Buying Discounted Notes

[Jim Williams]

I'm thinking of a scenario, and looking for opinions, for buying discounted mortgages.

My thought is to get a note under contract and then negotiate a deed in lieu(unless the seller already has one in place) with property owner before closing. I would then either rent back to owner or get rented if vacant. The next step would be to refinance my cash out and move on to another deal.

Is it realistic to find these with enough equity to refi and enough rent to carry a positive cash flow? Is it better to go thru brokers, or just partner with someone who has experience in these. My note buying experience is limited, but my real estate background is over 25 years working and investing in real estate. This is just a new thought as opposed to straight out flipping.

I have $110k in self-directed IRA, but would prefer doing deals at less than $50k. I'm also not area-bound, but the numbers really need to make sense.

Opinions will be greatly appreciated.

Jim

[Bob Malecki]

Hi Jim,

Well, you can't contact the borrower to negotiate a DIL until you own the note and are the actual lender. After that then yes, you could contact the borrower, do the DIL and put a tenant in the property or liquidate the home for capital gain. 

The issue you may have with using your SDIRA funds are two-fold:

First, you need non-recourse lending to refi the property since you cannot personally guarantee a loan to your SDIRA. Your IRA will also be responsible to pay UDFI tax on the leveraged portion of the net profit from the rental income. 

Secondly, there are only a few banks that will do non-recourse lending to SDIRAs and they typically will not loan at less than a $50K principal, usually at 60% LTV, so the underlying asset will have to be at >$90K in appraised value to qualify. (ask me how I know this ;^)

I've been successful buying notes at less than 50% of BPO value on homes in most states so you can probably find a note where a $50K investment on a >$100K asset is refinanceable with a non recourse lender. The pitfalls you will have are working with the borrower for DIL or foreclosure. Lots of twists and turns in this process, and that is AFTER you have done complete due diligence on the paper, and gotten the loan boarded with a licensed servicer. 

Feel free to connect with me off-board and I'm happy to set up a call to discuss further. I've done JV projects on notes both in and outside of my SDIRA as well as have a growing portfolio of reperforming notes in my SDIRA which are providing tax free monthly income.

Bob Malecki