Let's Talk Note Investing

[Chris Seveney]

If there was one feature of note investing you wish there was more information readily available on, what would it be?

[Don Konipol]

@Chris Seveney

I have not had any luck with the list of notes for sale put out by convention lending instructions.

The two notes we purchased from banks in 2019 were ones where the borrower had come to us for refinancing, was in default on their current mortgage note. We called the lending institution holding the note, and were able to make a deal to buy the note at a discount. In one case we purchased the note with a balance of $349,000 for $199,500. In the other we purchased a note with a balance of $2,175,000 for $1,875,000. Important to note that in both cases we were initially in contact with the borrower before we ever contacted the note holder. In neither case had the note holder put the asset up for sale.

We had already vetted the financial condition of the borrower, and worked out a plan with the borrower for us to receive payments and to be paid off within 2 years.

Interested, both these properties also had SBA loans in second position. We were able to negotiate buying the SBA notes from the SBA for about 80% discount, the majority of which we passed on to the borrower, who put up the money for the SBA note purchase. All this was agreed to in our initial negotiations with the borrower.

The smaller note resulted in an 86% return in 18 months, plus the additional amount we made as our share of the SBA discounted note. The larger note resulted in a 30% return in 12 months.

Since we lend money in the 12% range with 3-4 points, these represented much larger returns to us. So, when we receive a loan request where the borrower is in default on their current obligations, and if the deal is of interest to us, we will contact the note holder to try to work a discount. In most cases the note holder is unwilling to sell at a discount, but when they are we can do very well.

All our notes and loans are secured by commercial properties.