When we talk about being a note investor we have to be very careful not to overpay for the note, and while it might go without saying, if you are just getting started out investing in seller financed notes, only buy the note at its asset value. Using real estate thinking, only buy the note for the price you would have paid for the property in cash. (This is a good rule of thumb for everyday from #1 to deal #900) There are a few things to consider when we buy a note.
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The Reasons Why a Note Should be Bought for its Asset Value
It’s the only way to buy a note: Sure this sounds obvious, but there is only one way to buy a note, and that is for the best price possible without compromising the deal. With any type of investment, leaving money on the table creates more risk for you the investor. If you can buy the note at the right price you are buying at a solid “Loan-To-Value” percentage. The better the percentage in your favor, the lower the risk for you.
Unexpected Surprises: As we alluded to in the opening of this article, a real estate investor can work around the mistakes of a property seller, but often, note investors are only given so much information when making a purchase decision. Any mistake in the due diligence process, can result in you the investor buying a note that is much different than what you thought it was when you reviewed the deal prior to purchase. An example would be buying a note at a high price, only to find out the note is not performing. You the note investor are stuck with a “toxic” asset that will require months or even years to turn around. Make sure your due diligence is as thorough as possible-it’s your protection!!
Exit Strategies: A good note investor buys their note with a couple exit strategies in mind. When buying a note at its asset value you can try several options such as: cashing out the note, re-selling the note for a profit, and re-characterizing the note. Overpay on a note and you could be in for a lower return, and missed opportunities.
The phrase “Buy Right” cannot be understated when it relates to note investing. Only when you buy right do you mitigate your risk, increase your returns, and increase the flexibility of your exit strategies. Have you come across or purchased a note that wasn’t what your due diligence expected? Share your stories and comments below. I appreciate and encourage your feedback.
Photo Courtesy: Jack Parrott