Help with Note/DOT investing

[Wade Wisner]

I am hoping to get some feedback/direction from investors who have been long-term in the Note investing space. I am a smaller Main Street Type investor and have created/manufactured SFR notes as part of my fix-n-flip program for many years. They have been great – deal after the deal – investments where I continue to reap long term returns from properties I have rehabbed and flipped. What investor does not love compound interest? And even though a few borrowers have had bankruptcies, and I had to foreclose on another when the balloon was not paid these were really no risk and just delays of payment. I love the fact that I don't have to manage the property as with rentals and can invest from anywhere. The laws mostly protect me the lender and I have always gotten paid even if there are occasional borrower problems. Since about 2015 I have owned a number of Notes in northern CA through a lender/broker there who has done hundreds of these notes. These were mostly pot farm loans that traditional lenders wouldn't touch. Typically the LTV was 50% and the term of 2-3 years and interest only payments of 12%. I would roll one into another as each paid off. As a mostly retired investor I loved owning them for the cash flow. It was a great niche for many years, but that market has mostly disappeared with legalization of pot in CA, which has pot prices crash.

I have also used seller financing in purchasing REO and other real estate purchases and these have worked out really well for all parties. Although I have owned a number of commercial properties, I have not done much with notes in this property type, but that would be an area I would consider. Maybe mobile home parks? They seem to do seller financing a lot.

I would like to do more in the Note space and want to know if anyone has ideas of how to grow note investing? I am a smaller Main Street type real estate investor and looking for more one-off type investments. I have spent time on the PaperStac site, but they seem like mostly “dog” notes and not ones that I would want to own or trust to buy. Eddie Speed and NoteSchool say they have access to thousands of notes through mutual fund purchases by Colonial Funding, but I seriously question that they actually do, or that members get to purchase them. Also the cost of membership is exorbitant and I don’t think worth the money.

I would like to purchase quality mortgage notes – either performing or non-performing – as investments. Any ideas of how to find them, or niche markets like the pot farms that might be conducive for them? Worse case I just continue to manufacture them through my fix-n-flip business and buy with seller financing where available.

Also, is tax lien investing really viable today?  Thanks for reading.

[Jay Redding]

@Chris Seveney - Chris I know you know this, but sharing this for a lot of less experienced investors out there. We would all love to have that note that has 5 years of perfect payments, 800+ credit score and a 20-25% down payment.  The reality is that you will not find that in the seller finance space, and even if you do, there will be virtually no discount.  People have to remember that the seller finance space fills the gaps that the banks leave behind.  By definition, these type of loans are not the same quality as what is traded on wall street.  So if you make you buy box too tight, you will find very few deals that will fit your buy criteria.  Just because a buyer doesn't fit the bank criteria, does not mean that they are a poor borrower. In evaluating seller financed notes, there is always a balance between redeeming and non-redeeming factors.  You have to learn what you are willing to accept as not perfect, but good enough.  Example, a short pay history - non-redeeming factor, a 25% down payment, a redeeming factor to counter the short pay history. You have to evaluate if the borrower first has the ability to pay, then do they have the willingness to pay.  The more they have to loose, the greater the likely-hood they will work to continue to keep the home. We buy at a discount because these loans are not perfect, but will they pay is the question you have to ask.  Then to find inventory, you need to search out, i.e. network, and find out who is creating these type of notes or you help people that may have an interest in seller financing how to create a note that is marketable to the secondary market. Like anything else, there is effort that you have to put in.  If all you are doing is just sitting and waiting for tapes to come to you, you will eventually find some deals, but it will take a lot longer and you will have to kiss a lot of frogs before you find the princes.  We like the approach of helping people to create good notes that we would be interested in buying if they decide to sell.  You develop relationships with a handle of people that are creating notes and you help them recapitalize, it is like a conveyor belt of deals coming to you.