Opinion on Performing Notes in My Area

[Nate Crump]

There is a guy/company selling notes in my area. Obviously due diligence will need to be performed, but I wanted to see what some of you pros thought, on the surface:

1. The performing notes were all originated, has been doing it for 25 years. These are NOT primary residences (my first concern). These are recreational properties, one county over from me in a popular area for those activities. This company basically had huge chunks of land, and has been selling it off in 1-10 acre parcels, and putting up small cabin-like structures on them for hunting/fishing.

2. They are 1st position notes, and range from 15k to 75k. All performing.

3. He discounts UP TO 10%, so that makes me believe some are discounted less than that, and maybe on some not at all.

4. Usually 12% interest rate, but few will vary. He also says the yield can be up to 20%, but unless I'm confused I don't see how with a 12% interest rate, even if the note is discounted 10% from the remaining balance, how the yield can be as high as 20%???

Anyway, that's the very basic information behind them, just want to see what people thought. I found them while actually looking around at some of this very recreational property myself. Thanks.

[Dion DePaoli]

The 'Total Return' has a chance to get up to 24.4% +/-. The yield, will be around 13%. Yield plus the discounted principal will make up your total return.

For instance, $75k @12% over 30 years purchased at a 10% discount.

Purchase Price = $67,500
Annual Payments = $9,257.51(yield 13.71%)
Discounted Principal = $7,500
Total Return (Payment plus Discount) = $16,485.35
ROI = 24.42%

The problem is, you would have to collect all the payments plus have the loan pay off in year 1. Each year, the Total Return will fall, as the discounted principal recovered is spread over more time. Also, keep in mind, in year 1, the borrower making their payments will pay principal down by about $272.16. So the payments the borrower makes will also carry a portion of the discounted principal back to the mortgagee. The payoff at the end of year one is $74,727.84 not $75k. All in all, not that likely to happen I would presume and the borrowers will have the loan for more like 5, 10 and 15 years. There are not too many conventional loans that a borrower could refinance into with this type of property. So, as the mortgagee for this type of collateral, I would say plan to be in it for the long haul.

If the paperwork is done correctly and the borrowers put some money into the deal, might not be too bad of something to look at. The property described might take some extra time to market and sell in the event of a foreclosure and REO due to the niche nature of the land. Making sure you have fair real property valuation numbers to work with will be important. Sounds like most of the value is simply the land. The loan to value should be 65% or less. If the LTV is higher, then a default could cause some loss by the time you get through it.