I’ve attended NoteExpo 2018 and the recent Note Camp, and I’ve walked away with a colossal list of vendors for things I apparently need but didn’t realize I need. However, what I still don’t have is knowledge of the basic nuts and bolts of notes investing; although, Note Camp did a really good job of hosting some sessions where they walked through some basics in detail. So Scott Carson did a good job there. Nonetheless, how do I even price a note? Let’s start there! How do I even figure out the fair market value of the damn thing?? Lots of “abnormal returns” case studies are thrown out, numbers are spouted off at lightning speed, and people are told, “It’s that easy.” Okay. Then why can’t anyone stop to talk about something as basic and supposedly “easy” as simple pricing? Let’s walk through that first before you tell me how easy I’ll apparently become a gazillionaire. This seems like a basic thing, and I can’t find a good source for some of this. And no, I’m not paying someone thousands of dollars to show me how to present value a future cash flow expectation. I can do that all day long myself, and when I do, none of the note prices I’m seeing come remotely close to making sense. That’s what I’m missing, and it’s what I get the feeling a lot of others are missing too. For example, I brought up Fed rate increases to one guy and asked how they’d affect the fair market value of notes, and he said, “It won’t really; that’s not how the notes market works.” Uh what? Since when are debt instruments traded in a secondary OTC market not rate sensitive? So you’re telling me duration and convexity don’t apply to fixed income instruments anymore? lolwut THAT’s the sort of thing I’m talking about. Some of these supposedly simple things are not making sense. Is there a basic guide out there that explains some of this at a low level? I’m not opposed to buying a well written technical book or article, but I’m not doing the whole, “Give me $2,000 and we’ll talk basics” thing. My impression of the notes market so far is there is limited market transparency with zero to limited price discovery. Basically, people are making up what they want it to be, and a few have gotten lucky doing that. Maybe that’s accruate and maybe it’s not. Any recommendations from the smart people on here on where to go to bridge these knowledge gaps? I’m looking for solid technical references, as I’ve not been able to find myself (so I’m clearly not looking in the right places). Any help would be appreciated.

@Gordon F. I only wished I called 50 a day. There are a ton of banks AND private lending institutions and funds entering the market. If I continued to call like you said, I'd never have any time to follow up with the lenders or review any assets that they had available. I don't need 5,000 banks and as my buddy, Brecht at Distressedpro would say, You only need a few banks to send you stuff on a regular basis. Banks and lending institutions come and go, along with asset managers and other employees at banks. There is ZERO chance of me calling every bank effectively out there. My database is about 7,500 banks with only a 8-20% open rate on my emails. That still leaves plenty of opportunity for others to reach out. Most note investors who get into the business only want to spend time buying from the low hanging fruit. So those sources do get overrun and bid up beyond prices that actually make sense to us real note investors. It's still a small, niche business of relationships. Calling and making contact work as long as you work it and follow up and follow up and follow up! What it comes down is most people want to complain about a lack of inventory or pricing without actually going out and marketing.

So I’ve been to a couple notes seminars... now what?

Matthew Brown

Walnut Creek, CA · Member since 2018 · 13 posts · 3 votes

7y

Hey Gordon, I'm new to BP and am also interested in note investing. Have you checked out PPR and their Intro to Notes guide? It might be too broad / general for you (you've clearly got more knowledge on the subject than I do). There's also some pretty reputable Note Investing Firms on BP that I've been in contact with who seem pretty willing to share experience / information.

0 Reply

Danit Johnson

Mitchellville, MD · Member since 2017 · 1 post · 6 votes

7y

Hi Gordon, I’m new to notes and I was at the Note Expo also. I completely understand your frustration. Here are a couple things that helped me and you may found useful:

1. Note Closers Show Podcast Episode #361 by Scott Carson —He provides a ‘guide’ to using the Stair Step Pricing Model

2. Book -What Every Real Estate Investor Needs to Know About Cash Flow by Frank Gallinelli (available on Kindle)

Hope it helps

6 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

you need to get close to your real estate calculator and under stand the PV function that in a nut shell is how price a note..

Podcast Guest on Show #222

JLH Capital Partners51 Review

Website View Page

3 Reply

Tim S.

Investor · California, CA · Member since 2016 · 367 posts · 375 votes

7y

Hi @Gordon F.

I understand your frustration, note investing is not nearly as transparent as other kinds of investing.

I'll attempt to answer your pricing question, at least at a high level. There are a lot of conditions that affect what a note is worth. is the note 1st, or second position? Performing or not? How much equity? where is it located? All of these things ultimately determine how much risk is involved. A very safe note will sell at little to no discount, or even above par. The higher the risk the higher the returns needs to be, hence a lower price in terms of % of UPB (Unpaid Balance)

For example if the borrowers still owes $100k, has never missed a payment, the house is worth $200k, there are no other liens, taxes are current, the property is in a desirable location in a desirable city. You will likely have to pay very close to $100k for it. Interest rate of the note comes into play, if it's 3%, and you pay full value, then you are buying an investment that pays you 3%. If that's not enough of a return for you, then offer less than $100k, such that the yield meets your needs. Use a TMV calculator to figure how much to pay to get a higher yield. depends on number of payments remaining.

On the other end of the spectrum is a non-performing note. Borrower has missed some payments, the more they have missed and the longer it's been since they last paid decreases the value. many other things lower the value as well: history of filing bankruptcy, overdue taxes, poor condition of the house, rural location, problems with title, liens, a long list of other things. In order to price a note like this you need to estimate how much you will have to spend in order to correct the problems, legal fees taxes, repairs. Then determine how you will exit the deal: sell the note, hold and collect payments, foreclose and sell the house, etc. Then calculate what price you would have to pay to generate an acceptable profit.

You can see that it's not an easy question to answer, way too many variables.

In the end like anything, notes are worth what someone is willing to pay for them, so let's start there.

You need to decide what returns are acceptable to you. If you need to or want to make a 12% yield, then you would calculate how much you need to pay to get that kind of yield. The best book that explains this is Jimmy Napier "Invest in Debt", it's old but still available.

I haven't found any one book that goes into enough detail, they just kind of skim the surface. It would take several very thick book to cover it all. Here are some of the better ones.

Paper Profits:How to Buy and Profit from Notes

Bulletproof Title Due Diligence: Protecting Your Investments

6 Reply

Tim S.

Investor · California, CA · Member since 2016 · 367 posts · 375 votes

7y

Scott Carson has a bunch of YouTube videos on notes. This one explains one method of determining values for non-performing 1st notes.

https://www.youtube.com/watch?v=Bo1RJFaginw

This one shows how to do TVM calcs

https://www.youtube.com/watch?v=qXyC9StSDVI

https://www.youtube.com/watch?v=aUyPrYhET6w

3 Reply

Tim S.

Investor · California, CA · Member since 2016 · 367 posts · 375 votes

7y

"I brought up Fed rate increases to one guy and asked how they’d affect the fair market value of notes"

He's right, It has no direct bearing on the value of existing notes. The interest rate is specified by the note, what happens in the outside world doesn't change the terms of the note.

When you buy a house today, the interest rate a month or a year from now doesn't matter does it? You locked in your rate when you closed on your house. It's the same with note investing, the current market rate has no effect on an existing note, it's APR was determined the time the note was created. Adjustable rate notes are obliviously an exception.

What is important is how much you paid for the right to collect the remaining balance of the note.

The only way that prevailing interest rates are relevant is just in comparison to other investments you could make with your money. If 10 year treasuries were paying 5%, then you would want to get a significantly higher return on a riskier investment. A Risky note might not entice you to buy it for anything less than a 20% yield. It's all about risk/reward. You can buy highly risky debt for pennies on the dollar. That kind of debt is very cheap because it's not very likely you'll ever get it to pay off. Safe debt is expensive, and becomes more so the closer it is to being a guaranteed return. Notes can span a very wide range of risk, hence the wide range of pricing.

6 Reply

Gordon F.

OP

Specialist · Member since 2018 · 41 posts · 16 votes

7y

Thank you to everyone who has taken the time to respond. The book suggestions, YouTube links, and other suggestions are very helpful. Thank you to everyone.

Tim, I had this long response detailed out to get things down to a few conceptual mathematical formulas based on some of your points, but I deleted it. I decided I'm not posting all that crap. I seriously doubt anyone would read it lol. I'll just say you helped bridge some gaps for me. Thank you!

1 Reply

Alex Morstadt

Lender · Alexandria · Member since 2014 · 44 posts · 19 votes

7y

Note Investing Made Easier by Martin Saenz is probably the most indepth note investing book.

But physical courses and mentorships are where you truly learn the business.

0 Reply

Alex Saleeby

Rental Property Investor · Beaumont, TX · Member since 2015 · 161 posts · 77 votes

7y

@Gordon F. you ask very valid questions. I'm like you, detail oriented and want to learn more of the "nut and bolts" so to speak. One option for you to consider is to connect with an experienced note investor and JV on a couple of deals to learn more of the "how to" details.

Also, @Scott Carson has a 3-day virtual note workshop coming up soon (Nov 30- Dec 2). You might consider attending. Check out We Close Notes web site for more info.

Of course there are numerous articles here on BP and YouTube videos that are worth reading/viewing as well as several other note investors who offer educational material.

2 Reply

Liza B.

Specialist · McAllen, TX · Member since 2016 · 21 posts · 23 votes

7y

@Gordon F. thank you for getting this thread started. I’m also new to note investing and is interested in details. I will be attending Scott Carson’s Virtual Note Buying seminar that will be coming up and will give you some feedback.

@Tim S. thank you for you input, it is very helpful.

1 Reply

Gordon F.

OP

Specialist · Member since 2018 · 41 posts · 16 votes

7y

Okay, I'm going to post a cool, little conceptual example here for you guys that was relayed to me by a technical guy and close friend from one of the large funds.

You're the type of person that drives in the fast lane on the highway, speeding by everyone, and honking at people who are going slow. That's you. In this example, let's say you're driving 60 mph, while everyone else is driving 10 mph. You're very happy with the 50 mph difference and just whizzing by everyone.

Now all of a sudden, everyone else speeds up to 60 mph. Now you're all driving the exact same speed at 60 mph.

It is a mathematical reality that you are now all driving the same speed and you are not going any faster than anyone else. You cannot change the math on that. It's a stone cold fact of the universe. You're all driving the exact same speed.

Now the only question is, do you care? Well, going back to our first sentence, you're the type of person who likes to drive faster than everyone else, so yes, you care. You really liked whizzing by everyone at 50 mph faster than they were driving, so to get back to that difference, you increase your speed to 110 mph. You're now driving 110 mph, while everyone else is driving 60 mph, so you're now back to whizzing by everyone at 50 mph faster.

However, let's say you don't care. While driving 50 mph faster than everyone was nice, you're really just happy going 60 mph. You don't need to be driving faster than everyone, as long as you maintain 60 mph. In that case, you do nothing, and you're happy driving the same speed as everyone else.

In some cases -- and this is more for the crowd that listens to the whole "you don't need to calculate the yield on that thang, it's good enough!" -- everyone else may even speed up to 80 mph while you continue to drive at 60 mph. You don't care. You don't need to go 80 mph, as 60 mph is good enough, and you're happy with that.

If you understood the above example, then you now conceptually understand why certain concepts (e.g, duration and convexity) will impact your investment. If you want to know more, I'd encourage you to work through the math to see the types of impacts they have. The math is arduous, but it's not rocket science.

Having said that, your personality and investment philosophy will determine whether or not you care if things like convexity and duration impact your investments. Do they impact your investments? Yes, it is a mathematical reality. You cannot change their impact. The only thing you can do is decide if you care or not.

So going back to one of Tim's points, yes, math impacts your investment, no matter what order of derivative you're talking about. It's impactful. Now the only question is, do you care? Maybe you do, and maybe you don't.

As my friend put it, depending on how far you skew towards mom and pop versus investor will probably determine how much you care, not that either one is better than the other.

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Originally posted by @Gordon F.: