Has anyone bought an individual or a handful of mortgage notes

Question

I wanted to get feedback from those that dabble in buying one or two notes on their own.  What was your experience, what are your returns?  What did you learn?

Charles Campbell · Answer

I have purchased several performing notes and still hold those that haven’t paid off. One has to understand what you’re buying and how to perform due diligence on the important elements. I was fortunate to have a mentor when starting out (thank you @Bob Malecki) and later joined a note investor group( @Tracy Z. Rewey) where there is a significant amount of knowledge and support shared and readily available. Returns are generally what you negotiate,(9-13% for me) but keep in mind you’re only earning that on the unpaid balance, so the principal part of each payment you receive has to be regularly reinvested to maximize returns. I also invested in some note funds, they have all provided distributions at the agreed rate on the entire balance.

Don Konipol · Answer

90% of our loans are ones we originate. We have purchased about 10 loans in the last 7 years covering g the other 10% of notes in our portfolio.

Our notes that we purchase are commercial mortgage, usually partially in default, and we usually are in contact with the debtor to "modify" the note in a way that allows the borrower to make payments. The highest ROI notes we've purchased was a $3.3 million balance note secured by two commercial properties in Arizona that we paid $1.9 million for and a $475k balance note secured by a small retail center that we paid $250k for and that paid off in full 8years before maturity.

The BIG ROI is in purchasing a note at a large discount to unpaid balance and receiving full balance in an early payoff.

The absolute best book on note investing was published 40+ years ago: Invest in Debt by Jimmy Napier.

Doug Smith · Answer

That's actually how our business started. I was working for banks as a commercial lender and move to "Special Assets", where we worked out the severely delinquent commercial real estate loans in 2005-2007. I quickly realized that this could be done on one's own, so I raised some $ and started buying the loans on retail centers and limited-service hotels out of banks. A year or so later, we started buying residential mortgage loans. We were holding anywhere from 50-100 notes at a time back then, but in June of 2014, Lone Star out of TX bought all 16 of the HUD traunches WAY overpaying for the assets. As the big funds figure it out, we slowly liquidated those holdings and went back to our lending roots, but added some direct real estate investment. For us, it was always about buying notes on abandoned, severely delinquent property in deed theory states. Unlike others, it was never about getting them to reperform and holding them for a longer-term payment stream. If they did reperform, we sold them. We always targeted a cash on cash return of 18%+, but pricing started to climb in 2014, other business revenue streams made more sense for us, so we moved out of it. Keep in mind, we had my long-time bank special assets experience and we owned a national title company at the time. We really knew our poo and had the resources to scale. I don't think it's something that you can pay a guru $10K for mentoring and learn it in a weekend in a Holiday Inn ballroom. We were a lot more than dabblers, but at some point they were selling at prices that didn't make sense for us. Happy to discuss it further with you as a sounding board.

Chris Seveney · Answer

I started out dabbling in notes almost a decade ago and now do it full time. If you are doing performing loans you can expect 8-12% returns and if it pays off early then it gets a bump. Non performing loans of course can have higher upside but carry more risk.

Has anyone bought an individual or a handful of mortgage notes

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