Ep 273: An Introduction to Note Investing with Dave Van Horn

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Ep 273: An Introduction to Note Investing with Dave Van Horn

Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes

Most people understand the world of rental properties, house flips, and other common real estate investments. But there is one little-known niche that could provide massive cash flow and profits without the headaches: note investing. In this episode of the BiggerPockets Podcast, we sit down with Dave Van Horn, author of Real Estate Note Investing, to talk about how anyone can get started with real estate note investing—even as a first investor. In addition to a great conversation about notes, you’ll also hear some of Dave’s powerful strategies for getting his real estate offers accepted, how he started his investments using the BRRRR strategy (with credit cards!) and much, much more.

Listen here or on your favorite podcast app.

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Dave Van HornPro Member
Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
8y

@Account Closed These mortgage notes have since been modified after they've gone into default and because of this default they're purchased by a company like mine at a discount - usually in bulk. So it's important to remember we're buying it for less than what's owed (a percentage of Unpaid Principal Balance or Fair Market Value).

Then we're re-modifying these loans with a new payment plan that can include not only the principal payment but also interest, arrears (missed payments), and any corporate advances (like HOA fees, back taxes, etc). So now this asset has an exponentially higher return than the original interest rate on the note.

We then sell the note at a current market rate that's acceptable to investors (which is the "8% to 10%" you're talking about) and price it accordingly.

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  • Katie Colter
    Real Estate Broker · Eugene, OR · Member since 2018 · 13 posts · 8 votes
    8y

    Hey Dave I was looking at non-performing notes and they list the UPB %. DO you want a high or low percentage rate on those? Thanks so much, really enjoyed the podcast!

    1Reply
  • Lawrence Sarpong
    Charlotte, NC · Member since 2014 · 1 post · 1 vote
    8y

    WOW! I don't get on here and post much, but...this was an awesome podcast! Thank you!

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    I have had a friend for years that does well buying business notes. It's a different wrinkle than residential notes. There are also commercial notes out there as well.

    Residential notes I would think carry a lot more regulation and red tape than other types of notes but I do not know much about them.

    I looked into residential notes at the bottom about 5 to 6 years ago but it didn't excite me as much. I will listen to the podcast as I always like to learn more stuff.  

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  • Account Closed
    Investor · Fairport, NY · Member since 2015 · 124 posts · 74 votes
    8y

    This was a great podcast, very interesting.  I love the idea of using notes as en exit strategy, especially as interest rates are rising.   Can't wait to read the book.

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  • Dave Van HornPro Member
    Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
    8y

    @Stanley E.

    There are Arkansas notes out there!

    Although there are some states (usually ones with a lower inventory of hard real estate generally speaking - think Alaska or Wyoming) that you don't see as many notes in, Arkansas isn't one of them! And we're just talking institutional notes, seller financed or lending hard money are other forms of notes that can be done.

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  • Stanley E.
    Rental Property Investor · North Little Rock, AR · Member since 2014 · 148 posts · 43 votes
    8y
    Dave Van Horn , any suggestions on where I would begin with note investing here in Arkansas? Thanks
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  • Dave Van HornPro Member
    Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
    8y

    @Brian Ploszay

    Thanks for chiming in! I think a lot of the risks you mentioned can certainly be valid but I thought it would fun to challenge some of these using our experience.

    1.) That's usually true that you do not see the inside of the property with institutional notes but my argument would be: you don't need to, especially if the discount is big enough on the buy. I say this because the quality of the inside of a person's home doesn't necessarily determine whether or not the borrower will pay. And if you're buying a vacant NPN, statistically we've found that the outside can tell us a lot about the inside of the property. There's no bad notes, just bad prices.

    Now this is just institutional, with seller financed notes for example you do see the inside of the property.

    2.) You're right, foreclosure can take a long time in certain areas but you factor that into your pricing or bidding. Some notes are cheaper in those markets than others because of this in fact. It can also be a glass half full scenario depending on your desired exit, a longer FC timeline means more time to complete a better loan modification. Plus, there's no rule that says you have to buy in those markets.

    3.) We can insure the property once we own the note. We use a firm that insures nationwide.

    4.) That's a known elemant also factored into your pricing and bid. They can accumulate with hard property as well, just like a mortgage can accumulate when you're not collecting rent ;) But you can also recoup backtaxes when you modify the loan.

    5.) Again, municipal fines factor into pricing. Unfortunately they don't go away with hard property or notes.

    6.) This is debatable IMO. It's not over for us! We have more product than ever ;)

    7.) Legal fees are the cost of doing business, just like factoring in the rehab price or materials is for a property.

    8) We found this to be statistical. Most don't have the resources to fight lengthy foreclosures, if they did they probably wouldn't be in default. Now some will contest but there's a lot of factors that go into this. A large portion of 1st liens for example tend to be vacant, so it's rare that a homeowner would fight a foreclosure on a property they don't live in.

    Also I think it's important to remind everyone that just like with hard real estate, you don't have to buy in your state. And like you say Brian, education is key here. And the note space is a vast place that I don't recommend just anyone jumping into any part of it without doing some deep due diligence first.

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  • Dave Van HornPro Member
    Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
    8y

    @Stanley E.

    You could talk to others at your local REIA to see if anyone in your area is in the note business. You could also check out larger loan exchanges and websites like FCI Exchange and Loan MLS. You could even search LinkedIn and BP for note investors in Arkansas as well.

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  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    8y

    More on my experiences:

    1.  I agree that it is okay not to view the interior of the properties.  I take this risk.  But it is a proper point for the new note investor to realize. 

    2.  The length of the foreclosure case - in my market (Cook County Illinois), this is really a negative factor.  Surprisingly, many defendants show up in court with an affordable attorney, who can drag out the process.   About 35% of my notes were contested.

    3.  Noted on the insurance.  I looked locally, and found it to be expensive.  Plus many of my properties were lower balanced real estate.

    4.  My loan modification experience, re-defaults were common.  If they pay, it is a terrific investment.  You get a high yielding note and don't have to manage the real estate.

    In conclusion, this is a specialty that investors need to get educated, especially on the local level.  

    Skilled due diligence is a must.  Here are a few examples of what can go wrong - situations that I avoided through careful due diligence:

    1.  Real estate taxes were not paid and sold.  They were not redeemable, yet someone was trying to sell that worthless note.

    2.  Building was slated to be demolished by the city.  They would not remove the demolition order.

    3.  Mixed use commercial building - the defaulting landlord wrote a favorable and long term lease to the tenant.  The 20 year lease held up in court, making the building worth little.

    I've switched to buying properties at the sheriff sale.  Or buying notes where the foreclosure case has already reached its conclusion.  Lots of local banks don't actually want to take back their defaulted real estate - they can't manage it.

    .

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  • Aaron Farr
    Real Estate Agent · Spokane, WA · Member since 2017 · 77 posts · 57 votes
    8y

    @Dave Van Horn thank you for the wonderful podcast!  Very educational.  

    I am specifically interested in purchasing non-performing vacant property notes in my region.  Where is the best place to find these types of notes for sale?  I contacted your office at PPR and was told your company isn't currently selling to individuals like myself.

    0Reply
  • Dave Van HornPro Member
    Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
    8y

    Thanks @Aaron Farr

    In regards to our company, we are currently no longer selling NPNs to retail buyers on a one off or loan-level basis. When we do sell these types of notes, they're usually being sold in larger quantity on loan exchanges and through brokers.

    But to answer your question, I often say it's a lot like buying hard property...meaning there's really no one size fits all answer! Opportunities could be anywhere and there is more than one way to buy. And for serious note buyers, it tends to be more relationship based rather that simply transactional.

    I talk about sourcing notes more in my new book but the short answer is: Notes can be found through a variety of avenues including (but not limited to): Loan Exchanges, Servicers, Note Funds, Note Brokers, and even individual note sellers (which you may find at your local REIA, LinkedIn, or here on BP).

    Hope this helps! Feel free to reach out if you have anymore questions.

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