders are always teaching key persons in various aspects, marketing, compliance, real estate, law, insurance, title coverage, appraisal techniques, accounting and finance, regulatory issues.....on and on.
Now, about ten years later, you have done such a great job, we are going to move you into commercial lending! For the job you need to finish your degree, you just need one to work at the bank to move on.
Now in the big time. More legal issues, company entities, legal responsibilities of partners, officers, directors. Accounting and finance, financial statements, cash flow analysis, market trends of various industries and the impact of business risks. Inter entity agreements, capital structures, pro foma accounting considerations. More insurance concerns in "marine coverage" liability coverage and hazard coverage. Understanding contingent liabilities, securities, assignment of assets, uniform commercial code requirements and perfecting a security interest in other assets such as inventories, plant equipment, accounts receivable, rents and leases, options and forward contracts. Real estate issues now advance to city planning issues, zoning, traffic concentrations, population concentrations, development and construction, union and workforce concerns, employee benefit plans as to the liability side. Bankruptcy, acquisitions, asset liquidations, contract liabilities.....
10 years later, you move into management. You end up in Operations and portfolio management. I won't go into operations or correspondent lending relationships or compliance, but loans are blocked and sold as well as purchased. You'll be looking at maturity distributions of performing assets, matching up cash required with expected receipts. Use of funds and investment alternatives, bond portfolio, municipal and government lending, capital requirements, reserves for losses and bad loans.....but let's stop here.
Point is, did you pay attention to the time frame of progressing through the lending activities? At that last level you're looking at someone who has about 20 to 25 years of experience and they will have a degree, probably a graduate degree.
Granted, this example is inside some bank. There will be institutional road blocks to advance. But the actual years of experience might break down as follows for a really sharp person. 6 months of unsecured lending studies, law, contracts, income qualifications. verifications and due diligence, understanding tax returns and underwriting aspects of continued employment, credit, assets and forming a good lending decision. This is not one with an accounting or finance degree as the basics could cut this estimated time in half.
Secured lending issues, if you were to actually learn these aspects as mentioned above, another 4 or 5 months. So, IMO for someone to sit in some title loan joint and actually make loans over the counter, without formal education in the lending arena, you'd need about 6 months to a year of experience before any manager would be rubber stamping you loans, more like a year to get a rubber stamp approval.
My time lines are based on repetitious business, not doing some deal twice a month, but more like ten deals a day, 5 days a week. 200 deals a month, that means you have passed by about 1,200 loans before you have seen enough deals to guide yourself through the maze of lending at that level.
RE lending will take a couple years really to be a good originator, that is not underwriting loans but walking the loan through the required process and address issues of concern, like title or appraisal issues. I hired ex-bank loan officers, 10 plus years of experience as needed to pass the loan off for review. Trust was established and authority while not totally granted as in a bank, there was enough confidence to allow some to play with the money. Others were processors and most could take applications.
Now, bottom line, you simply can not in any way shape or form be a good note buyer or investor without having the knowledge and experience of a good RE loan processor or loan officer for residential notes. To get into commercial notes, you'll be close to be needing the bank operations level I mentioned above. The basic aspects mentioned above will be needed for small commercial deals, less for residential commercial like an 8 unit apartment, but if you get to look at a small note, 50K on a strip center your experience and education level requirements just jumped way up.
So, the book the paper game and similar books about how easy it is to buy notes is a consumer product, they are not educational materials as much as they authors may want to describe them as such. Horse-feathers as my grandfather would say.
Skimming over the aspects of finding a note, negotiating a price, getting agreements and assignments signed, calling the borrower and introducing yourself is not an education, it's an enlightenment to the process.
Now, hopefully everyone knows why I seem so negative when someone that has no finance knowledge, very little real estate knowledge and a lack of business experience posts to say they want to get into the note business and begin next month after some crash course.
If someone is a technician in some field or a business operator, perhaps an airline pilot or a computer engineer, there is no way I could step into their shoes in a month or probably a year and do what they do. So, I just can't see how any reasonable person could think that getting in the note business and do well can be accomplished by reading guru books.
Quickest way to invest your own money in notes is get with a broker. Have the loans serviced so you don't get involved in mortgage servicing issues. Learn all you can about RE, law applicable to lending and RE, study markets and then search for your own deals. Depending on how much money you have to play with, which would determine how many deals you could do, it will probably take you a couple years before you have an investing basis to really begin to do well. You could get lucky with your first note, then again you could lose the whole deal too. You don't know what you don't know. :)
PS. glad I got this out of the way, hope it doesn't discourage as much as it motivates some to getting involved on a professional investing level. :)
Quickest way to invest your own money in notes is get with a broker. Have the loans serviced so you don't get involved in mortgage servicing issues. Learn all you can about RE, law applicable to lending and RE, study markets and then search for your own deals. Depending on how much money you have to play with, which would determine how many deals you could do, it will probably take you a couple years before you have an investing basis to really begin to do well. You could get lucky with your first note, then again you could lose the whole deal too. You don't know what you don't know. :)
PS. glad I got this out of the way, hope it doesn't discourage as much as it motivates some to getting involved on a professional investing level. :)
Hey Bill, awesome post, you always tell it like it is and I do appreciate that. So here is a follow up question for you, how does someone "Vet" a broker? I ask because I agree with everything you said in your post above, but I still think I would like to explore purchasing a note for my own portfolio. I know there are smarter and more skilled people than me, for instance I know how an automatic transmission works, but if I tried to design one, or even rebuild one I would have parts left over, better to let an expert who is trained and experienced in that field do the job, so that I can enjoy the product, right?
So if a broker puts his "stamp" on a note, does that mean the broker has has done all the steps you outlined in the above post? Maybe, maybe not, he could be a fly by night armchair pilot with a license, or maybe he is trying to learn while he works? So where I am struggling is how do I know, or how can I find out if a note broker is well trained and looking out for my interest as well as his own? Is there an association or industry credential that endorses them?
Thanks in advance, I mean it when I say I appreciate your insight, especially since I know you have nothing to gain from helping me avoid a possible landmine other than the satisfaction of helping another like minded individual.
Rick
How to vet a mortgage broker?
Okay, better question is how would someone without of ton of lending experience vet a mortgage broker, as the way I do it is in a few minutes on a phone call, sort out the BS, their answers and my impressions.....that won't help anyone.
Never had the question and haven't thought about it. But I'd begin;
1. Checking with the state finance department and see if they are currently in good standing, if they ever had any orders issued against them, ever had a suspension or revocation of license. Are they bonded and insured?
2. Public records as to law suits?
3. If it's a large brokerage are they a Dunn and Bradstreet operation, I'd look them up, if not, I'd have a quick interview and ask for a credit authorization and see how they conduct personal business!
4. Start making calls, has anyone had any poor experiences, talk to Realtors and Brokers, ask closing agents if they have had closing issues or delayed closing with them. Run their business name through a RE records search, you'll see assignments, you can find who they do business with, follow up.
5. Loan officers at banks usually don't like brokers (LOL) unless they are good ones, do they know of them, anything to say? Take what you ear with a grain of salt, unless they have evidence or can point you to issues. Usually a loan officer will speak off the record, don't approach them so much as a bank officer, they clam up quickly.
6. Ask about clients that you can speak with, I had about a dozen folks that I asked if I could use them for such inquiries, if they don't have such clients they may not have any to say anything good about them LOL. Do they line up with those found of record?
7. They should have a financial statement, examine liquidity and ability to cover any repurchase agreement. Do they have a line of credit, verify it.
8. Do they do anything else? Is the broker an insurance agent, CPA, attorney, stock broker, credit advisor, etc....in other words are they part timing or full time mortgage brokers. Experience in the business and what kind of volume do they do. I'd like to know if they are degreed in areas of finance, continued education and any certifications... IOW a resume.
9. Do they service loans, if not and you want to buy some notes, who do they suggest you speak to for servicing? Then ask the servicers their experience with the brokerage and loss ratios (number of bad loans to good).
10. What is there investment philosophy and business model? What kind of notes are they seeking, any specialization, seller financed, bank notes, NOO investor deals, where is there business at? Are my goals in line with theirs?
11. Go visit the operations, are they professional and busy...but don't bug them, what's your impression? Are they bank like or is everyone having coffee BSing does it look more a car sales agency with sales guys telling jokes without customers ? Small brokers, one man shops, play the appointment game. They give you two options, I can't make that, how about Tuesday a 10:30? You make the time, doing so you can see how flexible they are....they may not have much to do or they might be really busy, something to consider.
12. I also like to ask any professional their opinion of another professional in conversation. This is an ethics test, how do they speak about peers in or even others related to their industry? Another ethics point is asking them when and how they lower the hammer on a borrower, are they egger to foreclose or do they know how and attempt to do a workout and modify a note? (There is nothing wrong in being stern and lowering the hammer, but when and how do they go about it, you're looking for attitude and ethical practices)
Well. others may have suggestions as well....good luck! :)
I would never assume a broker would watch over your money as well as you. I would still do your own due diligence "trust but verify".
If you have a chance to read "The Big Short" by Michael Lewis. You will become wary of "stamps of approval" from agencies claiming to rate the quality of any investment. Lots of AA & AAA ratings were bought with fees & deals were rubber stamped.
First I would like to thank everyone for all of the great information. I live in Atlanta and had a few questions about the requirement for needing a license in Georgia to purchase notes. When I looked it up online it looked like there was a requirement of 30 hours of education and pay a fee for a license. Is this like a Real Estate license which you still need to work under a broker? I figure the education would be good, but do you think it would be worth pursuing or better to look for notes in other states? Thanks again for all of the help.
Dave
My brain just exploded, cant believe I am getting all this info for free. I am aware about the laws in Georgia as @Doug Smith shared this with me a few weeks back. I am currently living out of the country and really dont have a location on where I want to invest in notes. I would like to stay close to Georgia but not stuck to any location.
@Bill Gulley So from what I gather the best way for a newbie to start is to find a good brokerage firm, vet them, and then buy your notes from them. All the while learning as much as you can on your own and from them.
I agree, never look at a note a rely on any system devised to rate the quality of a single obligation!
George, in your situation being out of country or not knowing any geographic market I suggest you not get involved in mortgages, sounds like you have note fever and that's about it.
I would not lean toward any large brokerage or lender for a newbie to begin with.
Find a small broker who has properly syndicated investors and work with that broker in buying and making loans.
Don't touch the note yourself, use a servicer to manage the notes.
If you don't follow these simple steps I'd say you'd do better investing in municipal bonds. Basing a purchase on a rating by anyone will be a leap of faith with smoke and mirrors. Large institutions on a one note basis, will have a take it or leave it price and will never have the motivations to sell as an individual holder would or a small brokerage. If you screw up in servicing you can lose your investment and be fined up to 2 1/2 times the balance, don't go there.
I'm not endorsing any small broker, but we have a few here on BP might start there....I would think they could all arrange something.
Watch out in buying a part of any one note with others involved, if it goes south some or all will lose out. Make your investment to the broker with recourse, never without recourse or only secured by any note they have. Now, this may not be how most want to deal but again I'd say the small brokers here could work something out for your money.
And, with all the interest shown on BP about notes it's giving me an idea, it's fuzzy, but and idea all the same. There is a lot of talent here, obviously money and interest so maybe these assets can be rallied on BP. Later.... :)
@Bill Gulley Im not sure if I have note fever or just tired of running in the same REI wheel. I didnt say I didnt know any geographical regions, I said I didnt have a preference on a region since in my home state of Georgia, I am not able to invest in mortgages unless I am a licensed broker.
I have not read the GA laws, does it say you can't invest in a brokerage that is licensed?
You don't need to be in GA, you need to be familiar with the market as to collateral.
Yes, I get bored easily too, pretty much why I did so many things, wasn't about making money, it's about the thrill of the deals, the ventures, the journey. :)
Check with Mr. Horn on BP, he can lead you in the right direction. You should not buy from a broker buy direct from the note holder. In Georgia, I don't know about if you can service the debts you buy but here in Texas, I service my own notes.
Joe Gore
That name rings a bell Joe, do you do business with him?
Talk to several.
Good advice is always limited, people don't know what they don't know, it's worse when they think they know, we are all human you know.... :)
No but I have talk to people that have and no one said anything bad.
Joe Gore
I think @Account Closed was referring to @Dave Van Horn here ...
@Bill Gulleyed. To own a note in Georgia you have to hold a state issued license." I guess I need to do a little more research into whether that means I can invest in a note through a brokerage.
I definitely understand about getting bored. However Notes have captured my attention because its not a business you can just throw up a sign and hope to turn a profit. I love the challenges it brings. I truly love learning about Time value of Money. If you can stick to what you know and then think creatively, the pay off with notes can be great. That is the fun part for me.
@Account Closed I have reached out to Dave Van Horn, he is a very good guy. I have done his Performing notes course. maybe once I learn the business for a while I will jump into non performing notes.
For now my days are filed with learning and reading trust deeds, riders, addendum's, and loan origination forms. Not the most exciting thing in the world, but if you are going to do notes you have to learn the language.
Sounds like you're going to learn ....good luck!
George,
I am in the same situation, I have been trying to learn as much as possible about the note business. I am a buy and hold investor, but decided to diversify into notes. I know you are out of the country, but do you get back to ATL? The Atlanta REI has a note group that meets every 4th Tuesday of the month in Smyrna. I went last month and planning to attend this months meeting. Looking at your profile picture I assume we both have the same non Real estate job.
Dave
I'm going to throw out one more small (and final for me) point. Found this out while looking for SDIRA investments. We hear comments like "...I have been trying to learn as much as possible about the note business..." often. I know this is a real estate centric web site, and we're talking about RE notes. But all note types aren't equal. Maybe I should say, all types of collateral aren't necessarily viewed the same way in the eyes of the legal system.
Many people (lawyers, note buyers, note holders) in NC, for instance, don't know about regulated "installment paper dealers" (in http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/BySection/Chapter_105/GS_105-83.html as regulated by NCGS 105-83). Yes, this applies only to 'personal property' and not 'security instruments' on real property... so potentially mobile home notes may apply. Car loans (their notes) certainly apply, if you deal in those type of notes. And in NC, every person (no exemptions for personal self-dealing or low annual transaction counts) engaged in the business of buying personal property notes is covered. And if you don't pay the quarterly tax and submit the forms, you can't bring a note collection case to a NC court.
Anyway... goes back to knowing your state's laws and quirks.
@David Stratton yes I am very familiar with the Note group in Smyrna have attended the meeting before. I wish I could make more of those. I usually home for about 30 days a year which only allows my to make one meeting a year.
@George Frye, @Account Closed, @Steve Babiak,
Yes, I believe that, currently, you’re supposed to be licensed to own a note in Georgia. If you want to verify that though, it might help to join ACAinternational.org. I think it’s roughly $350 a year and you can get the license requirements for all 50 states because keep in mind, they change constantly.
Thanks for starting this discussion.
I also read Jimmy Napier’s “Invest in Debt” when I was starting out in the note business, and I recommend it often. There are other books about the note business, such as Lonnie Scruggs’s “Deals on Wheels,” which deals with mobile homes. I know that Bill Barton came out with a book “Bailout Riches,” but I have yet to read it. But, not many current books come to mind about the collections side of the business.
Best,
Dave
I have a "note owners handbook" e-book that with an email address I can send on to you to read.
If possible can you email it to ([email protected]) Thanks!