Good sources of further education for note investor?

Question

I have been doing hard money lending for a few years though hard money brokers which source and set up the loans for me to fund.   I have not gone out and purchased any existing notes yet, I have just funded new loans.   What are the best education materials to further my knowledge?  Materials with a lot of DETAIL on all the due diligence that has to be done, everything that can go wrong, examples of what has gone wrong, details on making sure all the paperwork is bullet proof,  etc...  I'm more interested in materials that focus on the note investing side of it, not as much note brokering.  Since I'm doing most of my HML in CA, I read the George Coats book "Smart Trust Deed Investing in California" which had some good detail but is an older book (1991).  I want to keep furthering my education so I can mitigate my risks as much as possible on these investments I'm making.  Thanks for your suggestions!

Dion DePaoli · Answer

Rob,

This question and thread to some degree represents the conundrum in and of itself.  I agree with Bill, using the agency guidelines as a standards guide is a good and right place to start (and continue from).  To that extent, those guides are very detailed and you would struggle to find something not covered.  The compensating factors are probably a little more abstract to grasp.  Mostly just a matter of making some and seeing how they work.

The property valuation reconciliation you describe is a hurdle throughout the industry.  Often times you will include some form of real estate broker opinion on the property which is the sale angle to the appraisers value angle.  Any broker or appraiser can be good or not so good at their job.  The buck stops with you.  It sounds like much of that grind you get.   Fundamentally, it is the same reconciliation.  Interior inspections for seasoned loans is not abundant but do occur from time to time.  Assumptions can be reasonably made from the exterior and pride of ownership can be extrapolated giving some insight to interior conditions.  Those assumptions are always conservation in nature.

I have personally purchased and managed a lot of loans site un-visited.  Very comfortable with it.  It is just a skill set you develop.  Use the tools and resources wisely.  Technology has closed this gap pretty well.  Pictures not to mention videos can be taken and sent.  I suppose technically you could even do some live streaming walk through feed.

Looking to the intentions of the two types of loan investing, making the loan or buying an existing one, different variations of skill sets will develop.  Making a loan tends to look to the collateral as the 'what if' solution.  Purchasing defaulted loans, that 'what if' is removed.  The borrower is in default and you are going to foreclose.  So, I think, for me anyway, as I made the transition from lending to purchasing exiting, I skewed comfortably into another degree of conservative evaluation.  Confidence and comfort builds as you eventually have to rely on the valuation you came up with.  Until you test it, the perceived risk is greater.  Once you test it and get comfortable the risk is minimized.  That can not be explicitly taught in a classroom or book.  Too many variations on  details thus experience is the driving force there.  Much the case as a whole for education in this industry.

The desired list of things syndrome when it comes to note investing is a curious thing.  I to some extent believe it is a bi-product of how the populous in general approaches most things which are complicated in nature.  They want a simple list and pay no mind to the problems that come with 'over' simplification.  The case to support that is the abundant and reoccurring theme of treating loan investing like real property investing.  The general attention span does not give rise to detailed understandings of loan investing. Likely as a direct result from the amount of detail that goes into actually understanding.  A list approach then becomes a danger where since the item on the list can be checked off it can stand to not really be dealt with.

An example that runs through my head when I do see these suggested lists or actions exchanged amongst folks, is take title to the real property for example.  Get a title report is on the list.  Read the title report and interpret the title report is not.  To that degree, you could make the same comment on all sorts of documents used to evaluate or conduct due diligence or even in loan file.  'Getting' the report is actually not the object, checking title and dealing with defects or clouds is.  While getting the report begets the objective, the object does not arise on it's own as a result of obtaining the report itself.

Further speaking to an underlying idea in Bill's post is the mixing bowl of art and science that really comes with operating in this space.  Most books and courses are designed for alternative purposes.  This is a contributing factor as to why we always get, there is not one good source for the information.  The source's agenda is not teach you everything, it is to teach you how they (the promoter) want you to carry on so it benefits them.

I have found myself to generally be disappointed in the content, level of detail and the worst part is the cut off point of that level of detail.  In some instances, I am not sure some of it can be avoided, as the best education is experience.  However, the aforementioned curriculum often times dangerously broaches a topic and only cover the tip of the iceberg.  This causes improper ideas to emerge and the reinforcement of improper ideas.

We seem to measure or quantify the content of a given book or program by the amount of endorsements it receives.  This too is a dangerous idea.  Endorsements get handed out like hotcakes yet, I rarely hear a criticism of the endorser.  So a newbie attends a seminar on note investing for the first time.  How could they judge the material....they have no experience?  OF COURSE they think it is good.  They know no other standard.  Heck, they don't even know if it works.  But they will tell you how much they learned and in many cases how 'good' it was.

This is a business where details matter.  So much so, that a void of detail is a problem.  Those details sometimes are danced around in generalities that sound good but lack substance.  Due diligence is a fair example.  So you are buying a loan and someone mentions you have to do your due diligence.  We kick the phrase around like the folks who both say it and hear understand what it means.  The due diligence checklist says get a title report and check property value.  OK, got it.  Then what?

The problem this presents is due diligence onto it self is not the end game.  What you do with the title report is a whole other matter not referenced on the short list.    So you have a loan to buy, get a title report and find out the loan's priority is not correct or the loan is attached to the wrong security or there is a defect with the owner's interests.  Then what?  Due diligence is not the solution to those problems only the identification (hopefully) of those problems.  A list likely could not have produced information to allow us to deal with the discovery as each of those would need their own further sub list.  A newbie would struggle with such things until they work through them for resolution and gain the experience.

Certainly we have to some degree a norm of circumstances in many files. More likely in residential loans due to their common origination practices. Less likely in commercial loans. This general commonality gives rise to make it seem like those lists and perhaps some practices derive from the guru course are relevant. In many instances what goes hand in hand with that is the treatment of a discount to the loan as a matter of commodity opposed to function. The single biggest complaint I hear from newbie folks is the lack of understanding the function side of the loan's details. The folks who I have talked to have spent various amounts of money for courses on investing in loans to walk out not even understanding how to price a loan out. Now, call me crazy but I would think that tends to be a pretty important idea to tie in. And with that void, I would argue the intentions of those programs are suspect at best.

Bill Gulley · Answer

Here's an idea,

Since all lending begins with prudent lending practices, why not start there, google it, read law sites instead of Eddie Speed.

Anyone ever study ALTA requirements, ever go to an Appraisal Institute site?

Read secondary market loan requirements, go to the underwriting requirements. Know that.

Then understand "compensating factors".

Because, all good loans begin with this type of information, not some guru book.

From there, you recognize that your borrower doesn't meet all the guidelines, question is what do they meet and how can they get to being qualified?

If it's a short term loan, look at compensating factors, how many times or to what extent do you deviate from prudent lending practices, does it make sense, are you secured, is there an exit for the borrower and you.

Due diligence is backtracking through to the origination, valuation of collateral, title issues, is the title coverage, was the sale inflated or at market, where is the LTV, what's the current property condition, is it still marketable, what kind of loan was it, is it valid, is security perfected......basically, you're going backwards from today to the date of origination checking each aspect that effects the validity and security of the obligation.

An HML does half the work for twice the charge, they rarely underwrite because they usually lack underwriting skills, which are found in the materials mentioned above. Collateral lenders, so if those are the notes you're picking up, learn to go beyond collateral issues and underwrite the borrower again.

What you need to know is the loan, collateral and borrower's condition as of today.

NPNs, what keeps the borrower from bringing it current and how long might that take, is there borrower motivation to do so? Ability to pay?

Study the basic aspects of good underwriting first, then you begin making exceptions to the rules, some exceptions are acceptable within prudent lending guidelines, some aren't, they are spelled out in Fannie Mae underwriting.

Every residential loan is viewed from the base line of secondary market, if Joe makes the loan, it's based on secondary market, if Shark HML makes the loan, it's conservative collateral lending still under `secondary guidelines, with compensating factor to collateral borrower experience, etc. if you're buying a note, you going to hold it to term or do you want the borrower to refinance someday? Yes, secondary guidelines. Want to be a landlord? Arrange a DIL! Only so many ways for a lender to get out of a note, they refinance meeting conventional lending, they sell it paying you off, take a DIL or, pawn them off on someone else, the low road taken by too many.  Either the borrower and/or the property will need to meet secondary market or conventional guidelines eventually unless the note is held to term. Won't make much in mortgages doing that.

All loans, residential and commercial, consumer, auto loans, credit cards, anything has the same basic elements, lending requirements that are all under the umbrella of, let me say it this way, conventional thinking, based on basic financial requirements, after you know the basics then you can get creative and accept more risk. Due diligence is much the same until you get to the collateral.

Collateral must be understood, if you're thinking of mortgages, your RE knowledge needs to be on par with a real estate broker, you need to know where to look up something you don't know, but know it well enough that you can spot collateral issues, past, current and future. If you do car loans, you need to understand the car business.

There is a general "check list" for due diligence, but if you don't really understand the conventional aspects, you'll never recognize those small apparent issues that need to be further investigated, as to why, when, what does that effect, to grasp the risks involved.

For those not wanting to put so much effort into learning finance (BTW, it's finance, not real estate) I'd suggest you get with a broker and use him like you would your stock broker. You're certainly free to continue buying scheme books too.

Now, I understand that most note buyers look at tapes, broker deals or banks, none give you the information you really need, time limits stress you, limited information and buy now, can't contact the borrower or might not have current collateral information......why are you buying there? There are notes in your backyard, learn to find them and negotiate them. I'm understanding that the current institutional market is pretty slim.....that's because it's pretty well controlled and manipulated by the time it gets to the street.

I'm just puzzled thinking people want an list of things to consider, like you're buying finished goods at wholesale, notes include finance, real estate, marketing, psychology and law, how can you get a check list out of that? It's an art and a science.   :)

Boyd McClean · Answer

I would first of all tell you to read Gordon Moss book Performance Anxiety which you can find on Amazon. He specialize in 2nds. He also has a mentoring program.

Note school by Eddy Speed has material on the subject.

Papersource University.com

PPR.com.

I am sure that others on BP will have their own recommendations.

Don't expect to get all your needs satisfied at one source.

Some of the above are pricy in nature and you may want to seek others for feed back.

You will find more opportunity outside CA and higher returns.

Also go to events sponsored by some of the above mentioned.

Due diligence is very important and takes time to learn. It took me a while to learn to do it and once I got the hang of it I trained a VA who now does a better job than I. Also I found a full time mortgage underwriter as a VA on an as need basis that will take all my research and go through it all and point out all the weak points of a proposed purchase. She looks at it from her point of view and experience then writes a detailed report of all the red flags she sees. If you stay in this business you need to build a team.

This business is not something you will learn in a short period of time.

Good Luck.

Alberto Artasanchez · Answer

The correct site for PPR's training  is PPR Note Academy

Rob Cee · Answer

Thanks Bill Gulley for the detail level of your answers.  There are some great nuggets in many of your posts in the note forum and I take close notes when I read them.

I think the degree of difficultly goes up when buying existing notes vs. being the one that makes the initial loan (which is what I've been doing for the last 3 years).  I noted some of your advice Bill G. to learn more to become a good or better note buyer.  And Dion, it sounds like you don't think guru courses are all that effective.  It seems like the best way to make the jump from lending to buying notes at discount would be to have a very experienced mentor be there to walk you through your first few note purchases.  Or at least have an experienced note buyer you can go to with questions that pop up during your due diligence process.  And then the challenge would be to find a mentor like that without paying an arm, a leg, and 6 children for it:)

Definitely the fastest and most complete way to knowledge of anything is find someone that is really good at it and learn from them.

Dion DePaoli · Answer

Rob,

Indeed I am a big fan of teaming up with a more knowledgeable note investor.  I know sometimes the guru course offers joining a network which gives some idea of support but I reserve that idea on the skill set of the network.  A 100 new investors who have bought a couple loans each can certainly have some experience pointers but that does not speak to the breadth and depth of that experience level.  The culmination of those loans and experience could be all relatively the same.  This can then lead to the blind or misinformed leading the blind and misinformed.  I always like to point out that many folks have a mortgage or have had a mortgage.  On a bar stool the public will be happy to tell you what they know about them.  None of that means they are right.  Often times, they are not.  The same sort of thing can be said about new and novice note investors.  This is an asset class where details matter.  As I said, many folks just do not have the attention spans for the proper details.  They are happy to run off with the first idea that sounds like it makes sense and then tell the next newbie that is how it is done or means, etc.   One day I might sit through some of the courses or seminars.  I am pretty sure my head will explode from the multitudes of issues I garner from the course.  As such, I have reserved that item on my bucket list for retirement and when I think I have an old age right to act like the heckler's from the Muppet's.  So, it's gonna be a while.

Bill Gulley · Answer

Had you posted your background in the first place Rob, I may have left a lot out. Credit, capacity, collateral and character, in collateral, LTV, condition and marketability which includes title matters. Your exit strategies are key in preserving your capital. I suggest you stay current with the basics as much has changed. For example, buying a consumer note that was originated last March that doesn't have a RMLO stamp and number on it may well be an illegally originated note, you lose! Good luck. :)

Rob Cee · Answer

@Mike Hartzog thanks for the link to you your blog post Mike.  That is well done and excellent info.  That's the kind of info I like to continually read.

Rob Cee · Answer

Good post Bill G, thanks.

I have a pretty good knowledge of loan underwriting standards working in the conventional mortgage lending business for many years.  I'm lending in CA major metro areas right now because I know the state pretty well having previously lived there 25 years and knowing some hard money brokers there.   I have been just lending 1st trust deeds and only on investment properties.   As I don't want to deal with the extra hassles of foreclosing on owner occupants.

Since I'm not local where I lend, a big risk I'm taking is not seeing the properties I lend on in person.  Yes I get an appraisal and I review it very closely, but I believe a note investor has to look at the "forced liquidation value" of a property not necessarily the appraisers sunny view.  Also, sometimes I feel these appraisers try to "hit a value" to make the deal happen to continue to get that hard money brokers business.  I have seen some really inflated appraisals on some loans I have rejected.  You have to look very closely, for example recently I saw one sloppy appraiser providing 3/2 comps for a "3/2" subject that was really only a 2/1 in public records....so they were giving full value in the appraisal to non-permitted square footage!  I caught this reviewing the title records on the subject.  Had I lent on that and my borrower defaulted, I may have had to take back what was really a 2/1 (with non-permitted work making it a 3/2) and had a much lower LTV than I thought I had.  These are the type of small details I want to keep learning about to further mitigate my risks.   These are the types of details I would like to see in educational materials (but they often do not have this level of detail). I'm amazed at small note investors that lend all around the country in these far away states and often on rural property.   How can they feel comfortable with the collateral?  I have recently thought about getting appraisal reviews from an independent 3rd party appraiser hired by me on the trust deeds I am considering funding if I have any doubts about the neighborhood or appraisal.   What is more difficult to get when you are lending on non local property you can't see, is detail on the physical condition.  Often the appraisal doesn't give you a lot on this, it's more based on value.  A lot of times comps can be used that are in much better shape.

I think market timing is also important in trust deed lending.  You have to know local market conditions.  A major price slide in values can put your principle at serious risk even if you started out with a conservative LTV.

The 2 biggest keys for me so far are: 1. Getting a really solid valuation and 2. Having a low LTV.  If I get those two things right at the onset I should be ahead of the game in worst case getting my principle back if things go south.

Naphat S. · Answer

@Rob Cee  Thanks for asking this question !!!

All - I understand that there are many positions you can put yourself into NOTES business.But let say, if I am the "END" note investor and did not plan to broker/sell the note, or do anything with the note rather than getting sufficient passive income.

How much I should learn and those courses are good with me too? I don't want to rush in to this without knowing but don't want to be "paralysis of analysis" either

Thanks much.

Naphat

Good sources of further education for note investor?

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