Buying Notes from Banks vs. risking it on the Street

Is buying notes from banks a far sounder investment strategy than risking scooping up mortgage notes on the local street corner?

 

Many new note buyers and brokers turn to solo investors to market to and buy notes but while there are certainly a few golden nuggets to be found this way, why are more sophisticated investors opting for buying notes from banks?

 

Note Quality

 

Unfortunately, while smaller investors may be eager to sell their notes they are often clueless about how to structure a good mortgage note that is saleable.

 

Banks and institutional mortgage lenders of course have much more rigorous qualification criteria for those they loan to. They demand better credit, proof of assets, verification of income and employment, look a depth of credit history and have been notoriously tough on appraised values during the last 6 years. Most of these notes for sale have also been seasoned a lot longer than those you’ll find from individuals.

 

Fraud

 

While banks aren’t completely blemish free, buying notes from banks is certainly far less risky than other options.

 

There are unfortunately masses of individuals out there creating note farms. They are scooping up distressed properties and offering seller financing to anyone with a pulse (and sometimes even those without a pulse). Many times these notes are created based on financing to those just walking out of foreclosure, with barely any money down and some unscrupulous individuals may attempt all types of fraud to make their notes appear more attractive. This can include hiding underlying liens and claims to title as well as falsifying borrower information, including payment history and loan performance.

 

 With this in mind buying notes from banks also offers more security if issues like these do arise. You may not have an official buy back clause but you have virtually no hope of tracking down and getting a penny out of an individual investor versus a large bank.

 

Consistency & ROI

When calculating your real ROI from any type of investment you also need to factor in any time, marketing money and due diligence that went into a given acquisition.

 

Buying notes from banks provides a great ongoing source once you begin to build relationships, a resource which can offer growing discounts and easier deal flow for simply building your own portfolio or even brokering notes to others in high volumes. Plus, they offer many types to choose from including residential, multifamily, commercial, construction and business notes.