An exit strategy with notes?

Question

Just wondering if I am thinking about note investing correctly.  I understand there are multiple exit strategies but to keep things simple, is it possible to do the following:

1.  buy a performing note at some sort of discount to fair market and UPB and generate 12% ROI

2.  sell that note to another investor needing only 8% ROI

3.  profit from the difference in purchase price less sales price

thanks!

Jay Hinrichs · Answer

yes correct.. but notes are priced by location.. notes on the west coast sell at very small to no discounts.

Notes in the mid west rust belt or in default or the new term reperformers ( which are highly risky to buy thinking they will continue to pay and U pay a premium for them)  are priced completely different.

like the example above you would never get a west coast note to sell at a 40% discount at least from an informed seller.

but you could get that in the mid west and more even if its NPN..

Jim Hartmann · Answer

@Shadonna N., for a non-performing note you would have the options that you listed - i.e. foreclose, improve and sell the note or the property.  There are also other options that are open to your creativity.

If the person wants to stay and you feel that they are back on their feet again, you can re-structure the loan in many different ways to help them to work through that time to keep the house as well.  You can change interest rates, move the amount in arrears to the end of the loan, forgive a portion or many other creative ways to help them out and yourself as well.  You do have to be careful with modifying the original terms too much as it could be construed as a new note if too many things are re-arranged or modified.

If you end up foreclosing, you can move into it, fix it up, rent it out, sell it, etc.  When you foreclose and no one else buys the property at the foreclosure sale you can do what you want with the property as you now own it.  If someone else buys it at the foreclosure auction then you would hopefully make back what was owed to you (or more) as profit.

For me, I would assess the property and if it was close enough to me then I would likely add it to my rental portfolio.  Otherwise, I would determine the best exit that would work for the situation and see if we could get that to work for us.

Jim Hartmann · Answer

@Patrick Britton - I have to have that talk with myself at times as well.  You are correct, that they borrower's position does not change as they still owe the remaining balance of the note. You are basically acting as the bank would when they sell the note to another financial institution.  The borrower still owes the remaining balance at the same terms as was agreed upon.

Patrick Britton · Answer

@Jim Hartmann totally get all that (i used to trade bonds).  :)  I think i was missing something in that if i buy a note at a discount to the unpaid balance, the "new" balance the borrower owes is whatever I paid.  but this is not the case.  the borrower still owes whatever balance was agreed to in the note.  right?

Patrick Britton · Answer

@Jim Hartmann sorry Jim.  I get it now.  had a good long chat with myself and see where I've made the mistake.

Jim Hartmann · Answer

Hi @Patrick Britton

Yes, all 3 of the above steps could be done on the same note if that is your desire.

1. Using a financial calculator to determine the yield of 12% minus any closing costs and servicing fees, you would be able to generate a 12% rate of return.

2. By either selling the note to an institution or an individual who desires an 8% return on their investment, you could then sell all or part of the note to generate the profit that you mention in step 3.

Best of Success

Joshua Andrews · Answer

The answer is yes. All day long.

- Josh

Shadonna N. · Answer

@Jim Hartmann in your example, the final buyer purchased the note for 73K and will receive the P&I for the remaining term of the loan.

What would you with a non performing note?  Since you are the investor you can foreclose on the property, make improvements, and sell.  You can also sell the note.

Hector Bilbao · Answer

Hi @Patrick Britton

What are you trying to accomplish? Are you selling RE estate? Looking for Exit Strategy?

Jim Hartmann · Answer

@Patrick Britton - I am not quite getting your thought regarding the sales price being greater than the face value of the loan, but here is a simplified example:

Appraised value of home: $120,000

Initial loan: $100,000 at 5% interest amortized over 30 years (360 months)

Monthly payment: $536.82/mo.

Offer to note seller to get a 12% yield: $52,188   (this does not take into account any closing costs or any future servicing/costs)

Sell the note to someone who wants an 8% yield: $73,159

Your profit (difference between 12% yield and 8% yield): $20,971

This is a quick calculation and does not take into account all the details, but it gives a sense for how the discounting process would work.  The higher the yield that is needed, the larger the discount off of the  remaining amount of the loan.  To make a profit, you just need to find someone who wants a lower yield than the note was purchased at.

An exit strategy with notes?

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