What The Gurus Do Not Teach You In Note Investing - Part 4

[Chris Seveney]

I recently watched a video where an investor bought a mortgage loan at a steep price, with an exit strategy that hinged entirely on getting the borrower to agree to one specific term. The kicker? The borrower was elderly, and the investment would tank if this exit strategy failed. They were paying approx. 90% for this loan that is worth around 80% at best. The investor also had no backup plan, and it was clear they hadn’t considered the potential risk if this failed - they just said "we would foreclose" - which if they did would (at best) provide single digit return...

It gets even better, if they did get the borrower to follow their exit strategy, they would make around 13%...

Here’s the problem: The gurus often make note investing sound like it’s just a game of persuasion, telling you it’s "easy" to get borrowers to agree to anything if you push the right buttons. But the reality is far more complex. Sure, in theory, the strategy this investor used might sound clever, but it’s also incredibly risky to rely solely on the compliance of a borrower—especially when they might not fully understand the terms or simply can't agree due to their personal situation.

I have tons of ideas that might look good on paper, but I don’t pursue them because I assess the real risks involved. That’s what the gurus don’t emphasize: Risk. They love to sell you on the dream of easy money but rarely talk about the times when things don't go according to plan. In the world of note investing, you have to consider not just the upside but the potential for things to go wrong, especially when you're dealing with vulnerable borrowers. It’s not always about making money—it’s about managing risk and having contingency plans in place when things don't go as expected.

Don't let anyone tell you otherwise. Stay sharp, assess your risks, and always think beyond the “perfect” exit strategy.

[Jay Redding]

Great Points Chris - Investing in general is all about managing risk.  Whether it be a real estate deal or a note deal, we always determine multiple exit strategies and what the downside risk is before making an offer. 

[Dan Deppen]

A common mistake is assuming that people always behave rationally and make decisions in their best interest. Another slightly different one is mirroring, where you assume that the other person will view the world the same way you do. Anyone who has actually been active in this space will know that borrower behavior can be predictable and irrational, and they might have a fundamentally different mode of operating their life than you do.

[Chris Seveney]

Quote from @Dan Deppen:

A common mistake is assuming that people always behave rationally and make decisions in their best interest. Another slightly different one is mirroring, where you assume that the other person will view the world the same way you do. Anyone who has actually been active in this space will know that borrower behavior can be predictable and irrational, and they might have a fundamentally different mode of operating their life than you do.

Along with viewing the world your way, many think "their way" is the correct way so that is how it must be done. While there is some predictability in certain outcomes/situations - what we have found is the "path to least resistance" meaning the less the borrower has to do the better. The moment you have to make them think and do a lot of work the tougher your challenge has become. Now almost all of us on BP are borrowers so this is not a knock against borrowers - but just a reality. The more you make people do the harder it is to get them to do it.

[Don Konipol]

Quote from @Chris Seveney:

I recently watched a video where an investor bought a mortgage loan at a steep price, with an exit strategy that hinged entirely on getting the borrower to agree to one specific term. The kicker? The borrower was elderly, and the investment would tank if this exit strategy failed. They were paying approx. 90% for this loan that is worth around 80% at best. The investor also had no backup plan, and it was clear they hadn’t considered the potential risk if this failed - they just said "we would foreclose" - which if they did would (at best) provide single digit return...

It gets even better, if they did get the borrower to follow their exit strategy, they would make around 13%...

Here’s the problem: The gurus often make note investing sound like it’s just a game of persuasion, telling you it’s "easy" to get borrowers to agree to anything if you push the right buttons. But the reality is far more complex. Sure, in theory, the strategy this investor used might sound clever, but it’s also incredibly risky to rely solely on the compliance of a borrower—especially when they might not fully understand the terms or simply can't agree due to their personal situation.

I have tons of ideas that might look good on paper, but I don’t pursue them because I assess the real risks involved. That’s what the gurus don’t emphasize: Risk. They love to sell you on the dream of easy money but rarely talk about the times when things don't go according to plan. In the world of note investing, you have to consider not just the upside but the potential for things to go wrong, especially when you're dealing with vulnerable borrowers. It’s not always about making money—it’s about managing risk and having contingency plans in place when things don't go as expected.

Don't let anyone tell you otherwise. Stay sharp, assess your risks, and always think beyond the “perfect” exit strategy.

Perfect post.  This is why I emphasize education of real estate principles, law and finance are essential for the real estate investor.  I was told by one that he “learns by doing”, and yes this is a verifiable methodology.  But if “by doing” he means investing without first having the knowledge to KNOW the risks, EVALUATE the risks (and potential rewards) and to TAKE ACTION to reduce the risks then the cost of this learn by doing education is probably going to be significantly more expensive than a degree in real estate from MIT, let alone reading the\ree or four texts on your own.