Need advice investing in a large deal involving Notes, 50% ROI.

Tax Liens & Mortgage Notes
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Need advice investing in a large deal involving Notes, 50% ROI.

Jeremiah Leonard
Rental Property Investor · Cary, NC · Member since 2018 · 15 posts · 7 votes
During a local Meetup one of the head honchos of the group pitched a BOGO offer on mortgage notes. Yes I mean buy one get one. The BOGO is a bit misleading because he essentially plans to buy one house for around $50,000 renovate for a bit more, and resell at $100,000 or maybe slightly more. That is then leveraged to buy the second house, which is again rehabbed and resold at again $100,000. His timeline for this is 6 months per house, so in a year after the two properties are essentially flipped and resold or the mortgage refinanced with the existing owner the profit is split 50/50 so I the investor gets $75,000 from the $50,000 I put in, hence the 50%ROI. (These are my conservative numbers, the numbers he gave were: first house bought at 50k+20k rehab sold at 125k, second house bought at 50k w/7% +20k rehab sold at 140k profit of 96k after expenses and ROI of 96%, split 50/50 I the investor make 48k and the 50k back) He's planning on buying at least 200 notes and has already secured millions in investments to make this happen, each note would be around 50 cents on the dollar because of the quantity he's getting. I really need advice here, I know very little about notes and was planning on looking into BRRRR honestly. But I also have money I'm investing around, currently stocks but those have been averaging 7% annual ROI and with the market so high they've been doing worse this past year. So this seems like a really good alternate option to put that into truly passive income. Is this the real deal, have people done deals like this before? What sort of questions should I bounce off this guy and why is he willing to split the profits 50/50 with ridiculously high ROI, the way he pitches it I feel like he could pitch 25% ROI and make that much more for himself. I would really appreciate guidance and would love to be able to even call someone over the phone and really hash everything out. What I'm looking for most of all is for someone to immediately see this and go "no way Jose this guy is peddling snake oil." And tell me why.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
8y

If he has “raised millions” he doesn’t ne d your $50k......

There are lots of guys pitching unrealistic pie in the sky schemes at these meet ups.....my guess is he hasn’t bought Any, and is delusional about the profits to be made.

Also, your opening paragraph was about buying Properties, not notes.  If you were talking about notes, yes you’ve longer holding times getting to foreclosure while you’re paying additional taxes, insurance and preservation while doing so.

The “easy” money in buying notes was 10 years ago.....same as reo’s, the inventory is less than 10% what it was back then with probably 5 times as many guys wanting to get in, after the party has been over for some time.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @Chad U.  @Chris Seveney   Chad and Chris are active note investors.. I am not sure your seeing these kind of discounts and when you buy a note you have to take at least a year in FLA to foreclose.

    Me personally I funded one of the bigger flippers there in 2013 to 2014  probably did 250 short term loans for them.. and that's what they were paying then.. I don't think you can buy the assets that cheap today.. pretty sure prices have risen and there is not 200 deals to be had.. but I could be wrong of course.. 

    however I would say this is puffing and wishful thinking or like many that give examples they can do one or two but cant scale it .. 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    8y

    @Jeremiah Leonard

    @Jay Hinrichs is right. First off anyone offering 50% returns run for the hills. Second thing is if you buy notes your not getting the property back the next day. If it’s occupied in Florida you are a year + into it, if it’s vacant maybe get a DIL but that will still take months. 

    Also your numbers are off - if you buying the house for 50k and he has to put $ into it, your putting $20k mom. So your in it for $70k. Sell it for $100k minus fees your at 90k. You get 20k split so you get a 20% return

    Also with notes you have no idea what interior condition is, it could need $50k or be a complete tear down - especially when vacant. Again if it’s occupied not only are you waiting a year but easily dropping $10 in legal and servicing costs  oh and if they don’t want to go they file BK and there goes another year of missed payments before the trustee dismissed it because they give them several chances as their primary residence. 

    Most importantly how is your money protected? Is it a loan - is it a JV agreement - if a JV what authority do you have as if it is zero and your not accredited it's a SEC violation.

    There is a lot of little details with notes. This deal seems like it’s comjng from someone who really shoots from the hip

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    If he has “raised millions” he doesn’t ne d your $50k......

    There are lots of guys pitching unrealistic pie in the sky schemes at these meet ups.....my guess is he hasn’t bought Any, and is delusional about the profits to be made.

    Also, your opening paragraph was about buying Properties, not notes.  If you were talking about notes, yes you’ve longer holding times getting to foreclosure while you’re paying additional taxes, insurance and preservation while doing so.

    The “easy” money in buying notes was 10 years ago.....same as reo’s, the inventory is less than 10% what it was back then with probably 5 times as many guys wanting to get in, after the party has been over for some time.

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  • Jeremiah Leonard
    OP
    Rental Property Investor · Cary, NC · Member since 2018 · 15 posts · 7 votes
    8y
    @Jay Hinrichs I think you're right that the numbers he was giving were the optimistic best. He has done this the year previously with a smaller batch and said the numbers were actual numbers he was getting. I am meeting with him again to learn more about the opportunity (especially after hearing from you all I doubt I'll look into it further but I already set this up). Can you give advice on what questions I should be asking to get closer to the average values he was seeing last time rather than the best case which is what I'm sure he was pitching? Also I don't beleive his market is in Florida, I don't have the notes I wrote down but I beleive it was in the Midwest. Thank you again for your advice here!
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  • Jeremiah Leonard
    OP
    Rental Property Investor · Cary, NC · Member since 2018 · 15 posts · 7 votes
    8y
    @Chris Seveney I admitted my ignorance in my original post and I'll admit it again; I was not going to even look into going forward with this deal unless everyone posting here was saying "that's an awesome deal how can I get in on it." Since that's not the case I really want to learn more about what this deal looks more like realistically, I have a meeting with this guy on Sunday to talk to him and I want to be question ready to see if I can boil away the fluff. Thank you so much! I beleive the properties are located in the Midwest but I'll need to check my notes and ask the guy pitching the idea. He mentioned being able to have his agents look into the properties before buying so I'll ask how he plans to do that because you are confirming my suspicions that you can't really do that without permission of the home owner... I beleive his idealized scenario was that they send an agent, explain that if they can check out the property before hand they might be able to wipe out the debt for them, and on that possibility be allowed to see the property. Sounded like an ideal scenario so I'll ask if that's a requirement before they buy a property. Would you be able to do a brief call this week to help me prepare for my chat with the this guy so I can know what to ask and what to look for in the deal? Maybe 30 minutes or so?
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  • Jeremiah Leonard
    OP
    Rental Property Investor · Cary, NC · Member since 2018 · 15 posts · 7 votes
    8y
    @Wayne Brooks Thanks Wayne! I'm sure your skepticism is well founded, my understanding from the current market is that this deal was certainly blown out of proportion. I'm meeting with this guy anyways on Sunday to learn more about it, do you have any suggestions for what questions I can ask to break it down more?
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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    those kind of spreads are not realistic in todays market..  can they happen yes.. but scale and be the norm no is my thought.

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  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    8y

    @Jeremiah Leonard First, I applaud you for doing research by asking for advice. It takes courage to come on here on BP, admit your ignorance, and be prepared to hear the responses, the bad and the good. I'm with everybody else on here and cringe when I hear the details. Note sellers will not be happy with you if you send an agent to talk to the borrower about wiping away the debt as you mentioned above. The whole buying a note with the purpose of acquiring the real estate is really not a great business model. 

    For questions for this guy, get specific on how your investment is supposed to be set up. What does he want from you? What will you get in return? How will your investment be secured? When will you get your money back? Press him to be very specific. If he's vague, evasive, or won't answer your questions, be suspicious. Based on what you've said, I wouldn't believe his story or the opportunity. You probably won't either but there are a few out there who will and that's how guys like this make money.

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  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Jeremiah Leonard:

    What I'm looking for most of all is for someone to immediately see this and go "no way Jose this guy is peddling snake oil." And tell me why.

     OK. I'll say it no way Jose this guy is peddling snake oil along with @Jay Hinrichs @Wayne Brooks @Chris Seveney @Andy Mirza who are some of the most sophisticated investors here on BP.  

    When you meet with him, inquire about existing deals he's done. Ask to see his purchase agreements on the notes, rehab contracts, and the final HUD statements. Those returns are possible for sure, but his timeframes of 6 months are waaaaaaaaaay too aggressive. For instance, a couple rehabs I have going on REO's that I took back from my note purchase look as follows:

    1. Note Purchase- $21K, Rehab - $20K, Hold Cost - $4K; Projected Sale - $80K-85K; ROI ~ 70%

    2. CFD Purchase- $15K, Rehab - $23K, Hold Cost - $3K, Projected Sale - $70K; ROI ~ 60%

    On the first one, we bought the note in November, got a DIL after 7 months of loan boarding then tracking down borrower and back and forth on terms, so didn't start rehab until July after 7 months. It's in Columbus which is an extremely hot market right now, we are listing this week so should sell in days. Overall expected timeframe cradle to grave of 10 months. This is about as good as it gets! Getting notes at 25% of ARV is practically impossible in hot markets, but we got this one on a fluke as the Hedge fund who bought it from a HUD sale divested all condos from the pool.

    On the 2nd one, we bought this at Xmas, took 4 months for boarding and track down the borrower and got a cancellation of contract.  Started rehab in May, however this property has had one surprise after another.  I'm also acting as the GC and subbing it all out as I got quotes from GC's for double for what the budget was.  Hope to list end of month and this part of St Louis is still a buyer's market so expecting 3-4 months to sell.  Again overall timeframe of ~10 months.  

    And these are just 2 examples where we didn't have to foreclose, or go through a BK.  Depending on the state, this could add at least another 1 - 2 years onto the timeline.  And picking up notes at 50% or less in those value ranges is completely optimistic.  Anything with a value over $100K is commanding 60-65% or more.  So again, I say he is peddling snake oil.  

    If you want to PM his name, Chris and I can run it past our note investing circle to see if anyone knows of him.   

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  • Jeremiah Leonard
    OP
    Rental Property Investor · Cary, NC · Member since 2018 · 15 posts · 7 votes
    8y
    @Andy Mirza Thank you very much for the good questions, I'll definitely try and address each of these when I'm meeting with him. The only reason I wasn't immediately adverse to his sales pitch is because he is and has been a trusted member of the real estate group in attending, he's well established here, many people in the meeting know him and trust him. What I don't know is how many people actually invest with him or if they're just friends. I figured the thing that would make me look more stupid than posting on here for advice would be to jump on this deal without it. I've already gotten a ton of really great advice and there's all but zero chance I go through with it thanks to you guys, I'll definitely see how much detail I can get out of him to try and get more accurate numbers. Just because I've already agreed to meet and I'm curious about it.
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  • Eric Jacobs
    Specialist · Fort Lauderdale, FL · Member since 2016 · 187 posts · 128 votes
    8y

    .Something doesn't sit right with me.  I am in Florida and prices are nowhere near that and well suffice it to say there are a bunch of "red flags" here.  As for "BOGO" anyone will sell you something Buy One Get One as long as you pay double for the first one.  I would also be very uncomfortable with a "honcho" getting you out of the model that works for you and into something you know little if anything about .  Investing in notes sounds obvious.  Its not.  It sounds like you can't lose money.  You definitely can.  There are no shortage of people with "brilliant" ideas in real estate investing.  I hate to sound cliche but at least until you have your feet under you I would stick with the old adage "if it sounds too good to be true..."....good luck 

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  • Jeremiah Leonard
    OP
    Rental Property Investor · Cary, NC · Member since 2018 · 15 posts · 7 votes
    8y

    @Chad U.

    Pretty cool to see that the numbers aren't unrealistic given your own personal experience, but like everyone else has said the the timeline and the scalability seem unfeasible. That said the ROI you're seeing are for yourself, with his proposed 50/50 split with investors it would still be 35% and 30% respectively. Which don't get me wrong is great, but way way under what he's saying. And the 1 year timeline just seems crazy, especially to do two houses.

    As I mentioned in my reply to Andy I'm really stumped by how well respected and well known this guy is at the meetups I'm going to. Everyone knows him, everyone seems to suggest him, and several of the more successful people are working with him. I just don't know how exactly they're working with him. To that end I'll be asking him about references from previous deals and I'd like to gauge how many returning investors he has.

    I'll PM yourself and @Chris Seveney later today with his info, maybe he'll be someone on your radar. He's based out of Florida but his note deals are not local.

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  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    8y

    @Jeremiah Leonard Oh I see you're in Orlando......very interested to see who this individual is...

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  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    8y
    Originally posted by @Jeremiah Leonard:

    As I mentioned in my reply to Andy I'm really stumped by how well respected and well known this guy is at the meetups I'm going to. Everyone knows him, everyone seems to suggest him, and several of the more successful people are working with him. I just don't know how exactly they're working with him. To that end I'll be asking him about references from previous deals and I'd like to gauge how many returning investors he has.

    Speaking generally, using only an investors popularity, their investor Rolodex, or recommendations without understanding the investment can backfire. 

    Case in point: Bernie Madoff. He had all three of the characteristics you described...

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  • Jeremiah Leonard
    OP
    Rental Property Investor · Cary, NC · Member since 2018 · 15 posts · 7 votes
    8y

    @Bill F.

    For sure, Which is one of the reasons I'm glad everyone here is without fail saying "This is way too good to be true."

    I'd hope most people vet their investments but as you said with Madoff for hundreds of people his credibility was enough, and it's knowing about previous horror stories that has me here in the forums watching everyone throw up their own red flags on this deal.

    It's seriously appreciated.

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  • Jeremiah Leonard
    OP
    Rental Property Investor · Cary, NC · Member since 2018 · 15 posts · 7 votes
    8y

    @Eric Jacobs

    Thanks for the reply for sure, after all this feedback and other research I've been doing the whole scenario interests me, I want to learn more about Notes and the potential there but when it comes down to it there's no way I'd be ready for the timeline this guy has set up (another red flag among many) and like you said I am definitely following this adage, I'm going to learn what I can but it's pretty clear this is too good to be true. I don't want to be a statistic so I'm going to avoid this deal but I'm going to use what could have been a terrible idea as a way to learn more about the whole process.

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  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    8y

    @Jeremiah Leonard Your description of this investor reminds me of a local Orange County investor and his partner who ran a popular real estate investment club. They were connected with all the well known real estate investors and I know that some invested with them. They focused on buying seller financed properties in Utah and holding them as rentals. I don't know if they were bad at business or straight fraudulent but they lost their investors tons of money and one day just disappeared from the scene. I heard that they both had to file bankruptcy. From well known and respected to disappeared and disgraced.

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