NPN strategies and execution

[Rick Lin]

Hey everyone,

I'm really happy I found the BP community and have now listened to most of the podcasts and attended my first REIA meeting this week. I'm hoping to ride that wave and really get going on investing.

I’m still not 100% sure, but I’m leaning towards NPNs. Like most of you, my ultimate goal is to get out of the rat race.
I’ve heard that NPNs can be very lucrative, and I hope to experience that first hand, but what I’m not clear on is the appropriate niche strategy for myself.

At this point, I’m not looking to build an empire or anything large scale. I’m simply looking to understand the ins and outs at a level sufficient enough to be able to construct a strategy to, well, profit by using my own cash.

From what I do know, I think I'd like to start by purchasing a first position non-performing note. I think my "optimal" route with a NPN is to rehab it via loan modification and get it reperforming, and then flip the reperforming note to somebody who's interested in the cash flow. If I can rinse and repeat this a few times, I hope to build up capital (and confidence) and maybe will start to cherry pick a few to keep for cash flow. I would also probably take some capital and put a down payment on a four plex and hopefully (after fast forwarding a few years), I can quit my day job. Does this sound reasonable?

The first step to realizing that goal is to "understand how to play the NPN game." From my research, it is my understanding that this game is all about due diligence and analysis on the front end (pre-purchase) so that nothing on that happens on the back end (post-purchase servicing) is a surprise.

I understand that a million things could go wrong and that I might end losing everything, but I’d like to understand the risk/rewards to be able to make informed decisions. Also, if I account for it in my purchase price of the note, and am ok with having the money tied up until after the foreclosure proceedings, am I still at a huge risk? Nothing is risk free, but there are certainly good risks and bad risks (e.g., I would gladly cross a non-busy one lane street to pick up a crisp $100 bill, but I wouldn’t cross a 8-lane highway blindfolded in hopes that I would make it to the other side to pick up a $1 bill) and that’s what I’m hoping to learn from the seasoned note experts here—how to identify what’s a good risk and a bad risk from a very conservative viewpoint.

So, here are the “main steps” to getting going in NPNs as it relates to my strategy as I see it:
1. Find prospective NPNs for purchasing [obtaining from inventory of a company like Granite]
2. Perform due diligence on the NPNs [understanding the defect and why note is now nonperforming]
3. Analyze the NPNs that survive diligence [crunching numbers re upb, cost of servicing, etc. to see what max price I can pay while still having a reasonable chance of obtaining my desired yield]
4. Negotiate and purchase the NPN [finding the "highest price I will pay for it"]
5. Park the NPN at a servicer
6. Instruct the servicer to contact the owner and begin rehabbing the NPN
7. If the owner is amenable and an agreement can be reached, monitor the note until it is seasoned and then begin marketing the rehabbed note
8. If the owner is not amenable or an agreement cannot be reached, foreclose on the collateral
9. Regardless of which avenue was taken (either selling the rehabbed note or foreclosing), go back to step 1

So here are my questions:
1. How do I ensure that my steps 2 and 3 are thorough? These steps (to me) are the most crucial part of the whole game. Anyone have any thoughts on what’s reasonable here? Checklists to share? Someone to talk to?
2. Also, I understand that steps 7/8 are greatly simplified here, so am I wondering if I’m expecting too much out of a servicer? Or if the fees are so great that it would wipe out any possible profit?
3. I understand that this is just a simple outline and it can’t be that simple, but is there something BIG that I’m just not seeing? What are some of the greatest pitfalls I’m underestimating?
4. Any tricks to the trade? Or does anyone know somebody who knows all the tricks to the trade that wouldn’t mind talking to/mentoring me?

In one of the podcasts/articles, someone mentioned about “unfair advantages”. I really gave this some deep thought and I would say that my biggest unfair advantages are:
1. I have 100k+ in cash to at least buy a few notes that if things don’t work out, I’m still ok in life--besides my wife beating me up and providing her more evidence of my stupidity : )
2. I’m a lawyer by trade and before that, an electrical engineer, so therefore have been trained to be risk averse and highly analytical based on numbers.

For those wondering, my biggest disadvantages include suffering from “paralysis by analysis” and not really knowing if what I’m thinking of is in line with what’s realistic.

I’m slowly trying to think more like an entrepreneur but the lawyer in me frequently gets in the way.

Sorry for the long post, and thanks in advance to anyone who can help me get started!