lets talk about performing notes
Most Popular Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes@Or Yeger quality first you will pay differently for in different markets..
what your looking for is Yield the Yeilds will be dictate what you pay for the note.
Many quality performing notes that are say 7 to 10% will be sold at Par.
In my ever it to be humble opinion buying a note that was purchased as a NPN and is no performing is very risky.. the chance that you will be right back into NPN status is pretty great probably 50% chance or better.
I like performing notes with good solid borrowers not notes were the borrower has already defaulted as they now know how its done.. plus ower occ notes have all sorts of rules and regs you have to follow . I see this as ( at least for me) if I was going to buy those I would have to be creating a business out of it and be buying them in large quantities each month..
Give me a good stable 9 to 10% APR note that will pay every month as agreed now that Is a solid base to grow on.
20 Replies
- Investor · Newark, DE · Member since 2015 · 248 posts · 178 votes10y
Performing notes are sold for 60‰,or more, they are sold at a discount because the seller most likely bought this note as a NPN, seasoned the Note and is selling it as a performer.
If you buy a npn you can get discounts but if it is 80% off there are probably big issues.
The JV terms are set on how much you want to help, if you put up all the capital and I do the work, the split won't be 50/50, there is quite a bit of work involved. The return you should expect is dependent on lots of factors, but it can be double digit.
I think I confused myself with the word discount. i meant paying 80% of the upb not paying 20% (=80% discount).
Are there notes that are performing since inception ? those notes probably I expect paying higher rates.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Or Yeger quality first you will pay differently for in different markets..
what your looking for is Yield the Yeilds will be dictate what you pay for the note.
Many quality performing notes that are say 7 to 10% will be sold at Par.
In my ever it to be humble opinion buying a note that was purchased as a NPN and is no performing is very risky.. the chance that you will be right back into NPN status is pretty great probably 50% chance or better.
I like performing notes with good solid borrowers not notes were the borrower has already defaulted as they now know how its done.. plus ower occ notes have all sorts of rules and regs you have to follow . I see this as ( at least for me) if I was going to buy those I would have to be creating a business out of it and be buying them in large quantities each month..
Give me a good stable 9 to 10% APR note that will pay every month as agreed now that Is a solid base to grow on.
- Investor · Orlando, FL · Member since 2014 · 110 posts · 90 votes10y
1) what do you look for in the due diligence process of buying a performing note?
There are a lot of factors that go into the DD process for NPNs. First thing before digging too deep into the other parts of DD is to do a virtual view of the house. Google map around the area, is the house still standing? Is there cars on bricks? Is it currently occupied? Get a lay of the land before doing any other DD or you might just be wasting your time on the other parts.
After this it is best to establish a value of the house (realtor, narrpr.com & zillow), take the mean estimate of all together in your excel spreadsheet to get a good baseline value.
Next is to review taxes on your county site (these are fun sites to navigate...not :) ).
If the place hasn't been sold at a tax deed, keep moving to the assignment chains.
That is a good overall view of the DD process. I hope that helps out.
Next if all is well, you will want to look at the O&E reports to get a better idea of the asset
2) what discount should i expect to get 80%-90% UPB? If that is the case get ready for a major headache. That would have major issues if it was discounted that much. It really just goes with how much work you want to put into the asset and what your exit strategy entails. If you're wanting to turn the asset performing and it is still occupied, the work could be worth it.
3) from your experience what are the terms of investing with a JV when someone gives 100% of the funds and the other party puts in the work/sweat (sourcing notes, setting up the payments, negotiations etc). I don't think there is a baseline average, I think it matters who your investor is and what your current relationship entails. If they are unfamiliar with mortgage notes, then their risk tolerance might be different than yours. Plus if this is your first time working a mortgage note, that might be an issue.The main thing is make sure you are protecting your position in the deal.
4) what would you say the advantages of performing notes upon regular real estate investing (buying a house and renting). Advantages would be the types of exit strategies outweigh what you can do with regular real estate investing. You will also be able to get creative if you seller finance, sell partials of the note, purchase from your IRA, etc.Lastly you don't fix any toilets when they break, you're their bank not their landlord.
5) what kind of return should I roughly expect? No way to really answer that confidently, it's all over the board.
6) in theory how would you go about building wealth with performing notes? arbitraging bank loans to buy notes for example ?. Purchase NPNs turn performing and refinance for 360 months. Collect the monthly payments (season it for 6 months), sell partials, repurchase the loan after the partials expiration date from your self-directed IRA for $100. Collect the remaining payments on the mortgage tax free till the loan is paid off in its entirety. - 10yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
All good with the list there but Brett is trying to talk about Non-Performing Notes ("NPN") and the post is about "Performing Notes".
So let's chat about PN's per the thread title.
1. Due diligence often gets boiled down to some checklist of items folks seem to think they need to do. This is largely a drastic oversimplification of due diligence. Due diligence at its core is going to depend on the loan type and origin and the collateral. Due diligence on a hard money loan is less extensive than due diligence on a conventional loan. Due diligence on a commercial loan is going to be more extensive than that of a conventional loan. In an abbreviated list we would have to look into the physical property, the title to the real property, the credit worthiness of the borrower - past and future (includes performance), servicing of the loan if originated, the paperwork the loan was originated by and regulatory and compliance issues related to the loan and borrower. Moral of the story, there is much more than simply looking a property up on line, making sure it didn't trade at a tax sale and having an idea of whether the property taxes are current.
2. Loans trade in one of three manners: (1) Par = 100% of Unpaid Principal Balance ("UPB"); (2) Premium = more than 100% of UPB and (3) Discount = less than 100% of UPB.
Do not assume, as mentioned above, that loans automatically trade for a discount. That is completely false. Discounts are applied for defects in the loan as an offset to the risk of disposition and holding the loan. The level of discount will be affected by other compensating factors such as loan to value and guarantees. While you may have a particular yield in mind, the Seller may not wish to grant a discount to reach it. So just because you want 10% on a loan with an interest rate of 8% with an LTV of 75% doesn't mean you will get it. That seller will likely move on to another buyer. Bare in mind that the rate of return for prime loans is around 4.0%. Prime meaning, good borrower, good collateral and good origination.
3. Clearly you are a newbie. Otherwise you would be answering these questions. There is no such thing as "setting up payments", the loan is likely already originated. The payments are set in the note. What are you negotiating?
There is no warm and fuzzy answer here. You have much to learn. To that degree you are sort of asking what I should pay my plumber to be my brain surgeon. The answer is likely "not much".
4. Loan investing has pro's and con's in relation to real property. There are some threads that go deeper into that discussion than we need to hear. If you search this forum they will pop up.
5. This is a catch 22. You, by the question above, are NOT the actual investor. So you don't have a return. That said, in the spirit of the question, the investor can expect a return that is going to vary in relation to the risk in the loan. As I stated above, prime loans are priced at roughly 4% as risk rises from there, so does return.
6. Building wealth with any asset is the accumulation of capital which can then be deployed into assets to repeat the process. So the moral of the story is don't spend the income things that don't generate income or value.
The arbitrage of bank loans is an idea we probably don't need to touch on here. There is no likelihood you are trading into bank loans and trading out of them for a gain anytime soon. Flipping notes is not easy nor profitable as some may have you believe. Sellers demand reasonable pricing for their loan or they do not sell. It is more logical to assume like minded investors will price the loan the same therefore the margin is slim to nonexistent.
Welcome to the boards Or. This forum has a wealth of information you can find to help you continue to learn more. Good luck. @Dion DePaoli, seems a bit harsh with the feedback don't you think? Nothing wrong with the content because we can clearly read that you are experienced...just think you could convey your thoughts a little more appropriate rather than coming off as demeaning. Maybe I am overstepping my bounds but I see it as someone looking to learn...
- 10yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
Originally posted by @Bryan C.:
@Dion DePaoli, seems a bit harsh with the feedback don't you think?
No. But I didn't have safe spaces at my university either.
- 10yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
@Or Yeger
There are actually some missing details that affects the answer to your question. There are many activities working with loans and borrowers which require a license. There are many activities when trying to raise money that require legal disclosure or license. The question/idea you have is far to vague and what little detail you provide are acts that would be very concerning.
The term "JV" gets tossed around in conversation a lot on these board, more so lately. By and large they likely create regulatory and compliance issues. Most will not have proper structure to the actual Mortgagee. Third parties in mortgage lending and servicing require license. I also tend to think most JV's are not proper joint ventures and are more like two folks, albeit entities or people, trying to work on something with a very loose document tying them together. Even further, soliciting for a JV into a loan can be regarded as a violation of securities law.
For instance, as I asked, what are you planning to negotiate? You can not work with the borrower in any manner unless you are the mortgagee or hold a license. It doesn't seem you have a mortgage broker license nor do you have a mortgage servicing license. Negotiating between a borrower and a mortgagee as a third party for a fee in all 50 states is a licensed activity.
One of the other ideas you mentioned is setting up payments. Again, what do you think this task involves? You are not a licensed servicer so you can not manage, accept or work with a borrower's payments to the mortgagee. As I mentioned the payments are already set in the note which is an important basic detail that you should know and understand. So that misunderstood idea being present is a red flag in your level of knowledge working with this asset.
When it comes to the sourcing idea, which we can group in to brokering concepts, the question that begs to be asked is what can you know of the quality of loans, risk from the counter party or general pricing if you do not have a better grasp of loans in general?
Brokering with little to no real understanding of the asset class sounds good in discussion but in reality it is often a waste of time for all involved. Including broker, seller and buyer. When other occupations have brokers they are sought out because they have some basic level of expertise. A property and casualty insurance agent doesn't simply forward over contact information of the insurer or underwriter and expect a fee. They lead the interaction and have to be capable at some level of guiding the client. I think that idea gets lost in those who seek to broker whole loans. It is not just about forwarding an email.
This all brings us to a point where, as I mentioned, you have much to learn. That is not demeaning, it is just a fact. You really do have a heck of a lot to learn about lots of different aspects of this asset class and business. You do not know what you do not know. That is the dangerous part. In the relationship structure you imply, be it JV or formal management, the other party sounds like they are putting up the capital so logic would dictate you are supposed to put up the expertise. Expertise you need to still acquire. This begs the question then of what is that current minimal level of expertise worth?
Now I guess some folks may not like my brutal brand of honesty but I have no reason to not directly and bluntly address your questions and implying thoughts. I am not one to sugarcoat things. It doesn't do you any good if I sit back knowing what I know and have an understanding of what you are about to do wrong and not turn up the fire a little bit. The potential outcome of improper dealings in this asset class are large fines and orange jumpsuits. It's not all ponies, clowns and rainbows. You can get in serious trouble here for overstepping your bounds and doing improper activities. That can also cost the investor money and legal issues as well, not just you.
Nothing in my posts suggests you can not do well in this industry but rather you should address the things you do not yet know in order to actually do something of value. Anything less is a disservice to you and your partners. As I mentioned this forum has a wealth of information in it. Start reading the threads. Be careful whose information you digest, there are many folks at various early stages of the same venture you are on and they may not have the right answers even though they sound nice and easy. Such is the nature of the beast, when setting out to learn something trying to teach will accelerate your learning. It allows you to put to test what you think you know. That is the beauty of the forums, discussions here don't get anyone hurt or in trouble. Participate in the discussions around the forum. Ask questions. You will start to learn more.
Best of luck. - Real Estate Investor · Rancho Santa Fe , CA · Member since 2016 · 323 posts · 107 votes10y
@Or Yeger Yes I agree with Dian I worked as Investment Analyst for a Private equity, for a while and Did a lot of Land Banking and NPN, the only thing I disagree is the returns try more like 3.1% in this current market. also be careful cause, some people that may sounds knowledgeable, may really think they are but don't, know specially a complicated subject that not everybody in Real estate knows like NPN.
Best of luck in this venture please keep me posted, see how it goes
Dion, first of all I thank you for the long and detailed answers, i have no problem with your honesty.
I know that I can't myself service notes, I guess I wrote "setting up the payments" in my mind was like boarding the notes to a service company that has all the knowledge about regulation etc.
Also as in JV maybe I don't have the right knowledge but I meant as two people coming together in some sort of a contract or LLC, one is the investor and one is the "know - how guy", of course I don't think that at this stage I would be the "know-how guy", I just wanted to figure out if there is any customary terms in notes like 50-50 split or whatever.
Also this post is part of me learning, I read the forums and read some books, viewed some videos and wanted a bit more information and answers to stuff I had in mind, I thought about pulling the gun on investing in a note as part of a JV so I could learn from and experienced investor.
I don't take this business lightly and I don't expect rainbows and unicorns just yet, I know I have big gaps in knowledge but that's why I try to learn and digest as much as possible.
- 10yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
I suppose "customary" is going to be defined by who you ask. I would suggest there is no customary split. That said, I have seen other offers for 50/50 splitting. Frankly, to me this make very little sense.
An investor puts up all the money, takes all the risk and only gets 50% of the profit. So if the asset is an NPN and we assume a market return of 20% then the investor only makes 10%. This sort of begs the question, why not just buy a 10% performing loan and not need the co-partner for the most part at all?
To address the common rebuttals, many folks will say "education" but this is really an abused idea. We should understand that notes are more like snowflakes and less like copies of a book. Sure, a defaulted loan is a defaulted loan, however similarities start to diverge from there. Since obligations are different and income and asset levels are different and balances and equity levels are different it is more likely you will have loans that are less similar to each other than more. This sort of puts to rest the notion that the one who does something for the sake of education in loan investing is truly benefiting "more" than they otherwise would if they do it themselves.
Let's be honest, filing foreclosure is not anything close to complicated. Find lawyer. Hire them. The lawyer does all the heavy lifting there.
Modifications and reinstatements are not going to be similar events among loans at all. Borrower's circumstances and loan characteristics ensure disparity among any two loans. Further, it is dangerous for folks to believe that loans are more similar than not. That sort of implies a one size fits all loans approach to disposition and nothing could be further from the truth.
Now, this is not to say there is not much to know or learn because there is. Having knowledge of foreclosure, bankruptcy, regulations and compliance is important and is no single topic is a small idea to digest. For some of those ideas the universe of information is larger due to variance among states. In fact the path to learning through doing is long for exactly this reason. A broad range of things to know and they are limited to some extent on a per loan basis. Ergo, one needs many loans to gain a well rounded and more thorough knowledge of the ideas within the industry.
Again, my point is the "education" card is a bit over played as a justification for certain acts in the industry. I could (did?) make the argument that the education idea is played out more often to benefit a party outside of the investor. Who really benefits from a 50/50 venture where one party is the only capital investor? It is not the investor per my above example of reduced return.Another angle to this dilemma is the evaluation of the part of the partnership which brings the education or "know how" segment. To some degree, if I don't know what I don't know then I can't properly evaluate another party who possess knowledge I don't know about. The guru paradox if you will. From that premise I think we can extrapolate that there is likely, to a large degree, a plethora of lesser skilled and knowledgeable folks leading less knowledgeable folks. It may perhaps also inflate lesser levels of knowledge improperly. I bought one loan so I am now an expert, type thing.
In that regard, I do believe quantifying levels of knowledge and skill within the industry is not easy. Is it a function of units or time or variety or spectrum of industry exposure? My personal answer that question is probably going to be "yes, all of those".
To steer back a bit to the core of the question, what is then the economic value of the non-capital contributing partner in a relationship working on an unfamiliar asset class? It seems it is not an even split. One party taking a risk and one party simply doing work is not an equivalent exchange. I would love for that to not be true but reality dictates otherwise. With what I know and my experience I could not bring myself to ever suggest an even split if I were the non-capital party. And I sort of know this asset class pretty well.
Mainly this is more due to approach I suppose. The investor exists in the relationship to earn a return. So the return needs to take priority. That tends to be an important mechanic in capital markets. This takes us to the next idea in the thought path, what is the investment worth to the investor or rather what return does the investor expect to earn and is therefore willing to party with a portion of the return to have another party do something to help create and manage the return?
There is not going to be an easy answer there. It seems there are investors who are willing to take the 50/50 deal. On the flip side, there are investors who think that is too rich. Investment funds have lower level shares of return such as 20% for managers while also collect a fee. There is a certain level of marketability to this notion however. For example, Steve Cohen's funds have a 3% management fee and a 50% profit share. He also returns around 30% year over year returns mitigating risk along the way. So his firms performance over time has evolve to command a high fee and split. The key here is it didn't start there.
In the end, it will boil down to what is negotiated and agreed to. How marketable the structure is will largely be influenced by the risk and the return along with the confidence or likelihood of the risk being mitigated and the return showing up. Like I said, there is no real normal for the most part. There are a variety of assets in the marketplace, there are a variety of managers and a variety of revenue sharing structures. To that extent, any one is only as good as the alternative. Ultimately the investor will decide. That said, it is probably important to understand that a high split better produce stellar results otherwise it is not worth the relationship.
- Investor · Jefferson City, MO · Member since 2013 · 309 posts · 100 votes9y
@Brett Burky I know that this post is a couple of months old but I was curious about your reply as to how to make money from notes.
"Purchase NPNs turn performing and refinance for 360 months. Collect the monthly payments (season it for 6 months), sell partials, repurchase the loan after the partials expiration date from your self-directed IRA for $100. Collect the remaining payments on the mortgage tax free till the loan is paid off in its entirety."
I am curious about the part that says "repurchase the loan....from your SDIRA for $100"
Perhaps I am misunderstanding? If your SDIRA held the note and you sold a partial would not the remaining payments be already owned by the SDIRA, no need to re-purchase? Perhaps you could clarify for me as you have me curious....
Thanks!
Join the conversationCreate a free account to reply, vote on answers and follow this thread.