5 Notes in Ohio (what questions to ask)

[Wendell De Guzman]

I am an absolute newbie with regard to buying notes. I have done over $15M worth of real estate transactions but have yet to do a single note transaction. So...note experts, need your advice. But before I ask for your advice, here are the info I gathered so far:

1. Unpaid Balance: $302,727.55

2. 5 notes on properties in Cincinnati, Dayton and Cleveland OHIO

3. I can buy these notes at 37 cents on the dollar

4. 3 of these notes are on SFHs, 1 is on land and 1 is on a 4-unit building

5. They do not know the occupancy of the 4 properties except the 4-unit building which is occupied (but don't know the exact # of occupants)

6. My concern is that the last time the payments on these notes were received are from several years ago (2011, 2010, 2008 and one note as far back as 2004)

OK...so here are my questions:

1. Based on the facts above, the location of the properties and the purchase price, is this a good deal?

2. If the answer to #1 is NO, it's a bad deal...what is the right price that makes sense and why?

3. If the answer to #1 is IT DEPENDS, what other info do I need to get to make an assessment whether this is a good deal or a bad deal?

4. Does anyone have a contract to purchase notes that one would like to share with me?

5. What is the due diligence that one has to do on purchasing notes?

6. How do I go about making money from these notes?

7. Does anyone have any info or experience about buying notes in Ohio?

I am direct to the asset manager of a small lender (through one of my business partners). Thank you in advance BP nation!

[Dion DePaoli]

Wendell,

Echoing what was mentioned. This is not a trade you seem to be ready for.

Question number 6 above clearly illustrates that idea. YOU need to understand that before you go marching off into the sunset.

Additionally, the purposed plan you have is not very good. If you purchase a NPN and then try and sell it three months later, just exactly what was done to increase the value of the asset?

The real life answer is NOTHING. You will loose money. If you can achieve the same sale price as you paid, you will loose your due diligence and closing cost money. There is this ridiculous idea out there which is growing ever larger on the newbie note investor landscape which believes that NPN loans have some innate perpetual value increase. They do not. That is crazy. That loan is not performing, this means there will be capital demands on the investor in order to maintain their interests through the security instrument. Those costs do not get redeemed from the asset until the asset is dispositioned.

I have seen this very often lately. Two ideas apply. One, no foreclosure action is commenced and you do not initiate one either. So the asset is as far away from any type of disposition as the day you purchased. The result, no price increase since the capital demands to take the asset through the process are still 100% present, whatever those costs might be. The second, a foreclosure action was started so the act of you holding the loan will result in time moving forward on the FCL timeline, however in the scheme of things unless a substantial action occurs, say a Judgement of Foreclosure or you are right on top of a FCL Sale date, then the margin of value increase is not even worth trying to measure. Further, the majority of the capital demands will still be present in comparison to your entry into the asset. That is since your desire was to deploy the least amount of capital into the asset to keep your cost basis low in an attempt to make a margin on the re-sale, there really can not be much if any of a value increase, since the relative cost to dispostion the asset is the same for all potential owners. Third, if you do manage to achieve a milestone, say a Judgement of FCL, then I would tell you that your mind is lost if you would rather sell the loan at a discount instead of sending it to sale and either getting paid off or getting the REO to sell, lease or whatever, since well, you and the asset are here at that point. So that is the equivalent of giving your money away.

If I had a dollar every new note investor who tosses in the idea of modification to reinstate the borrower into a more affordable loan, I could get Detroit out of BK. While most understand at some basic level of what that means, there is usually a massive misunderstanding of the work and costs to achieve said results. Not to mention there tends to be no method of identifying those assets pre-purchase. So often times, nice thought, zero results in modification.

This is the point where I could easily argue on a vacant property the value decreased since nobody is actually taking care of it. I can make a similar argument on property taxes as well. However, I will digress as I think you get the point.

On the offer in the OP. You have 5 Ohio assets at roughly $60k UPB average. Great. Ohio 'warzone' properties. I am guessing the property value securing those balances is close to $35k to $40k if not less. So the asking price or indication is about $22.8k or 65% of the property value. (granted I am speculating, but odds are this is correct) That loan's price is closer to $12k. That too may be way too high based on costs to cure title defects and remaining time to foreclose. So you would be paying almost double the price an experienced investor would pay. With your $12k purchase price you will need an additional $12k (in general ballpark) in order to disposition the asset. Taxes, insurance, servicing fees, legal fees, property preservation all of these things add up quickly.

I am not as overly concerned as Doug as the geographic concentration or exclusion. Is Ohio a tough state? Sure. So is New York, New Jersey and Pennsylvania. The toughness seems to be defined by FCL duration. That said, there is still a "proper" price for the asset which accommodates the amount of time and capital demands to dispostion the asset. To his point, you can choose a different state with shorter times and a different legal process (judicial vs non). In that sense though, I tend to allocate that idea to simply preference. I also recognize to some degree loan investing is opportunistic. You can only purchase what you see or are offered.

In regards to the last question, what items are needed for due diligence? All the same items you reviewed in the performing loans plus any legal actions taking place such as FCL or BK. Having a list of items to look at is not the same as understanding what each component means or how it translates into increase or decreasing risk and capital demands.

Not trying to deter you from getting your feet wet. I am trying to make sure you get a better operational plan and expectations.