All Forum Posts by: Jim Hartmann

@Michael Didion - yes, there are many ways to buy notes and mortgages.  In its basic form you are either creating a note and mortgage (or deed of trust) and collecting the payments until paid off or you are buying all or part (partial) of a note and mortgage that someone else has originated.  If you buy a note/mortgage from someone else you would purchase the note at a discount which would allow you to collect the payments at a yield greater than the interest rate on the original note (since you buy at a discount you have less of your own money invested and get the higher rate).  

Some good books to get started are:

Real Estate Note Investing - Dave Van Horn (Bigger Pockets published book)

Invest in Debt - Jimmy Napier

Performance Anxiety - Gordon Moss

Best of success to you.

@Shadonna N., for a non-performing note you would have the options that you listed - i.e. foreclose, improve and sell the note or the property.  There are also other options that are open to your creativity.  

If the person wants to stay and you feel that they are back on their feet again, you can re-structure the loan in many different ways to help them to work through that time to keep the house as well.  You can change interest rates, move the amount in arrears to the end of the loan, forgive a portion or many other creative ways to help them out and yourself as well.  You do have to be careful with modifying the original terms too much as it could be construed as a new note if too many things are re-arranged or modified.  

If you end up foreclosing, you can move into it, fix it up, rent it out, sell it, etc.  When you foreclose and no one else buys the property at the foreclosure sale you can do what you want with the property as you now own it.  If someone else buys it at the foreclosure auction then you would hopefully make back what was owed to you (or more) as profit.

For me, I would assess the property and if it was close enough to me then I would likely add it to my rental portfolio.  Otherwise, I would determine the best exit that would work for the situation and see if we could get that to work for us.

@Patrick Britton - I have to have that talk with myself at times as well.  You are correct, that they borrower's position does not change as they still owe the remaining balance of the note. You are basically acting as the bank would when they sell the note to another financial institution.  The borrower still owes the remaining balance at the same terms as was agreed upon.  

@Logan Turner, It would be interesting to also look at your rate of return if you were to sell your note using a 30 year amortization, but have a 10 year balloon or some other balloon.  This does not lock up your money for the entire 30 years, but allows lower payments for the borrower.  Of course, you could amortize at whatever terms you desire, but this helps a borrower to get back on their feet (if needed) and then re-finance at the 10 year mark (or before).  You want to make it so that the borrowers are able to re-finance. The sooner that they re-finance, the higher your return.

I agree also with @Steven Burke   You do have to re-invest it into another similar or higher yielding investment however.

@Patrick Britton - I am not quite getting your thought regarding the sales price being greater than the face value of the loan, but here is a simplified example:

Appraised value of home: $120,000

Initial loan: $100,000 at 5% interest amortized over 30 years (360 months)

Monthly payment: $536.82/mo.

Offer to note seller to get a 12% yield: $52,188   (this does not take into account any closing costs or any future servicing/costs)

Sell the note to someone who wants an 8% yield: $73,159

Your profit (difference between 12% yield and 8% yield): $20,971

This is a quick calculation and does not take into account all the details, but it gives a sense for how the discounting process would work.  The higher the yield that is needed, the larger the discount off of the remaining amount of the loan.  To make a profit, you just need to find someone who wants a lower yield than the note was purchased at.

Hi @Patrick Britton

Yes, all 3 of the above steps could be done on the same note if that is your desire.  

1. Using a financial calculator to determine the yield of 12% minus any closing costs and servicing fees, you would be able to generate a 12% rate of return.  

2. By either selling the note to an institution or an individual who desires an 8% return on their investment, you could then sell all or part of the note to generate the profit that you mention in step 3.

Best of Success

Good point @Brandon Hicks

@Brandon Hicks - Thanks that makes sense.  Will take a look at that as an option.  I have heard others talking about pulling out equity on properties as well to use for other investments in the future.  So, I have to decide whether to that would help me in the future or not.  Thanks for all your thoughts - very helpful.  Jim

Thanks @Brian Faulkner, that is a good point about checking with insurance and the bank regarding the electrical wiring.  I will check with a couple electricians to see what it would cost to upgrade the wiring.  Assuming it will likely be expensive as @Aaron Montague mentions, I would think that $16000 would be in the right ballpark.

@Brent Coombs thanks for your honesty with the numbers.  I could probably be more conservative on the rents and make sure it works at those numbers as well.  I agree the electrical is huge as well as the fact that the roof will need some work eventually.  Also, appreciate your challenging my thoughts on buying when the market is hot.  It does make for a poor buying pattern to keep buying when the market is high and not when it is lower.  I was hoping to get the ball rolling once again and purchase more now and when it goes down, but I have struggled with the fact that if I buy now I may not have as much for the next down turn when things become less expensive.  I need to get some comps for the area, but I now a recent 3 unit house recently sold less than 2 blocks away for $140,000, but I am not sure if there are others to compare against or not.  Will need to check on that.

@Brandon Hicks 12 of the units are still seller financed.  The 13th is a single family house that we used to live in.  This is bank financed.  We recently (Feb2017) re-financed our previous house, bought another to live in and rented out our previous one.  There definitely should be some equity in the other 12 units, but I am currently paying 6.75% interest (amortized over 30years) on these properties.  What would be the advantage of re-financing with the bank besides pulling out some of the equity?  Thanks for the advice on the chopped up houses.  That does seem to be my experience also on most of the units.  I do have some that have performed well with long time tenants, but most are fairly transient and after a while struggle to pay so I end up with evictions on occasion.

@Aaron Montague thanks for running the numbers.  The trash in our town is included in the water/sewer bill for each month.  For 6 units and above I need a dumpster, but for smaller buildings they use the trash toters and the charges on these are fairly reasonable.  I will look up those numbers and add them in.  Agree on using the old wiring as leverage to bring the price down.  

Thanks everyone.  Was hoping to make sure I looked at it from all angles and your comments/questions will help a lot.  Jim