What criteria do you consider when qualifying notes?

Question

Hi everyone,

My goal for the next 90 days is to buy my first note!

I'm transitioning from multifamily brokerage to note investing (hopefully full time in 2019).  Though I've been in real estate for quite some time, I'm new to the world of notes.  From what I'm hearing from local note investors, many of them focus on NPN acquired directly from hedge funds given the steady increase in foreclosures.  I have spoken to a few seasoned note investors who will only buy seller financed performing notes even though those seem harder to come by.   I'm open to both performing and non-performing notes for residential, MF and NNN and wanted to see how you narrow down which notes to seek.

I know everyone has their own preferences and strategies with qualifying notes so I'm hoping you'd be open to sharing whatever you're comfortable with.  For example, I recently spoke with a note investor with the following initial qualifiers:

NPN / SFR / Current Market Value: $50K - $250K /  2 or 3 BD / min 880 SF / County Population: min 50,000 / Low Crime Rate

Any feedback or insight would be appreciated.  Thank you!

Chad U. · Answer

When buying notes, they typically will not be in your backyard, so like any long distance investing you need to pick a couple markets and get intimately familiar with them.  The number one thing I tell any aspiring note investors is that you really need to nail down the value of the underlying asset.

What is the average selling price, what are as-is values, what are ARV's, how many days on market.  You also need to build a team, with an investor friendly realtor being your first member who can give you a CMA and perhaps a driveby.  So pick a few markets and when  a tape comes in with an asset in that area, you can be comfortable putting in a bid.

Odie Ayaga · Answer

I don't think I'd advise purchasing your first note on a 3 month timeline. You didn't disclose what your education level in the note space is so presuming you're just starting out I don't think that's enough time to really get your bearings.

I think minimally you need to determine whether you want to go performing or non-performing. The other criteria can flow from there, however those 2 paths are very different. I tend to differ from the crowd that advocates buying performing to prepare for non-performing. I don't think buying bonds is good practice for buying stocks and i think it's a similar comparison. If you opt performing you may be able to buy sooner, but I think learning how to buy NPN is a longer journey that you can't force into an arbitrary timeline.

Tim Fitzgerald · Answer

I would strongly advise against putting up any of your own money with such limited experience. I believe you should strongly consider using "OPM" (other people's money). That is, don't buy any notes at first.

Instead, get good at marketing for notes (that is, finding notes through either direct mailing from purchased note holder lists or networking through professional referral sources)-- I like the preformingnote space (the "ma and pa") note holders as I am good at finding them and I'm used to dealing with these types of people...a lot of the time, they need guidance and that's where I come in. I pre-quality the people who want to sell their notes and then I REFER them to my own network of note investors who accept referrals and who pay out referral fees. These investors buy notes every day, and if you watch them work, they will teach you everything about the business and the due diligence process. You're earning money as you learn.

After you refer (or "broker' or whatever you want to call it) X number of note transactions, after some time you become well-versed enough in the business whereby you can invest in your first note for your own account (using the proceeds you've amassed from your referrals) that you can then comfortably put up some of your own money to build your own note portfolio.

If you want some pointers as to how I'd suggest you start, you can PM me.

Odie Ayaga · Answer

If 90 days is your hard and fast goal then I'd say spend the first 30 days learning everything you can about notes. Listen to 3 podcasts a day at least.

Spend the next 30 determining how and what you're going to buy. Are you going to buy with a partner or on your own? From where? Are you going to buy performing or non? 1st? 2nd? CFD? Partial?

Then you can spend the last 30 executing on your decisions from the middle 30. It won't be easy and may even be a bit reckless, but if you're diligent naybe you can make it work. Best of luck and keep us informed about your 90 day journey!

Chris Seveney · Answer

@CJ Lee

Everyone had their different criteria based on their experience and level of risk. As someone who also had a real estate background and got into notes I would suggest to start in single family and buy a performing note first. That way you learn some of the players and systems.

Three months of education is still a limited education and with NPN’s you don’t know what you don’t know.

Cheryl James · Answer

Criteria will depend largely on the asset.  Performing vs NP.  1st vs 2nd.  Ultimately what is the end goal?  I am starting in the NPN 2nd space.  I do not want to inherit properties through foreclosure, so I will be focusing more on the ability of the buyer to pay and the equity plus likelihood of an upcoming sale .

Annie Davis · Answer

My apologies Tim...... I typed your name as “Tom”

Annie Davis

Annie Davis · Answer

Hi Tom-

Do you have a set of prequalifying questions you utilize when prequalifying a seller looking to sell their performing note backed by real estate(single family)? I’ve been studying and preparing for last few months to begin note brokering and understand the main things to look for in order to pass note on to a potential investor but would really appreciate knowing the questions you personally ask as a broker.

Thanks very much.

Annie Davis

Scott Carson · Answer

I don't think its unreasonable for you to pick up your first note in 90 days.  I'll reach out to you with a PM on some things...

CJ Lee · Answer

@Odie Ayaga Thanks for the outline and words of encouragement!

What criteria do you consider when qualifying notes?

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