All Forum Posts by: Rob Cee

I think investing in HM loans (aka trust deeds, mortgages) is one of the best most secure investments.  Much more control then the stock market, much better returns then bonds, less hassle than rentals.  It's like a dividend because you get a payment every month.  Vs investing in say Index funds they go up and down like a roller coaster and you get no monthly dividend.  

If you are going to invest through HM brokers to bring you deals, #1 you have a choose a HM lender with a lot of experience and integrity.  Find out how long they have been in business, do a background check, check their license, get references, etc...  Best to find one that has been though multiple real estate cycles (didn't just get in the business in 2009).   

There is a lot to look at when choosing which deals to lend on that are bought to you.  You need to cherry picky the best.  If it's a flip you need to look at the flippers track record, get some links from Realtor.com or Redfin of before and after from flips they have completed.  Check how much cash reserves they have in the bank.  Make sure there is a personal guarantee.  Check credit, get a loan application, get a rehab cost estimate, etc...  

The #1 thing IMO is getting the valuation right so in case of default you have plenty of equity.  You need to find a way to really zero in on the value, this can be trickier than it seems especially if the property is out of your area.

Also you need to get familiar with everything you need in the loan package (note, deed of trust, title insurance, hazard insurance, business purpose statement of loan, HUD 1 settlement statement, etc...).

Unfortunately there are very few books or seminars that address passive investing in mortgages and trust deeds. The best one I have seen is George Coats "Smart Trust Deed Investment in California". It's a 22 year old book though. The main concepts apply in all states. It is very difficult to get properly educated on all the risks related to trust deed/mortgage investment. There are a lot of landmines to watch out for. Paying a experienced long time mortgage attorney in the state you plan to lend in to sit down with you and go though everything that can go wrong may be a good step. Papersource has some decent info on not investing that can be applied to DD in HML.

I personally only invest in 1sts, only investment property (NO owner occupied), only SFR's, and only in a house I wouldn't mind owning if I have to take it back.

I had invested in real estate for a decade+ before I started investing in trust deeds and I also have a background in conventional mortgage lending. And I still find it overwhelming sometimes with everything you have to look at to mitigate your risks before investing in a trust deed/mortgage. And I still am probably taking many risks unbeknownst to me ("the unknown unknowns"). If you are totally new to real estate it may be daunting to invest in private mortgages. Or ignorance can be bliss until something bad happens. Most people that I know that invest in notes and HML's, had invested in real estate for many years prior. So they had a foundation in real estate concepts.

I agree with a lot of what you say Jay.  It is definitely better to know who you are lending to, I also think it helps to be local so you can better value properties and scrutinize appraisals & BPO's.

I don't think I will lose money on this, but after all the legal fees I may not get all my back interest owed to me. And it is too close then I like. One issue with this particular loan was I didn't scrutinize the appraisal thoroughly enough, I think the appraisal was a little inflated leaving me with less equity then I thought. I think when the HM broker orders the appraisal, it is not always totally un-biased. That appraiser wants to make the deal work, they are not always the most conservative on value. The subject property is a fixer. The appraiser used all comps that were at least somewhat fixed up and would sell to a retail FHA or VA first time buyer. The subject would only seller to a landlord or flipper. The appraiser IMO did not adjust down enough for the house I lent on being a fixer.

Appraisals and valuations are more complex then most people think. If you get a crappy appraiser, they can really over-value a property. There are so many details...neighborhoods and vary wildly from block to block and you can get a dumb appraiser who uses comps from the good block to value properties on the bad block. I looked at an appraisal for a hard money loan I turned down a while back where the appraiser did not check to see if the bed/bath count & square footage was all permitted on the subject. So he used ALL 3/2 1,300sf comps for a property that was physically 3/2 1,300, but the public records had it as a 2/1 900sf. So he gave that illegal square footage value as if it was permitted! If the trust deed investor had to take that property back they would have had a much lower LTV than they were led to believe. Because if they had to sell that to a retail buyer, FHA, VA, conventional appraisers WOULD NOT count that non-permitted square footage in their appraisal. Therefore it would sell for much less than the comps that were all legal 3/2 1,300 sf. This is a great example of a detail on a appraisal that could be easily overlooked by a non-experienced trust deed investor. In addition, all the comps used on this appraisal were in the middle of nice cul de sacs when this house sat on a busy street close to commercial, and the appraiser did not not adjust down enough for that. So many small details on appraisals!

I do think you can successfully buy notes and lend hard money to people you do not know and in areas you do not know, there are plenty of people doing this on BP successfully.   I just think you need to have to have extra precautionary measures in place.  For example I have some very experienced appraisers (that are also investors) that I am going to have do appraisal reviews for me for properties I lend on out of my area.

For me the #1 key in HML's is nailing the appraisal. If you have enough equity you can usually worst case get made whole even if a lot goes wrong. This loan that I'm dealing with right now, a ton has gone wrong with the borrower, the appraisal was bad, yet I still will probably not lose any money and may even make money.

One rule I personally follow with HML is I only lend on properties that would cash flow as rentals if I have to take it back and rent it. So worst case if all hell broke loose and I couldn't sell this house I'm foreclosing on, it would make a great rental. It would be a cash flow rental with a nice return in a major metro area of very expensive state, rare indeed. If I went section 8 it would be huge cash flow. It would also work as a flip if I had to rehab it and go there. So many exit strategies worst case. This is what I like about lending and notes. If you are at a low enough LTV there are a lot of options even if the borrower doesn't pay.

Thanks Jay. I filed a NOD already a few months ago. But the DOJ could possibly delay the foreclosure timeline, don't know yet. I have been in communication with the HM broker that originated this loan and they have been very helpful and supportive, and gave me a attorney referral. The quotes I've got from two attorneys I talked to handle this is from $2,500 retainer all the way to $7,000 (most charge around $400/hr). I will report back to let everyone know how this turns out.

It is on the west coast.  Jay that is a good idea to talk to the title company that closed it.  I did ask my servicer about it, and they then asked their attorney about it, and the attorney responded that they have dealt with this issue, and they have a fairly high retainer fee to handle it for me.  There's the old saying of course that says the person who represents themselves in legal matters has a fool for a client.    

Has anyone had to deal with receiving a "Notice of Forfeiture In Rem" letter from the Dept. of Justice for a property they hold a note against?  This can happen if the owner of the property is using the property for illegal activities and the Gov wants to seize the property owners assets.  The note holders (and anyone with an interest in the property) have to file a claim with the DOJ to protect their interests in their lien.  Has anyone here gone though this process?  Does the note holder need to pay an attorney to file this claim with the DOJ and deal with this?  Or can they do it on their own?  Attorney costs could be significant.  

The thing about seller financed notes is you have to put a lot of time, effort and money into finding them. Needle in the haystack.  Notes being  sold by institutions you just contact the company.   And hard money loans you can have brokers bring to you to fund. No big marketing  effort needed Also I personally will only deal with investor loans, no owner occupants for me.  If I could find seller financed non owner occ investor loans without a huge amount of time and effort, yeah I would love to go for those, and probably  would prefer them.  

I agree with the Paper Source as a good place for info.  There is a e-book on that site written by W.J. Mencarow about everything that can go wrong with a note that is very good.  And a e-book called "Legal Lessons" by Lorelei Stevens (who has been in the note business since 1971) that is very good.  I heard Henry Dvorken's course is good (I have not looked at it but it was recommended by two experienced note buyers) and I saw Dyches Boddiford has a note investing course (I have not looked at that yet either).   It seems like most of the note buying education out there focuses more on buying seller financed notes & getting into being a note broker, two areas I personally am not as interested in.  I do not want to broker notes, I just want to invest in them.  And much of the educational stuff out there is very dated.    I think more investors on BP are looking for info on buying notes from servicers, funds, institutions, etc... (versus trying to track down seller financed notes through direct mail, etc...)   Gordon Moss book "Performance Anxiety" (I have not read this yet either) seems like it is the only recent publication that deals more with the type of note investing people on BP are interested in.  I did read George Coats book and it is good, but very dated and rambles a bit.

I have not invested in existing notes yet, but I have funded trust deeds originated by hard money brokers the past few years.  It was very difficult (if not impossible) to find any decent education material or seminars to attend that taught hard money lending or trust deed investing as well.

Bob it depends what you mean by "decent value". There are portfolio and larger national HML's that sell performing firsts in major metros of CA & WA at low LTV's. But you are not going to get 15%. More like 8-10%. But you also are getting a note that is performing right now, no headaches and don't have to do any collections and deal with deadbeat borrowers or have collateral on your notes that is low cost houses in rougher parts of the South and Midwest. It depends what you are looking for. OP was talking more about passive investing.

Vic there are also a lot of HM lenders running funds you can invest in if you are accredited.  This is truly passive and "set it and forget it" way of investing in HM loans and takes zero time other than your initial due diligence on who is running the fund..  A nice plus is you can automatically re-invest the interest income and get the effects of compounding easier in a fund.  With the rule of 72 at 10% your money doubles every 7 years.  With funds you also have ALL your money invested ALL the time earning %, vs. when you fund individual trust deeds (like myself) there are times when you money is on the sidelines not earning any interest while you wait to find the next loan to fund.   You would have to do a lot of research on the fund manager and make sure they have a long track record and have been though multiple market cycles.  I have not invested a HM fund myself because I'm a control freak with my money and have a lot of trouble trusting others and turning money over to them:)  But I'm sure there are some very solid ones out there.

Hi Vic,

I'm in a similar situation to you looking for passive investments that are not J.O.B's. Right now I fund HM 1sts though HM brokers who source the loans for me and I make 9-11.5% depending on risk, all on the west coast. Use both SD IRA money and cash in bank. I fund the entire loan myself, no fractional. So I get to make all the decisions myself during defaults. I do both loans on flips and rentals.. There are pros and cons to long term vs. short term loans. Long term loans mean you don't have to always go out and find the next deal to fund. But over longer periods borrowers can get themselves into more difficulties (BK) and deferred maintenance can happen. Short term is nice because your money is not locked up that long in case new investment opportunities arise. It does not take a lot of my time. When a new opportunity comes across my desk and have to put some time into due diligence. Most important is the property valuation. There are some garbage appraisers out there just trying to get valuations to come in so the deal works for the HM broker. You need to really look closely at many, many facets of an appraisal and possibly pay for an appraisal review by someone YOU hire. To me the valuation is the #1 thing you need to be good at to protect your capital. You may think you are at 65% LTV but really be at 75% if the appraisal is inflated. There are also good and bad HM brokers.

I very recently started looking at buying existing performing 1sts in addition to HML. I may only want to buy performing 1sts in non-judicial foreclosure states in the west coast, probably only in major metros in CA or WA for me personally. I am in the very beginning stages of looking at investing in performing firsts so I know very little about it.

Does anyone else out there invest their own funds in performing firsts right now?  What types of returns do you get?  What states?

I'm not looking at NPN notes right now because that looks more like a business (J.O.B) vs. an investment.