New to Notes - Knowledge Check

[Anthony Antonacci]

Hi Everybody,

New to the world of REI and especially the concept of buying notes. Have dove into some reading here the last week or so and wanted to check for understanding on some key concepts and lay out some questions...hopefully this helps some others, too. Thank you in advance.

Notes in General

1. What is the difference between 1st/2nd position and what implications does this carry for an investor?

2. How can an individual investor who is unable or unwilling to buy notes solo get into owning notes? PPR and other services a route?

Performing Notes

1. If these notes are performing, why would someone be selling them at a discount? Are performing notes more commonly acquired through owner financing? How do you locate these deals?

2. Can someone explain the interest to be reasonably expected in a performing note? If it is a residential loan at 4%....is this your rate of return? 

Non-performing Notes

1. Strategies are to a) restructure and make performing (to hold/collect or sell note later) or b) foreclose and secure the property for sale. Can someone provide feedback here and/or expand upon this?

2. Certain states are more favorable to purchase these correct? I am in Illinois which has a very long foreclosure process as compared to Texas. Would it be less ideal to buy non-performing notes in a state like IL?

3. These are often bought in bulk by large investment groups...what kind of quality is out there for a small, individual investor? 

4. Do you get to set terms for the borrower when you take over the note? For instance, late penalties, etc.

Thank you!

AA

[Dion DePaoli]

1. What is the difference between 1st/2nd position and what implications does this carry for an investor?

First, second, third, etc refers to lien priority. The first lien is has the highest priority claim to the collateral's equity. So liens in higher lien positions are lower in their claim to equity which is an elevation of risk of loss. A second lien could have no property equity to attach to making recovery of principal very difficult.

2. How can an individual investor who is unable or unwilling to buy notes solo get into owning notes? PPR and other services a route?

Well you answered your own question, if you are unable or unwilling - you are not in the game.

1. If these notes are performing, why would someone be selling them at a discount? Are performing notes more commonly acquired through owner financing? How do you locate these deals?

Loans trade for Par (100% of balance), Premium (100%+ of balance) and Discounts (less than 100% of balance). Discounted sales are due to some form of defect in the loan which ranges from paperwork, borrower or real estate. The vast majority of the loan market are Fannie Mae, Freddie Mac and Ginnie Mae loans. Seller finance is but a very small sliver. As far as deals are concerned - first you have to know what you are looking for.

2. Can someone explain the interest to be reasonably expected in a performing note? If it is a residential loan at 4%....is this your rate of return?

The market rate of new originations is around 4.0%. That would be the rate of interest a borrower expects to pay. An investor who purchase that loan in line with the 3 types of loan trades above would expect the same yield at par, lower yield at premium and higher yield at discount. Deeper discounts create higher yields. Those higher yields will still be dependent on the underlying note.

1. Strategies are to a) restructure and make performing (to hold/collect or sell note later) or b) foreclose and secure the property for sale. Can someone provide feedback here and/or expand upon this?

Defaulted loans mostly end up in foreclosure. Foreclosure is the termination of the rights of redemption of the borrower. This allows the Mortgagee to have the property sent to auction to be sold to recover their money. If the auction doesn't produce a sale then the mortgagee will be granted title to the property which they can continue to try and sell or not as they see fit. Reinstatement for defaulted loans are a lot over romanticized by newbies. Just because a mortgagee reinstate a loan doesn't mean they should. It is possible to allow the borrower to short the balance through a sale or a refinance along with arranging the borrower surrender the property to satisfy the amounts due. The primary disposition in all of that group is still foreclosure.

2. Certain states are more favorable to purchase these correct? I am in Illinois which has a very long foreclosure process as compared to Texas. Would it be less ideal to buy non-performing notes in a state like IL?

Favorable and idea is a relative term. Loans trade for prices in line with the risk of the loan including the types of defects and geography of the subject property. A loan in Texas will likely be priced higher than a loan in Illinois due to the short time frame of disposition thus lack of additional capital input if they are both at the beginning stages of default.

3. These are often bought in bulk by large investment groups...what kind of quality is out there for a small, individual investor?

The majority of loan sales are done by institutional investors and loans are traded in pools not one off, single loan transactions. Quality is a relative term. Million dollar collateral is nicer than ten thousand dollar collateral.

4. Do you get to set terms for the borrower when you take over the note? For instance, late penalties, etc.

NO. When the note is executed at origination those are the terms of the loan. Those terms do not change unless specifically agreed to in writing by the Mortgagee and Borrower in a formal agreement called a Modification. The terms may temporarily be alter to benefit the Borrower by the Mortgagee in what is called a Forbearance. Loans can not can change to make the burden higher for the borrower, the changes are to benefit the borrower otherwise the act will be considered predatory.

Welcome to the boards. Those responses should give you some additional jumping ground to find topics to review on the boards. There is a lot here. Enjoy.

[Jeff Rabinowitz]

@Anthony Antonacci, welcome to BP. The answers to your questions would take hours to write and would fill a small volume. Fortunately for you, these topics have been covered in hundreds, maybe thousands, of threads, blogs, and podcasts here on BP. The site can be easily searched. Enter a topic into the search platform to the right of the toolbar and dig in.

[Jay Hinrichs]

@Anthony Antonacci  you know the questions to ask.

I would recommend you go on  e bay and buy a used set of Eddie speed materials.. and many of the other note gurus'  you can then read through all that material .. will take you a lot of time trying to track down all the hundreds if not thousands of threads on BP...

If your really interested go to one of the Note buying conventions in Vegas ... for a few grand you will get a condensed version..

[Jay Raught]

Originally posted by @Anthony Antonacci:

Notes in General

1. What is the difference between 1st/2nd position and what implications does this carry for an investor? 

 First position notes are a contract that indicates the amount owed on a property. The position is an indicator of who has first rights of foreclosure if the borrower defaults

2. How can an individual investor who is unable or unwilling to buy notes solo get into owning notes? PPR and other services a route? 

PPR, FCI, Watermark exchange are possibilities, sometimes note holders will sell one offs.  You can also look ton JV on deals. 

Performing Notes

1. If these notes are performing, why would someone be selling them at a discount? Are performing notes more commonly acquired through owner financing? How do you locate these deals? 

The note could be a re-performing note and the note holder may wish to move due to the exit strategy they had upon purchase of the note.  To locate the deals, network, ask questions like you are etc. 

2. Can someone explain the interest to be reasonably expected in a performing note? If it is a residential loan at 4%....is this your rate of return? 

The rate of return will vary on the purchase and many other factors. 

Non-performing Notes

1. Strategies are to a) restructure and make performing (to hold/collect or sell note later) or b) foreclose and secure the property for sale. Can someone provide feedback here and/or expand upon this? 

My strategy is to reinstate the loan, modify the loan to help the borrower, REO if they cannot or DIL, Rental if it gets to that point.

2. Certain states are more favorable to purchase these correct? I am in Illinois which has a very long foreclosure process as compared to Texas. Would it be less ideal to buy non-performing notes in a state like IL? 

I target notes in about 5 -10 states. Some states have more deals than others, some states are best to avoid.

3. These are often bought in bulk by large investment groups...what kind of quality is out there for a small, individual investor?  

There are deals out there for the small investor. 

I hope this gives you a basic idea of what you are getting into.  Also check out the Note MBA podcast. There are over 60 episodes related to notes.  If you have any other questions feel free to reach out and I will be happy to answer any questions you may have. 

[Dion DePaoli]

1. What is the difference between 1st/2nd position and what implications does this carry for an investor?

First, second, third, etc refers to lien priority. The first lien is has the highest priority claim to the collateral's equity. So liens in higher lien positions are lower in their claim to equity which is an elevation of risk of loss. A second lien could have no property equity to attach to making recovery of principal very difficult.

2. How can an individual investor who is unable or unwilling to buy notes solo get into owning notes? PPR and other services a route?

Well you answered your own question, if you are unable or unwilling - you are not in the game.

1. If these notes are performing, why would someone be selling them at a discount? Are performing notes more commonly acquired through owner financing? How do you locate these deals?

Loans trade for Par (100% of balance), Premium (100%+ of balance) and Discounts (less than 100% of balance). Discounted sales are due to some form of defect in the loan which ranges from paperwork, borrower or real estate. The vast majority of the loan market are Fannie Mae, Freddie Mac and Ginnie Mae loans. Seller finance is but a very small sliver. As far as deals are concerned - first you have to know what you are looking for.

2. Can someone explain the interest to be reasonably expected in a performing note? If it is a residential loan at 4%....is this your rate of return?

The market rate of new originations is around 4.0%. That would be the rate of interest a borrower expects to pay. An investor who purchase that loan in line with the 3 types of loan trades above would expect the same yield at par, lower yield at premium and higher yield at discount. Deeper discounts create higher yields. Those higher yields will still be dependent on the underlying note.

1. Strategies are to a) restructure and make performing (to hold/collect or sell note later) or b) foreclose and secure the property for sale. Can someone provide feedback here and/or expand upon this?

Defaulted loans mostly end up in foreclosure. Foreclosure is the termination of the rights of redemption of the borrower. This allows the Mortgagee to have the property sent to auction to be sold to recover their money. If the auction doesn't produce a sale then the mortgagee will be granted title to the property which they can continue to try and sell or not as they see fit. Reinstatement for defaulted loans are a lot over romanticized by newbies. Just because a mortgagee reinstate a loan doesn't mean they should. It is possible to allow the borrower to short the balance through a sale or a refinance along with arranging the borrower surrender the property to satisfy the amounts due. The primary disposition in all of that group is still foreclosure.

2. Certain states are more favorable to purchase these correct? I am in Illinois which has a very long foreclosure process as compared to Texas. Would it be less ideal to buy non-performing notes in a state like IL?

Favorable and idea is a relative term. Loans trade for prices in line with the risk of the loan including the types of defects and geography of the subject property. A loan in Texas will likely be priced higher than a loan in Illinois due to the short time frame of disposition thus lack of additional capital input if they are both at the beginning stages of default.

3. These are often bought in bulk by large investment groups...what kind of quality is out there for a small, individual investor?

The majority of loan sales are done by institutional investors and loans are traded in pools not one off, single loan transactions. Quality is a relative term. Million dollar collateral is nicer than ten thousand dollar collateral.

4. Do you get to set terms for the borrower when you take over the note? For instance, late penalties, etc.

NO. When the note is executed at origination those are the terms of the loan. Those terms do not change unless specifically agreed to in writing by the Mortgagee and Borrower in a formal agreement called a Modification. The terms may temporarily be alter to benefit the Borrower by the Mortgagee in what is called a Forbearance. Loans can not can change to make the burden higher for the borrower, the changes are to benefit the borrower otherwise the act will be considered predatory.

Welcome to the boards. Those responses should give you some additional jumping ground to find topics to review on the boards. There is a lot here. Enjoy.

[Dolly Caswell]

Very well answered @Dion DePaoli.