My Take on Investing in Notes

[Nate Crump]

I am not yet discouraged, but as I read about buying notes I seem to find mostly information with a slight negative twist to it. I am 100% sure these members are trying to help gung-ho newbies such as myself, avoid the sting of regulations, SAFE Act, etc., but I get to the point where I ask if it may not be the best route for someone with a small chunk of capital they simply want to invest into their own retirement.

As an example, I am curious if it is important to know ALL the laws from ALL the states? There is a current thread mentioning how if you buy a note in Georgia, you have to have a license there.

Well, I was getting prepared to buy some notes in the near future from someone like PPRnoteco. (Dave seems to have a great reputation), but I worry I could get stung by purchasing a Georgia note and not knowing this law as I live in Utah. Do I need to research all the laws of any state I am looking at?

Or what if I have a note, and the home-owner needs to make a change? Maybe you decide you want to re-write the note, but does the SAFE Act not make that possible anymore, even if it is something you wanted to do to help the home owner, ie. lower an interest rate or something. Can you even contact home owners, or do you need to be licensed? I do feel I've got a bit of mixed answers on things like these.

To be honest, I see two groups of very well established people in the notes forum: One group that mostly deals in the hell you could find yourself in if you do something wrong, and a second group that almost seems to be saying, 'don't overthink it, just do it. It's not as bad as the first group makes it sound'. (I am appreciative to both groups for the advice they are sharing).

Anyway, I don't have any particular questions, other than just being curious if any other new, would-be note investors are feeling this way and if anyone has any opinions on the matter.

[Dion DePaoli]

I do not think anyone that is actually in the note business that contributes to any thread around the topic has the intention of scaring newbies away. Most of the information is shared to make the newbie aware of some of the risks related to notes. There can be many due to the multiple moving pieces. Some newbie frustrations can come from trying to relate note investing back to the more familiar idea of real property investing. Real property tends to be pretty familiar to most folks but notes do not fit nicely into the same sort of 'box' that real property investing does because of all the moving pieces and various concepts to know pretty well. It then becomes difficult to discuss a potential issue or concern without it seemingly taking a negative twist. I think as you learn more about note investing and become more familiar with the moving pieces, the segment you once found negative in tone becomes informative and loses tone altogether.
You could even use this thread as an example to why some note threads end up with negative tones. For instance, "...why would you need to know individual state laws unless you are originating notes in that state or brokering?"

Not picking on the poster but there is no real way to refute this comment without expressing how misguided the statement is. This is a business where the laws matter and are a much larger part of the business than real property. An easy example, how can you evaluate a note that is in foreclosure if you don't know the state foreclosure laws? You do not pick up the phone and call a foreclosing attorney to ask them what the value is. There is probably something to be said about relying too heavily on attorneys as a supplement to your knowledge being dangerous but we will leave that for another thread.

In a non-negative manner, let's recite the questions and see if we can give some answers:

Do I need to research all the laws of any state I am looking at?

You should familiarize yourself with the laws of a state where you plan to invest. You do not need to know ALL the laws but should have a practical understanding of the laws that pertain to your endeavours. For instance, if you only plan to invest in cash flowing loans, then you may not need an in-depth understanding of state foreclosure. However, since all loans have a risk of default or breach you should have some understanding of the law.

Or what if I have a note, and the home-owner needs to make a change?

A "Borrower" (see the real property reference in the sentence?) can not make or change a Promissory Note once it is executed. That would sort of defeat the purpose of having a note, if the terms of repayment could just be changed by the borrower on a whim. A note can be forebeared or modified which are formal adjustments to the note terms. Both parties (Mortgagee and Borrower) will be required to agree to the terms of any change to the note, if that change is not a beneficial change for the borrower. If a forbearance or modification does not take place, the terms of the note prevail.

Maybe you decide you want to re-write the note, but does the SAFE Act not make that possible anymore, even if it is something you wanted to do to help the home owner, ie. lower an interest rate or something. Can you even contact home owners, or do you need to be licensed?

The SAFE Act does not restrict a Mortgagee from corresponding or modifying an existing note. The SAFE Act provides for rules around mortgage licensing as a means of public protection onto those who hold themselves out to the public as being in the business of making loans or negotiating loans or loan transactions between a borrower and a lender or mortgagee.

So, a 3rd party loan modification agent would need to be licensed in order to discuss loan modification terms between a borrower and a mortgagee. This is also the premise I believe you have mis-understood. In other posts there are comments about a potential note investment (keyword "potential") and counter comments warning that any contact prior to owning the note is 3rd party negotiations and requires a mortgage broker license amongst some other concepts. Only a licensed mortgage broker or attorney can be the 3rd party negotiator between a borrower or potential borrower and a mortgagee or potential mortgagee. A borrower can negotiate for themselves and a Mortgagee can negotiate for themselves against the other party without a license.

All of this business can be learned. Concepts such as state laws can be looked up in state law websites. So, in the example of license requirements in the state of Georgia, you should be able to look up and see the state requirement to hold a license issued by the state for all mortgagees in about 5 mins or less. Point is, go to the state you're interested in and start reading some of the rules. If that is not appealing to you or your time is too valuable, note investing may not be the right thing for you. Notes are legal contractual agreements as such most of what happens in and around notes is legal 'stuff'. The common public is a protected class and thus we have laws to protect them.

My final thoughts are simply around the two ideas of the groups. One group spends a fair amount of time deliberating the risks involved and the other group seems to not be concerned with the risks involved. I am not so sure real note investors exist in group two. There are risks innately involved with notes. Loans by definition are risk. So I am not too sure how you can think about a note or a loan and not contemplate the risks involved such as prepayment, default, extension or paper defect. Perhaps there is just a difference between the prudent investor and the not so prudent. I just tend to think most note investors end up being prudent because somewhere a note went bad and it cost money in total or to cure. However, do not confuse being prudent with being intimidated. By being prudent, I will be able to resolve all issues with my note no matter when they show up. Tough files are not a problem, they are a chance to make good money. Like real property in that sense. The most beat up property could be a diamond in the rough for the right rehabber. Note investors don't use hammers and nails, they use laws and regulations, your tool belt is different. You do have to spend time learning what to put in the belt and how to use the tool though.