Note Investing Advise

[Duriel Taylor]

Good evening all, I hope all is well. I wanted to reach out to the note investors out there. I am not interested in buying this note right now, but I am trying to understand how to underwrite notes in a whole. I want to know what experience investors look for. As a experience flipper and buy n hold investor, even if the numbers do not make sense, I can underwrite to the numbers I want to offer and my max offer, thus I want to understand how to look at these assets the same. Please see attachments. I will give you an overview of the offer.

My note investing goals; Buy low Non-performing Hold and collect mortgage payments
Resale to an investor looking for performing note
Address: 2124 Tullis Dr Montgomery, AL 36111

Asking: $42k

Layout: 3/1, single family home

Area: C

Lien position: 1st

UPB: $80,968.80

Monthly mortgage payments: $719.78

Sale comps: $62k

Rental comps: $600 per month

4 months behind on mortgage payments

Taxes: $218/year (actual, from county website)

Insurance: $217/yr (based on a formula for a home in the 50k-60k range)

Here are my thoughts on how to underwrite it:

Offer: $28k

Fair Market Value: $62k

Modified mortgage payments: $650 monthly

Payment upfront: $5k

I came up with the 5k based on lawyer fees, BPO, tax for the yr, insurance for the year and servicer fees.

-My exit strategy is to make this perform again for 6 months and resale to an investor whom preferences are performing notes.

-I would sale the note as performing, for 50k.

-I will gain $3900 for the 6 months as the note is now performing.

Questions:

1. Am I taking the right approach by collecting the 5k upfront from the borrower? (the fees to complete the transition)

2. If I am collecting those fees upfront, how do this benefit the end investor and or what disadvantages does the end buyer (note investing wanting a performing note)? Since, I am paying the taxes and insurance upfront for year 1, which is collected from the borrower, when will the end investor have to collect to ensure these expenses are paid in year 2 and beyond?

3. Is there a percentage in which I should underwrite notes? For example, when you flip a home, you should buy it at 70% off the after repair value, this will ensure a 25%-30% profit margin once you sale. I also ask this based on the end investor, how much meat do you leave on the bone for them, as far as the equity between fair market value and agreed purchase of the note?

4. Are there any critical points in which I missed when underwriting this note?

Please reply with as much information as you want. I do and will greatly appreciate your time and replies. I look forward to hearing from you soon.

Regards,

[Chris Seveney]

@Duriel Taylor

Even though some have answered already, I will add some comments:

1. You can only collect up front what is the payoff amount. 

2. If you advance the funds, then the borrower will be due those funds. If the borrower is paying then they should also be paying escrow monthly to cover taxes and insurance. What I have done also is if I have to front the $ is I get them on a trial payment plan to increase their monthly payment to pay down those advances. If you advance them and sell the note, in this case your not going to get that $ back as any offer on this note is based on the FMV of the property and not the UPB / payoff. With a FMV of $62k and UPB of $82k, if you pay $5k for taxes and insurance the property value has not increased so that is $ that needs to be figured in your offer price.

3. For notes every investor has a different strategy and even calculates returns differently (IRR, vs ROI vs CoC). However you choose to calculate it, make sure you consider the worst case scenario. Which leads to #4

4. YES. You are not factoring costs if you have to foreclose on this note. In Alabama the borrower would have a 1 year redemption period as well, so your looking at possibly being in this deal for 2 years before you get your $ out. Plus you would need to consider FC costs in Alabama as well as the holding costs. 

Lastly, how did you get to $28k? 

Why did you come up with a modified payment of $650? 

For the modified payment, typically you will want it BELOW market rent on a house that is upside down. You have to think what would the borrower do, continue paying a house that is $20k+ upside down at higher than rent values or stop paying, let you foreclose, live free for a year+ during the redemption then go rent a place for $600. 

Also never assume a borrower begins paying day one. You have to be cognizant of the fact that the day you fund the note, it will take close to a month to transfer the service, then borrower reach out. When I forecast notes I never expect a payment in the first 90 days and if I get one its a bonus.