Promissory Note Sellers?

[Aaron Millis]

I have recently learned about investing in notes and I have tried to reach out t multiple banks, credit unions, and mortgage lenders in my area for more information and to see if the sell them there. However most of them have no clue what I'm talking about and all of them have said no. Where can I find places that sell notes?

[Dion DePaoli]

@Aaron Millis

BP has a Forum specifically for notes : https://www.biggerpockets.com/forums/70-tax-liens-...

A newbie private investor buying a loan from a bank is not high probability at all.  Banks have a fiduciary duty to obtain the highest best market price for any asset they need to liquidate.   A private investor likely demands more of a discount than any of them are willing to give up.  Many smaller banks will simply handle the delinquency or default in house if they hold the loan in portfolio.  

I don't understand why that dated barstool banter still exists - "buy direct from a bank" but it hasn't been true for years.  Banks will seek more qualified counterparties.  Those folks are generally investment funds.  Eventually some funds do trade down the street and that is where most of the product comes from.  

In regards to the desired performance status of loans, the matter at hand probably has more to do with what you think you have learned vs reality.  There is in fact 'not' numerous ways to profit on defaulted notes.  

A borrower can only do one of two things:  (a) pay you or (b) not pay you.   As an investor your profit/gain is a function of one of two things (c) principal amount of loan and (d) interest accrued.  A Mortgagee is only due the principal, interest, advances and fees defined by the note.  This leaves us with two true ways a profit occurs (1) you collect from the borrower or (2) you collect from the property.

The one remedy available to a Mortgagee defined by the security instrument and note is foreclosure.  There are alternatives to foreclosure such as a short (pay or sale) and deed in lieu of foreclosure.  

Loans carry risk of loss.  They are not risk free.  Defaulted loans (NPL's) generally carry more risk than a performing loan (PL).  However, there is still risk of loss in a PL.  Just because someone is paying now doesn't mean they will do so into the future.  Nor does it mean they will pay in full.  A NPL carries the idea of more risk as it is the thing of value when a borrower doesn't pay which the Mortgagee doesn't own and can't use to recover from until it is either auctioned or owned.  (the property) The path to that conclusion generally mandates additional capitalization.  

You purchased a loan for $50.  You will need to put $20 into it to sell it for $100 to make $90 and earn $40.  The $20 goes into foreclosure fees, servicing fees, insurance fees, taxes, evictions, bankruptcy defense, repairs, title defects and a couple others.

The additional capital demand is largely determined by time.  The longer you have to work through the asset the more capital it will take.  So I often tell investors their biggest risk is actually time.  

As such, I firmly stand in the camp that newbie investors are better suited with PL's to learn about the industry than NPL's.  A PL will lessen the capital burden and expose you to the ideas you will need to learn.  Trust me, just because it is performing doesn't mean it is without problems.  You are likely not interest in purchase that type of "prime" loan.  They have yields down around 4% and 5%.  So your desired return puts you into riskier loans innately.  

Property taxes have "Super Lien Status" which is unique to only a couple types of liens.  The term means that regardless of the time the lien is filed, which determines the priority in title, they rise to top.  So a tax lien, once filed, automatically becomes the first lien on any property.  Regardless of how many other liens might already be present including a mortgage or deed of trust.  Provided that lien is not itself Super, which would couldn't be jumped over. 

When a property is pledged as collateral, for a Mortgagee to use in the event of default, to recover the sums due under the note, the owner of the property has an automatic equity of redemption.  That is, the owner has a last chance to pay off the debt prior to losing ownership of the property.  This chance is a time period called Redemption.  Foreclosure by definition is the termination of the borrower's equity of redemption.  The redemption period expires either prior to foreclosure auction or post foreclosure auction subject to state law.  Foreclosure is NOT the "taking" of the property.  

That should give you some cannon fodder to search the forums for.  There is a good body of discussion across these ideas and many more.  Additionally, if you post questions to that forum you will get more input from others working with the asset class.