Buying Notes and becoming the bank

[Rhonda C.]

I am new to Bigger Pockets and just went to my first REA meeting where the speaker talked about buying non-performing notes and "becoming" the bank ie refinancing with the occupant. The details in how to actually do that were not discusssed as "you could learn about them in our three day class for $2000". Any insights from BP members as to the whether or not there is wisdom in making this my first ever RE transaction or not and what the $2000 secret sauce is would be appreciated.

[Jeff S.]

I imagine that most people who learn to SCUBA don't make their first dive to 350 feet or among sharks, @Rhonda C.. My analogy is intended. The returns from NPN 2nds can be as impressive as the losses. Like many, it can be a great business if you have the time, risk tolerance, education, and wherewithal. Rather than chase yields though, if you have an interest in notes, I suggest you learn to learn to walk with performing notes in first position only, then perhaps transitioning to performing seconds, and only then to non-performing seconds.

Investing in firsts, located in your area, are safer, easier, and will afford you the beginner's education you need to understand the law, underwriting, and basic paperwork. You can often obtain these from local hard money lenders or create your own by loaning to local flippers. Done properly, you're secured by property you've seen and to borrowers you've met and can vet. After a while, the ongoing time investment will be minimal, if that's important to you.

As you get comfortable, you could make 2nd position rehab loans to the same flippers, behind your first position purchase money, or do riskier 2nd position rehab loans only, depending on the amount of cash you have. These would still be local, to those you can meet, and on properties you've visited. Only then, when you completely understand the processes, might you venture out and buy an NPN 2nd.

Understand this now becomes a job as you chase delinquent borrowers across the country. You have to have the local (often out of state) resources to evaluate the note, the property, and the borrower. How will you develop these?

I saw Eddie Speed speak for free recently and he is very skilled and convincing. I recall his weekend workshop cost somewhere around $2k. (Seems to be the going rate.) During a break, we asked his assistant at the back of the room if we would gain access to his contacts (out-of-state lawyers, agents, contractors, etc.) during the $2k class. He laughed. For this you have to join his $25k or so "inner circle."

How convenient that Eddie never mentioned that.

Nothing is free, Rhonda, and nothing is always easy or without risk. As you attend them, be careful chasing every shiny object you see at an REI club. There are often safer, less risky, and more cost effective approaches to learning the strategies offered by many of these speakers. It's good you asked here first.

Good luck.

Jeff