Analysis of Performing Notes

[Eli Kallison]

Hey BP,

I’m looking to purchase my first performing note. While there are plenty of resources related to non-performing notes, I’m having trouble finding anything that can give me guidance on 1st position performing notes. There seem to be the following areas that I need some help with:

Financial Analysis

Local market conditions and the property notwithstanding, analysis of the mathematics of a note seems relatively straight-forward. I’m not looking for risk analysis here, just black-and-white analysis of the financials assuming all risk is equal.

It seems that you want to buy an unpaid balance with as high an interest rate as possible, at as much of a discount as possible. What else do I need to consider? Assuming I want long-term cash flow (primary goal) and to protect/grow capital in the process (secondary goal), what benefits or drawbacks do balloon payments have? Are there other repayment factors I need to consider?

I need guidance here.

Risk Analysis

This is something I’m more familiar with. Analyze borrow’s ability to repay, credit score, seasoning of the note, property condition, value, location, market trends, etc. I feel more comfortable with this.

Logistics of Buying a Note

When you buy a note either from a broker or a seller, what documents do you need to ask for? What is the primary thing to look for on each document? Does the borrower need to provide anything like insurance documents, etc that would be important for me to look at?

When you’re ready to purchase, what legal resources or paperwork do you need drafted? Who does this and how much does it cost?

On-going Upkeep

How do you make changes/amendments to the note assuming something happens like property taxes or insurance goes up or down. Or, the borrower and myself agree to make amendments. Is this done through a RE attorney?

What do I need to look out for if payments are being made on time?

To what extend do companies who service loans get involved in collecting late payments, etc? How much does it run to have a loan servicing company collecting rents, and is this recommended?

Any information would be much appreciated!