Servicing fees and actual returns

[Michael L.]

Hi all,

Still trying to wrap my head around the basics of note investing. It seems that to calculate actual returns, you need to of course factor in your acquisition costs,  but also the servicing costs. FCI charges $15 per month to service, and an additional $15 per month for escrow accounts.

So for low value notes, with payments of only around $100-200 per month, doesn't this servicing fee represent a large amount of the actual interest received, to the point that the long term actual APR on investment is quite low or zero?

[Bill Gulley]

@Bob E. 

Oh, wow, what I do and did I don't think can be put in a box and explained in a forum post, even a long post. Running a mortgage company with servicing brought opportunities to me, I also appraised notes for the State of Missouri and after assessing value they agreed to allow me to make an offer. I doubt anyone is in that position to follow everything I was doing. Now, it's simply word of mouth with Realtors and a few bank officers.

I wouldn't deal at a 13% yield, too low, it takes 15/16% to get involved, sometimes a little less if it's a note that can be rolled over quickly, refinanced. Many notes ran in the 30% range.  

Most of my business deals with seller financed notes, residential, commercial and other factoring of obligations. Notes originated for the secondary of institutional portfolios are not the main thrust, those come from distressed situations directly with the bank and borrower in unique situations, not tapes.

There are much better note opportunities from the note holder, not brokers. Individuals or concerns that provided funding, originated the obligation. They are in the best position to accept a deeper discount on a ho-hum note, a default or a slow pay as well as a performing note.    

I'm pretty sure I was the only guy in the country that offered loan servicing with a guarantee to purchase at a stated price in the event of default and advanced payments to the note holder, then collected amounts due. It was a blend of servicing and PMI on seller financed transactions. That is a powerful advantage. I could also have notes assigned without buying them, but with the option to do so. I'm thinking of teaching this so that it can be replicated, later on.

Servicing  of a large portfolio should be around an .125 to .375%, not a dollar amount of service charges, but a flat fee is the best way for single notes and it is high for small notes. I also stayed away from escrows as much as possible, it's a regulatory pain.

I'd say that even high is better than the down side in our new regulatory environment, some notes just shouldn't be purchased due to the fixed costs with them and the potential for them to blow up. To each his own.

The velocity of money plays on note investing, keep the money moving, so my plan was never to hold a note more than a couple three years, much less to term. The quicker I receive the discount the higher the yield on that investment.

Holding notes is fine for us retired folks, better than going to the bank or insurance agent, but business wise is to work and produce the highest return.

Your best deals will be by working directly with the lender who originated an obligation.

I have to say too, note investors really need to understand the new brokerage laws! 

Hope that filled in some of the spaces. :)