Non Performing Notes

[Samuel Hoston]

I want to invest in notes and I am seeking anyone who is willing to teach me the ins and outs of the business. I see so much online about it but I need someone who will take me through the process step by step. I hope there is someone who is willing to share their knowledge with me. I will greatly appreciate it and hope I can return the favor somehow.

[Bill Gulley]

Welcome to BP, David. Take care with solicitations in the forums. While always encouraging a contact or saying call me or let me help is a very good business practice in real life, urging people to contact you in the forums is not as acceptable as the forums are for discussion, not suggesting to contact for more information which is a solicitation. Provide feed back for everyone to learn or comment on, make a contact with that person, discuss the business and then you may have the opportunity to ask for more contact. No problem, there are others with poor forum habits as well.

Back on topic.

Just about everything you find about notes will have an underlying marketing tone or agenda to it, certainly stay away from dated materials.

Notes are legal documents, instruments and obligations. They are not like most other assets, like something in inventory that can be sold. Those new to notes generally fail to understand what a note is, the classifications, types of interests acquired, the obligations involved, the rights to enforce the contract, what collateral interests are as opposed to ownership rights, the legal rights of borrowers, the exemption rights of a borrower and the regulatory issues between investing with your money and getting into brokerage functions that require compliance.

If you look at mortgage/note investing, it's a far cry from RE with respects to the knowledge required.

If we were to put notes and RE investing knowledge in an office building, residential RE would be on the ground floor as you enter the building, it goes up to the 4th floor where small multi-family RE begins having their offices across the hall and that goes up to the 6th floor where small commercial properties are dealt with, small office, retail. Getting to the 8th floor you'll start seeing lending operations for short term loans secured by residential properties. That flows up to the 10th floor where larger commercial projects are devised and managed and across the hall are small note dealers. When you get to the 12th floor there are larger commercial property managers running around along with mortgage brokers blocking and selling loans. You begin to see syndicators, tax credit developers and banking managers.

Most that want to get into note investing get hooked by brokers and gurus saying it's easy to do, that it's a step by step process. If they were to go into full disclosure (even if they could) it would scare most away and they wouldn't have potential customers/clients or transactions. They will often suggest you come into the building of knowledge, get in the elevator and get out on the 9th or 10th floor. Big mistake!

Start on the ground floor and learn your way up, you can't learn much getting off on the 10th floor listening to someone who has a vested interest in you and some transaction.

Things to look out for:

Buying or selling with or without recourse, buying a note without assurances from the seller as to compliance in the note as well as the collateral.

Pooled investments, these can get into security violations. business partnerships in buying and selling notes can get into licensing issues. Borrowing money from other investors can take you out as an investor and put you in the business of dealing in notes.

Getting into notes with other investors, sharing in a note, you could be paid equally if things blow up, but there is no way for each party to be equally secured, someone has to be in front of another when you have more that 2 sharing that milk shake, neither one gets all of the last sip.

Substitution of collateral being allowed, this is a huge red flag as such substitutions need to be and remain equitable, values must be verified and not at the whim of a broker without approval of the investor.

Recourse or the ability to collect your money in the event the note seller made a material mistake, error or in some cases intentional acts including fraud.

Lastly, notes are made, funded as legal obligations, they are subject to law. The first place to start is by studying law, not finance and not RE. What is the legal obligation made, then the legal aspects as to the collateral, then to the legal obligations of both debtor and creditor, then to the financial aspects, time value of money, financial risks, types of financial arrangements to limit risks. Then a greater understanding of collateral, the RE secured. Then you need to move on to taxation and note management, modifications, collections, securing collateral and disposing collateral. Each of these aspects are intertwined and can go much deeper in both legal and financial terms.

Notes just aren't bags of popcorn that can be sold off with several people helping themselves along the way. Do some reading on BP and you'll see that notes can become very involved and it's easy to lose money in anything when you don't fully understand what you're getting into. If anyone says it's easy or with limited risk or that they guarantee anything, look to their agenda and understand their position as well as yours. :)