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?

[Tim S.]

@Jim Goebel

For example, the balance on the loan is $100,000,  you paid $50,000 for the note.  If it sells at auction for $120k, you will get $100k, $20k would go to jr lien holders, if there are none then it goes to the borrower.  The most you can get is the unpaid balance of the loan.  When you buy a note, you are buying the right to collect the payments, and the unpaid balance.  You do not have rights to the home equity that may have accrued, the borrower gets that.  

You also have the right to the "legally collectible" balance, but don't count on ever getting it.  For example if the borrower does not have property insurance, you buy the insurance, that expense can be added to the loan balance and becomes legally collectible.  Legal fees for foreclosure also can end up there.

As far as getting wiped out, if you are buying a 2nd position note, then yes you can get wiped out.  Usually through BK7 if there is no equity.  Or, the first note holder forecloses, say the house is worth $100k, they owe $120k on the first and $20k on the 2nd. It sells at auction for $90k, that would go to the first, nothing left over for the 2nd.

For 1st position notes it's much harder to get wiped out.  But there are scenarios where it could happen, pretty rare. 

[Don Konipol]

@Jim Goebel

Once the note holder (s) and other lien holder(s) are paid in full, for the unpaid balance, accrued interest, and legal fees or other expenses incurred on behalf of or because of the borrowers actions (the fees must be reasonable), the balance represents equity in the property, and as in all real estate equity belongs to the owner of record.

Some states are non judicial foreclosure states, others are judicial foreclosure. Texas a non judicial foreclosure state (foreclosure does not go in front of a judge) has the quickest foreclosure time, theoretically 21 days. Most non judicial states foreclosures run 3 - 12 months, while most judicial state foreclosures run 12+ months. In NY and NJ it’s not unheard of for a debtor to drag out a foreclosure 7 years or more! Also, many states have different laws for homestead property and investment property. In Michigan, which has a borrower redemption period, the redemption period runs 6 months for commercial property, and 24 months for residential. Other than possibly renting the property out, the creditor foreclosing can be stuck with a “dead” property for up to 2 years AFTER he completes the foreclosure. In EVERY state, the laws benefit the borrower at the expense of the lender, ranging from a little (Texas), to a lot (NY, NJ, Illinois).

Let me be clear, and this is based on my 40+ years in the real estate investment and real estate note investment field; If you aren’t knowledgeable about the ins and outs of mortgage notes, purchasing a note can provide an expensive lesson. Unlike the consumer protection laws that may protect people buying or selling their personal residences, in the BUSINESS of note investing, wealth tends to move from the less knowledgeable, less experienced and less astute to those with more knowledge, experience and street smarts.

[Jim Hartmann]

@Jay Hinrichs 

We have been marketing to seller financed notes (residential and commercial) over the last couple years and have had some success with this method.  We send out 200-300 letters per week and get a couple calls per month of people who are trying to figure out if we can help them or not.   

As with all notes, we do buy at a discount to give us or our investors a return on investment to tie up funds for the length of the loan.  Our goal is to make it a win-win for both sides, so we are not trying to find only the desperate sellers but we have had a couple that were "needing" to sell rather than "wanting" to sell.  A good majority of them however are just looking to cash out to move on to other investments.  

[Jay Hinrichs]

Originally posted by @Jim Hartmann:

@Jay Hinrichs 

We have been marketing to seller financed notes (residential and commercial) over the last couple years and have had some success with this method.  We send out 200-300 letters per week and get a couple calls per month of people who are trying to figure out if we can help them or not.   

As with all notes, we do buy at a discount to give us or our investors a return on investment to tie up funds for the length of the loan.  Our goal is to make it a win-win for both sides, so we are not trying to find only the desperate sellers but we have had a couple that were "needing" to sell rather than "wanting" to sell.  A good majority of them however are just looking to cash out to move on to other investments.  

I get it.. I grew up in the land business with my dad.. he created 200 to 500 seller carry back notes a year.. he had note buyers in LA ( big investors( and smaller note buyers scattered around CA)..  every year he would go to LA to meet with the big note buyer they would set up what the yield for the year was going to be and off they went. 

but even back then in the 60s and 70s our office would get lots of .. Need cash today :)  now I get hammered by a few bigger note buyers in New York they cold call me. robo style and still get the occasional letters.. its nothing more than the exact same method people use to buy distressed real estate.. Little less beating around the bush than some of the direct mail you get for physical assets of course.

[Paul Chapey]

@Tim S. You wrote: "
"As far as getting wiped out, if you are buying a 2nd position note, then yes you can get wiped out. Usually through BK7 if there is no equity. Or, the first note holder forecloses, say the house is worth $100k, they owe $120k on the first and $20k on the 2nd. It sells at auction for $90k, that would go to the first, nothing left over for the 2nd."

Slight tweak here. The 2nd position is not "wiped out." Technically, it is 'wiped off." The debt is wiped off in that it is no longer secured by the property, that is, their security interest is lost. They become sold-off junior lienholders. The 2nd note holder can still sue for the outstanding balance of the loan. Good luck with that...but a deficiency judgment is still possible.

[Chris Seveney]

@Paul Chapey

Just to clarify - in a FC they are not wiped out the debt is unsecured - you could get a deficiency against the borrower if it is allowed in the state. If it was a ch7 - it is wiped out and you cannot collect or attempt to collect that debt.

[Paul Chapey]

@Chris Seveney Thanks for clarifying. Since Tim Simmons and I are both from California, that was the state I should have mentioned. On the Chapter 7 issue, if the debtor reaffirms the debt, then a deficiency judgment on a 2nd-position note would be allowed.

[Tim Fitzgerald]

Originally posted by @Jay Hinrichs:

Originally posted by @Logan Hassinger:

@Wesley I.

do any of you guys direct mail  seller carry back folks.. It tends to go in waves but I get direct mail on notes that I am a bene on and have gotten these quit frequently over the years.. or all you just looking for bank or hedgefunds..  I think the owner carry back direct mail folks look for that whopper hit.. you know the kid inherits the note has a bad money need and sells their note for next to nothing to just get cash today. ? 

Yes, at least half my business comes from direct mailing individual owner carrybacks. It's a numbers game like anything else. ROI is quite nice in my experience. Not necessarily looking for 'whopper hit'... I am looking for volume. The key is in setting up a consistent direct mail program.... most of my closed business comes after several mailings, in large part because folks become motivated at different times.. at any given time, a certain % need to sell now, and these are the folks who will respond to that particular mailing. Direct mailing is a science, albeit an inexact one but it's like anything else-- you should be able to up your closing % by approximately 1 additional % point for every year of experience you amass.

[Chris Seveney]

@Tim Fitzgerald

How much you spending per year on marketing ?

[Tim Fitzgerald]

Originally posted by @Chris Seveney:

@Tim Fitzgerald

How much you spending per year on marketing ?

Postage is the bigger expense as opposed to the cost of the leads themselves (roughly 0.20 per lead). I go with larger, color postcards, but you can cut your mailing cost down by going smaller and not going with color-- as long as the message itself is effective. Bare-bones, I would say that you should do 1,000 names per mailing at a minimum but when you scale up, it's far better to do at least 3,000 at a time. Absolute minimum total marketing investment per 1,000 leads should be somewhere around $500 (I'm usually around $850 because i get a better response rate with the larger, better cards) and let me also say that, conservatively speaking, a $500 investment can turn into $2,000 profit or more- can be much higher depending on experience level and approach. 

[Wesley I.]

@Don Konipol

So if the note holder and other lien holder(s) are paid off during the auction process, the extra amount that is left after payments goes to the record holder.

In this case, is it the person that won the bid?

What if the note holder takes the property back, will he/she be the record holder?

Just trying to clarify as I will be going through this scenario.

[Patrick Desjardins]

Originally posted by @Jay Hinrichs:

finding for real note sellers.. and avoiding the fake broker Daisey chains. 

Ditto. It used to be easy and there were more good notes than there were buyers. Notes were a low hanging fruit.

Now it's difficult finding notes at a comfortable price, especially if you can't buy multi million portfolios.This is by far one of the least transparent industries.

[Chris Seveney]

@Wesley I.

If money is left over it goes to owner of property. So let’s say you have a first and payoff is $50k, there is a second with payoff of $10k and it sells at auction for $75k

You get $50k, 2nd lien holder gets $10k and owner of property gets $15k

If you take it back it means you were the high bidder. Assuming you bid what your owed then no one else gets paid. Whatever the case you can never get paid more than what you were owed