Contingency-reserve fund when using investor money to buy mortgage notes

[Suzie Remilien]

How much money do you set aside for contingencies (i.e.bankruptcy, unpaid taxes, evictions) when purchasing notes?

Also, how long should such contingency funds be held and should they bear interest? 

[Paul Birkett]

Hi Suzie

Frustratingly, the answer is "it depends"! As you know, there are a lot of moving parts in the notes business...and most of those parts cost money or create expenses before you see any income. The costs are driven by the type of loans you are buying and what you are trying to do with them.

Known Costs: these are costs you know when you are buying: Taxes (that the borrower has not paid), Water, Sewer, HOA and any other liens. Title costs, loan boarding and de-boarding fees (if you are moving servicer), servicing fees and insurance. These are the main items.

Estimated Costs: These are costs and fees that are driven by the nature of each loan. A simple performing first lien will have no extra costs other than Assignment creation and recording. However, if you buy a pool of non-performing seconds, you will have foreclosure fees, workout fees, legal fees, door knocking ....the list is pretty long. You can quickly spend 100% of the note cost on fees. So, you need to be certain that you can get that money back before spending it.

Foreclosures run up to $4k (depending on the state)

BK  will cost you at least $1k in legal fees

Taxes are known when you buy, could be zero could be $20,000+

Evictions depend on the state but can be $2k

I'd say you will need to hold them until you exit the note and I don't understand your question about interest?

Im not sure that answers your question!