What do you expect to see from Note Investing in the next year?

Tax Liens & Mortgage Notes
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What do you expect to see from Note Investing in the next year?

David Putz
Investor · Jackson, NJ · Member since 2010 · 167 posts · 55 votes

Being a note investor for over 10 years and starting at large fund I always saw large tapes.  When I broke off in 2012 and started buying personally, I hoped never to see the day of tapes of less than 300-500 would never end.  I have seen many new investors enter (and exit) in this time but I have also made some great friends along the way.  I am curious with things being up-in-the-air where others see this investment space moving to.  We had a webinar recently that talked about this and will have one tomorrow so I was wondering from this social media where others see things in a year from now.

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
5y

@Dan Deppen

I believe opportunity in 2021 is directly correlated to your relationships. For a new note investor, looking to by 1-10 notes per year I believe there is plenty of inventory readily available to them. I think the challenge with this group of investors is they are taught from some guru who makes it sound like buying notes is the equivalent of going to the grocery store and picking an ice cream flavor (readily abundant and cheap).

For those who have been around, I would recommend speaking to people you buy from now and see what their plans are for liquidating. It’s interesting as several I talk with have not bought a lot over the past few years and have been downsizing their portfolio so they don’t have a lot of assets to sell. They also are not in a rapid buying mode as many moved to some other investment strategies. If they start buying more it would lead to more opportunities down the road but it could be a few years.

I go back to relationships though as it’s key to have strong relationships with few versus week relationships with many. Due to my relationships I have Never had issues with inventory and I can say I didn’t travel around the world chasing people to build them / it’s done through a phone call, specific asset type acquisition and doing what you say you will do over and over.

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  • Dan DeppenBusiness Member
    Erie, CO · Member since 2017 · 274 posts · 267 votes
    5y

    I think inventory will increase in 2021, but it remains to be seen whether a go-to seller who puts out large tapes regularly will emerge.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    5y

    @Dan Deppen

    I believe opportunity in 2021 is directly correlated to your relationships. For a new note investor, looking to by 1-10 notes per year I believe there is plenty of inventory readily available to them. I think the challenge with this group of investors is they are taught from some guru who makes it sound like buying notes is the equivalent of going to the grocery store and picking an ice cream flavor (readily abundant and cheap).

    For those who have been around, I would recommend speaking to people you buy from now and see what their plans are for liquidating. It’s interesting as several I talk with have not bought a lot over the past few years and have been downsizing their portfolio so they don’t have a lot of assets to sell. They also are not in a rapid buying mode as many moved to some other investment strategies. If they start buying more it would lead to more opportunities down the road but it could be a few years.

    I go back to relationships though as it’s key to have strong relationships with few versus week relationships with many. Due to my relationships I have Never had issues with inventory and I can say I didn’t travel around the world chasing people to build them / it’s done through a phone call, specific asset type acquisition and doing what you say you will do over and over.

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  • David Putz
    OP
    Investor · Jackson, NJ · Member since 2010 · 167 posts · 55 votes
    5y

    @Chris Seveney what also has changed is the landscape of the investors who are in the game. Large funds who were not around in 2010-2011 are now all over the place. Most of these who got into notes 2013- have either created these large funds or gotten out.

    Inventory has been influx. I have heard that those buying lower valued assets there has been a lot, such as cfd or assets lower than 100k in value.

    I think the angles of finding deals will be a combination of connections and software. Finding deals are still flowing while pricing is also influx. We placed offer on a pool of private assets last week and shall see how it turns out.

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  • Nick Taylor
    Las Vegas, NV · Member since 2019 · 17 posts · 3 votes
    5y

    Suggestions on how to find/choose a good seller vs a bad seller? (are there many bad ones?)

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  • David Putz
    OP
    Investor · Jackson, NJ · Member since 2010 · 167 posts · 55 votes
    5y

    @Nick Taylor bad seller? Please define that a little better. There are some sellers who have higher pricing which often has to do with how they bought.

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  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    5y

    I've gotten more tapes and inventory in the last month than all of 2020, and believe this will continue into 2021. 

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  • David Putz
    OP
    Investor · Jackson, NJ · Member since 2010 · 167 posts · 55 votes
    5y

    @Chad U. I have to say December was a busy tape month. I have also seen a lot of the same product being sent around.

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  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    5y

    One of our sellers who buys the really big pools said that there was absolutely nothing put out for about 6 months after COVID started. In the fall a few big players started putting out big pools again but he says it wasn't as much as a year ago. Another trading partner mentioned how there was a lack of inventory for NPNs that was causing prices to go to stupid levels.

    I believe that in 2021 we'll see more NPNs available because the market will continue to re-stabilize. I think we'll also see the problems with defaults start to emerge from the damage that's been done to the economy this year. I don't believe that anybody has any firm idea on how bad or good it will be.

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  • David Putz
    OP
    Investor · Jackson, NJ · Member since 2010 · 167 posts · 55 votes
    5y

    @Andy Mirza The large fund I came from continues to buy (100's mm at a clip) and when I last spoke with them they shared how there is a ton of inventory at the top level still.  Most of what they buy is Fannie stuff, however when the sell off the smaller pools (~50m) they now have more funds (100 mm+ funds) then they did even 5 years ago.  So most of the inventory is not trickling down as it did few years back.  I am curious if there is enough inventory that comes out, will it get past that level of investor or will it stay up there.  I am sure some will trickle down and that inventory will more than likely be the lower priced assets. 

    1Reply
  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Andy Mirza:

    One of our sellers who buys the really big pools said that there was absolutely nothing put out for about 6 months after COVID started. In the fall a few big players started putting out big pools again but he says it wasn't as much as a year ago. Another trading partner mentioned how there was a lack of inventory for NPNs that was causing prices to go to stupid levels.

    I believe that in 2021 we'll see more NPNs available because the market will continue to re-stabilize. I think we'll also see the problems with defaults start to emerge from the damage that's been done to the economy this year. I don't believe that anybody has any firm idea on how bad or good it will be.

    Stupid levels is right. One particular seller that I reconnected with from your neck of the woods, recently wanted 94% of UPB for a pool of NPN's. But then again, they've always had a reputation for commanding stupid prices.

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  • Barry H.
    Investor · Scottsdale, AZ · Member since 2017 · 260 posts · 78 votes
    5y

    As a Note creator (rehab homes and then sell to investors and carry the paper), I find the Note world to be disappointing. I have 10% Int Only Notes with 60%-70% LTV - all in KC MO. I needed some cash about a year ago and Note Investors were offering me 85%-90% UPB for TEN PERCENT Notes in a ZERO Interest Rate environment. I did not sell one of them of course.

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  • David Putz
    OP
    Investor · Jackson, NJ · Member since 2010 · 167 posts · 55 votes
    5y

    @Barry H. What pricing would work for you? At 10% coupon you should get more than 85% upb, however depends on if the property value was sub 50k.

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  • Barry H.
    Investor · Scottsdale, AZ · Member since 2017 · 260 posts · 78 votes
    5y

    @DavidPutz

    Thanks for the engagement. I guess I am just one of those ignorant people who does not understand the value in Note Investing. My Notes are in the $40K to $80K range with perfect payment histories (all investor / borrowers making high ROI off the rentals). I worked hard to not only rebuild a property, but also to vett and set up lending with Prom Notes, DOTs, Personal Guarantees etc.

    These are high interest performing loans.  If they were 5% amortized loans and/or Non-Performing, for example, I could see offering some sort of discount at purchase.  I feel like I have have the Golden Goose.  I just figured when I went to sell, I would get Par, or Heaven forbid, more than Par for what seem like the best Notes out there.  I clearly just don't understand the Note world, because if I was a Note Buyer looking for a 10% guaranteed annual return until the asset was sold or refinanced, I would pay Par in a heartbeat. The amount of uncompensated time Note Investors spend looking for the diamonds in the rough is fascinating.  It is a labor of love I guess.  :-)  

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    5y

    @Barry H.

    I wouldn’t see people paying more than par as if borrower paid off in a week then they would lose $. While interest rates are low private lending is hot right now and people can get 10-12% with points and personal guarantees on hard money and it’s shorter time frame. It’s also non owner occupied so it would be considered a lot less risk.

    not saying I agree with everything above but what I believe doesn’t really matter as it’s what others believe and perception.

    there are also creative ways to cash out such as selling partials to other investors etc. To try and maximize returns.

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  • David Putz
    OP
    Investor · Jackson, NJ · Member since 2010 · 167 posts · 55 votes
    5y

    @Barry H. I understand what your saying however going into a note purchase assuming only one exit, perform until maturity, is not always reasonable. At times a performing loan defaults just because it sells to another lender. There is also chances of being refinanced and property selling. If any of these happens then the returns could end up poor. If you would like, send them over and I'll share how we would price them.

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  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Barry H.:

    As a Note creator (rehab homes and then sell to investors and carry the paper), I find the Note world to be disappointing. I have 10% Int Only Notes with 60%-70% LTV - all in KC MO. I needed some cash about a year ago and Note Investors were offering me 85%-90% UPB for TEN PERCENT Notes in a ZERO Interest Rate environment. I did not sell one of them of course.

    Unfortunately, since these aren't institutionally originated notes, there is a small secondary market to sell these into. To compensate for the risk, most note investors would want a minimum 12% yield on their investment, hence the 10%+ discount to UPB. This is pretty standard in this business.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Barry H.:

    As a Note creator (rehab homes and then sell to investors and carry the paper), I find the Note world to be disappointing. I have 10% Int Only Notes with 60%-70% LTV - all in KC MO. I needed some cash about a year ago and Note Investors were offering me 85%-90% UPB for TEN PERCENT Notes in a ZERO Interest Rate environment. I did not sell one of them of course.

    these are not notes that those in the note space will buy..  they look at it as you ripping all the cash out of it.. 

    those that buys notes as a business model NEVER pay par.. they will ONLY buy with a discount.. thats the industry.. 

    I understand your model. its been and is being done by many all the time..  you have to create your own mom and pop buyers for these notes.. your not going to sell them to those in the industry as I stated above.  

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  • Barry H.
    Investor · Scottsdale, AZ · Member since 2017 · 260 posts · 78 votes
    5y

    @JayHinrichs

    Thanks for that supplemental explanation.  As a private lender, I realize I am already outside all the traditional boxes.  

    I am fine making 10% indefinitely on my Notes until principal is paid off so I can reinvest the principal.  

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  • Barry H.
    Investor · Scottsdale, AZ · Member since 2017 · 260 posts · 78 votes
    5y

    @DavidPutz

    Thanks for the supplemental explanation and the offer to look at my Notes. However, the Notes are super solid and I cannot mentally accept the idea of discounting them.  

    This overall thread has been insightful.  Thanks. 

    0Reply
  • David Putz
    OP
    Investor · Jackson, NJ · Member since 2010 · 167 posts · 55 votes
    5y

    @Barry H. If your interested in selling connect and we can see what we can do. We price our performing notes a little differently than most, we use Xirr and not yield.

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  • Barry H.
    Investor · Scottsdale, AZ · Member since 2017 · 260 posts · 78 votes
    5y

    @DavidPutz

    I can provide a spreadsheet to you to look at.  

    Please message me and I can provide to you.  

    :-)

    0Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    5y

    @David Putz A little bit late on this reply since the thread has changed direction....

    Yes, that's a huge difference between 2008 and what we're seeing now. When people talk about a future "tidal wave of foreclosures" because of COVID, one of the things I think is "even if we do see a tidal wave, most investors won't see the benefits of it the way they think they will." There are a lot of established players that were handling the remnants of 2008. If we see more foreclosures (either in a tsunami or a surge that plays out over several years), there are already established players with capital and systems in place, ready and waiting.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Barry H.:

    @JayHinrichs

    Thanks for that supplemental explanation.  As a private lender, I realize I am already outside all the traditional boxes.  

    I am fine making 10% indefinitely on my Notes until principal is paid off so I can reinvest the principal. 

    No problem I have been in the private seller carry back note space for basically my entire life.. My dad did this in the 60s through the 80s.

    Its kind of like finding that private lender that you can have a one on one with.. just need to get belly to belly with someone you can talk to and will understand what you do and is happy with paying par..  its not going to be those in the business of buying and selling paper ( most all of the time)  I get solicited from the every week.. they are doing just what wholesalers do and robo calling or call center calling..

    One thing you may want to do if your looking to raise the cash is package some up and see if your local bank will advance on a hypothication.

    We did this alot when i was in the timber business.. we would buy a chunk of timber ground  log it and then sell the dirt on contract.  The timber usually paid for the entire purchase so we got all our cash back out of the logs.. and were left with the dirt with no debt.. I would then sell the dirt on a note and trust deed .. Now land notes to a professional note buyer take HUGE haircuts.. So we would just borrow against them most of my notes were 3 to 5 years.. the folks needed that time to get their homes sold their building permits done etc.

    when they paid us we paid bank of course .. the note payment from my buyer was more than enough to cover the Hypothication loan we took. And then we got the use of the cash to go buy another deal..  Now these types of deals can be tough to get .. My local commercial banker has been very good to me for 27 years.. and did deals that they simply dont offer to the public its relationship based.  At the same time i had a nice 7 figure line of credit to buy Timber Deeds  .. Oh man getting excited thinking of the good ole days. 

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  • Barry H.
    Investor · Scottsdale, AZ · Member since 2017 · 260 posts · 78 votes
    5y

    @JayHinrichs

    Wow - that's a great history !!  Hypoythication loans?  I don't even know if that is a word !!  :-)

    It sounds like you have had your hands and head around many investment strategies.  I think I will look to create trust with a private buyer(s) and when I truly need $$$, I can sell a note(s) at my "irrational" evaluation of "Par."  

    Thanks again for the exchange and insights.  :-)

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Barry H.:

    @JayHinrichs

    Wow - that's a great history !!  Hypoythication loans?  I don't even know if that is a word !!  :-)

    It sounds like you have had your hands and head around many investment strategies.  I think I will look to create trust with a private buyer(s) and when I truly need $$$, I can sell a note(s) at my "irrational" evaluation of "Par."  

    Thanks again for the exchange and insights.  :-)

    Others call it selling a partial.. although it is different when you hypothicate the note you are pledging 100% of it to cover the 50% fo the note your borrowing.. if you default the bank steps into your position and your wiped out.. And of course you just dont walk into your local B of A and tell them you have notes you want to hypothicate.. this is a commercial bankers realm. 

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