Newbie questions on buying mortgage notes

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Newbie questions on buying mortgage notes

Haritha N.
Member since 2020 · 22 posts · 10 votes

I am fairly new to the concept of buying/selling mortgage notes and I have been reading about it. From what I understand (to put in simplistic terms):

  • Lenders (could be banks, financial institutions, private people) lend money to borrowers for purchasing properties. They do this in the form of recording a note between the lender and the borrower by having the property as the collateral.
  • Lenders then sell the note to investors (institutional, private) online or through loan servicers, brokers and other channels. Now, the buyer of the note for a property becomes the lender as far as that property is concerned. Any P&I payments that the borrower makes go to the new buyer lender. Satisfying escrow, tax and other legal requirements of the mortgage are now the new buyer lender's responsibility.
  • If the mortgage is paid as per the terms till the end of the loan term, the new buyer lender will get the P&I payments from the borrower for the remaining months of loan term from when he/she bought the note.
  • If the borrower defaults on the payments, it is the new buyer lender's job to evaluate various avenues like loan restructure, deed in lieu, refinance, foreclosure and arrive at the best possible action by discussing with the borrower. If it goes to foreclosure, the buyer lender will incur additional costs for notice of default, auction, follow up, lender-own, repair, sell/rent the property.

My questions are:

For a performing note, why would anyone sell it at any cost less than unpaid balance? For example, if the unpaid balance is $150k, LTV is 45%, why would a seller want to sell it for $147k, even a difference of 3k ?

If a performing note stays performing till the end of the loan term, it is almost as if we did a CD or high yield savings account with the loan interest rate for the loan term  - of course, in a CD, you will get interest only for the term and get your principal at the term end. When we buy a note, we get interest and principal throughout the term so that principal diminishes over time. If this is the case, why don't investors flock to buy the mortgage notes instead of buying an investment property?

Assume we buy a performing note for full UPB of $150k with 6% rate for 240 remaining months, we get $899 per month of p&I throughout 240 months. It seems like a safe earning of $10k per year for $150k investment. In the worst case if the borrower defaults, we could choose to profit by helping the borrower continue to pay or foreclose.

  • If I buy a house with the same $150k and assume it rents for $1500, we got to deduct about 40% of the rent (=$600) for all the repair/propmgmt/capex/vacancy expenses, we get $900 per month. If the expenses are a bit lesser, we may get $1000.
  • If the difference is only $100, why would it make sense for someone to buy an investment property rather than buying a performing note? Performing note will be more liquid than buying the property too - we can hold the note as long as we want the cashflow. If we want to get the cash out, we can sell the note. What am I missing?

If I want to start buying performing notes, where do I start? FCI exchange site is not working. I could see one site paperstac, that I will register with. But, it has about 177 listings when I checked, seems less pool of notes. 

As an individual person, can I buy a note without any license? Does it vary from state to state?

If I want to buy a house, the team that I would be looking for is - buyer's agent, prop mgmt, prop inspector, prop appraiser, attorney, title company. Similarly, who are the partners that I should look for if I want to buy a note?

Do you have any platforms that you use to know the new performing/non-performing notes that are added from multiple lenders? I will do my due diligence once I come across a listing, but, where do I see these listings in the first place? 

I am sure I will have more questions as I learn more. Appreciate inputs from experience note investors.

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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
6y

@Haritha N., you've come to the right place to get your questions answered and to learn about real estate and real estate type asset investing.  You've got some quality answers, so I'll just address a couple of things that were not answered.

First, this is a technical point, but someone who buys an existing note is not the lender; he is the note holder.  The lender is the entity or person that funds the note at its origination.

In answer to your question about if returns are equal, why would anyone buy real property instead of notes?  The answer is that although the immediate cash flow may be equal, real property's opportunity for additional profit that notes do not.  Real estate has historically gone up in value over time, at least at the rate of inflation.  So a property purchased this year and held for 20 years may easily be worth double what it is worth today.  Notes will only increase in value if interest rates decline, if rates rise they will decline in value.  Of course if you hold a note to maturity you won't realize this gain or loan.  But notes don't have the opportunity for appreciation that real property does.

Additionally real property can usually be fairly easily leveraged, which notes cannot.  So, if you borrow 80% of the purchase price at say 4% interest, and your return on the investment total cost is 6 %, your return on your invested dollars will be increased by approximately 8%, turning your 6% return into a 14% return.  Of course, any use of leverage entails additional downsized risk.

Also, real property ownership has tax benefits that notes do not.  Real property can be depreciated, at an amount thats greater than the real loss of value for improvements thats occurring.  In fact, most real property does not incur a loss of value if properly maintained, so depreciation allows some of the net income to be tax deferred; tax strategies are available which may lead to the elimination of having to pay the deferral.

So, as a consequence real property also acts as a store of value in times of high inflation.  As currency loses its value and purchasing power, ownership of real property can be a safe haven equaling or even exceeding loss of purchasing power.

Another point I'd like to emphasize is that their is substantial difference between various categories of notes; the note universe contains many different investment types and lends itself to many different strategies.  The first difference is between residential mortgage notes and commercial mortgage notes.  Within residential you have owner occupied notes and investor notes.  Within owner occupied you have primary residence and secondary residence.  Notes can also be classified as conforming or non conforming, Dodd Frank compliant or exception, performing or non performing.  

For individuals, buying performing notes from a lending institution is not a possibility.  These notes if conforming are sold to Fannie Mae or Freddie Mac, if non conforming are packaged and sold as mortgage backed securities.  So for performing notes this leaves notes that were done as owner financing when a property was sold.  The good ones are bid up by mortgage pools; the lesser quality ones often find their way onto the note exchanges that seem to pop up all over.  These are often reperforming notes, and while some peoples experience with these has been good, I think we will hear quite a different story after the next recession.  My advise: take any advice with a grain of salt if the person giving the advice was not an active investor prior to 2009!

As for non performing residential notes, well thats where most of the note players on BP play.  The most successful ones are able to pick through the over priced garbage out their and identify the few gems hiding in the pile.  To do this successfully takes A LOT of knowledge, experience, analytical ability, negotiating smarts and hard work.  

Lastly, you can invest in either performing or non performing, residential or commercial, either through a note broker or as a participant in a mortgage fund or pool.  The quality of these notes, as well as the mortgage funds are all over the board, good, bad and ugly.  As in any investment due diligence is a necessity.

Lastly, my observation after 40 years as an investor, broker, fund manager and syndicator of both real estate and of mortgage notes: Notes are the more difficult investment to get right.  I've seen many investors who didn't know what they were doing get bailed out of a bad situation because over time the property they purchased increased in value.  A property increasing in value 5-15% per year covers a multitude of sins.  However, people who made bad note investors don't get bailed out by capital appreciation; their mistakes are compounded by their lack of control over the property, by a court system that assumes the note holder is a bad guy and the borrower a victim; by foreclosure laws requiring a note holder to jump through loops and pay huge legal fees to repossess a property for non payment, by not obtaining title insurance and discovering that their are superior liens on the property, by note sellers who provided incomplete or misleading information, etc.  IMO, investing in notes successfully requires a lot more knowledge than investing in real property.  

Private Mortgage Financing Partners, LLC
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  • Dan DeppenBusiness Member
    Erie, CO · Member since 2017 · 274 posts · 267 votes
    6y

    When buying a performing note, the price I am willing to pay ultimately comes down to the yield I am targeting and the interest rate on the note. My target yield will vary based on the riskiness of the loan. Personally, I would never pay 100% of UPB for a loan. What happens if it stops performing and you now have foreclosure costs?

    Paperstac is a good place to look for loans to buy. You can also network with private investors who trade with each other all the time.

    Most states don't require you to have a license, but a handful do.

    When buying a note the main thing is verifying the value. This is tricky because you can't see the inside of the property. That's where a lot of the risk lies. You should have a realtor on your team to help with this. Also pull an O&E report from a title company, and have an attorney who is licensed in that state review the chain of title and alert you to any liens or other issues. Although talk to them about the process, length of time, and cost to foreclose in that state if you need to.

    4Reply
  • Haritha N.
    OP
    Member since 2020 · 22 posts · 10 votes
    6y

    @Dan Deppen,

    So, the more risky a note is, the more distant the bid price is to the UPB, right? If bid price is UPB, the yield will be the interest rate of the loan.

    Will look at paperstac. Do private investors trade seller/owner financed notes generally (or) do they trade banks/institutions owned notes? 

    0Reply
  • Dan DeppenBusiness Member
    Erie, CO · Member since 2017 · 274 posts · 267 votes
    6y

    @Haritha N., 


    Private investors will trade both. But find out if they are using a loan servicer. I personally won't by loans that are self serviced because if they didn't fully comply will all of the laws you could run into trouble if you have to foreclose.

    2Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    @Haritha N. I know you have a bunch of questions as you are learning but I just wanted to shed some light on just a couple of points:

    1. A note is the contract or agreement between the lender and the borrower, which lays out all the details of the loan itself. This document is not recorded.

    2. The mortgage or deed of trust is the security instrument that pledges the property as collateral for the note. This document is recorded. It allows the property to be foreclosed upon to satisfy the note in case of default.

    3. People and institutions buy and sell loans like any other assets. Their motivations vary just like owners of real estate. Why do people sell real estate for less than it's worth? For a host of reasons, one of which is liquidity so that they can use the cash for other things that are more important to them. Same thing applies to loans.

    2Reply
  • Jamie Bateman
    Investor · Baltimore County, MD · Member since 2014 · 466 posts · 438 votes
    6y

    @Haritha N., you have already received quality answers (@Dan Deppen and @Andy Mirza are experienced note investors, for sure), but I wanted to add a few points:

    • - The main reasons notes are typically sold at discount have to do with risk (a promise to pay isn't really a true guarantee), time value of money (money today is worth more than the same amount in the future), and opportunity cost (what else could the note holder do with the money, as Andy@Andy Mirza alluded to).
    • - You can read through my BP blog posts here.
    • - If you scour this forum you will find answers to many of your questions. 
    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    6y

    @Haritha N., you've come to the right place to get your questions answered and to learn about real estate and real estate type asset investing.  You've got some quality answers, so I'll just address a couple of things that were not answered.

    First, this is a technical point, but someone who buys an existing note is not the lender; he is the note holder.  The lender is the entity or person that funds the note at its origination.

    In answer to your question about if returns are equal, why would anyone buy real property instead of notes?  The answer is that although the immediate cash flow may be equal, real property's opportunity for additional profit that notes do not.  Real estate has historically gone up in value over time, at least at the rate of inflation.  So a property purchased this year and held for 20 years may easily be worth double what it is worth today.  Notes will only increase in value if interest rates decline, if rates rise they will decline in value.  Of course if you hold a note to maturity you won't realize this gain or loan.  But notes don't have the opportunity for appreciation that real property does.

    Additionally real property can usually be fairly easily leveraged, which notes cannot.  So, if you borrow 80% of the purchase price at say 4% interest, and your return on the investment total cost is 6 %, your return on your invested dollars will be increased by approximately 8%, turning your 6% return into a 14% return.  Of course, any use of leverage entails additional downsized risk.

    Also, real property ownership has tax benefits that notes do not.  Real property can be depreciated, at an amount thats greater than the real loss of value for improvements thats occurring.  In fact, most real property does not incur a loss of value if properly maintained, so depreciation allows some of the net income to be tax deferred; tax strategies are available which may lead to the elimination of having to pay the deferral.

    So, as a consequence real property also acts as a store of value in times of high inflation.  As currency loses its value and purchasing power, ownership of real property can be a safe haven equaling or even exceeding loss of purchasing power.

    Another point I'd like to emphasize is that their is substantial difference between various categories of notes; the note universe contains many different investment types and lends itself to many different strategies.  The first difference is between residential mortgage notes and commercial mortgage notes.  Within residential you have owner occupied notes and investor notes.  Within owner occupied you have primary residence and secondary residence.  Notes can also be classified as conforming or non conforming, Dodd Frank compliant or exception, performing or non performing.  

    For individuals, buying performing notes from a lending institution is not a possibility.  These notes if conforming are sold to Fannie Mae or Freddie Mac, if non conforming are packaged and sold as mortgage backed securities.  So for performing notes this leaves notes that were done as owner financing when a property was sold.  The good ones are bid up by mortgage pools; the lesser quality ones often find their way onto the note exchanges that seem to pop up all over.  These are often reperforming notes, and while some peoples experience with these has been good, I think we will hear quite a different story after the next recession.  My advise: take any advice with a grain of salt if the person giving the advice was not an active investor prior to 2009!

    As for non performing residential notes, well thats where most of the note players on BP play.  The most successful ones are able to pick through the over priced garbage out their and identify the few gems hiding in the pile.  To do this successfully takes A LOT of knowledge, experience, analytical ability, negotiating smarts and hard work.  

    Lastly, you can invest in either performing or non performing, residential or commercial, either through a note broker or as a participant in a mortgage fund or pool.  The quality of these notes, as well as the mortgage funds are all over the board, good, bad and ugly.  As in any investment due diligence is a necessity.

    Lastly, my observation after 40 years as an investor, broker, fund manager and syndicator of both real estate and of mortgage notes: Notes are the more difficult investment to get right.  I've seen many investors who didn't know what they were doing get bailed out of a bad situation because over time the property they purchased increased in value.  A property increasing in value 5-15% per year covers a multitude of sins.  However, people who made bad note investors don't get bailed out by capital appreciation; their mistakes are compounded by their lack of control over the property, by a court system that assumes the note holder is a bad guy and the borrower a victim; by foreclosure laws requiring a note holder to jump through loops and pay huge legal fees to repossess a property for non payment, by not obtaining title insurance and discovering that their are superior liens on the property, by note sellers who provided incomplete or misleading information, etc.  IMO, investing in notes successfully requires a lot more knowledge than investing in real property.  

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    9Reply
  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Don Konipol:

    @Haritha N., you've come to the right place to get your questions answered and to learn about real estate and real estate type asset investing.  You've got some quality answers, so I'll just address a couple of things that were not answered.

    First, this is a technical point, but someone who buys an existing note is not the lender; he is the note holder.  The lender is the entity or person that funds the note at its origination.

    In answer to your question about if returns are equal, why would anyone buy real property instead of notes?  The answer is that although the immediate cash flow may be equal, real property's opportunity for additional profit that notes do not.  Real estate has historically gone up in value over time, at least at the rate of inflation.  So a property purchased this year and held for 20 years may easily be worth double what it is worth today.  Notes will only increase in value if interest rates decline, if rates rise they will decline in value.  Of course if you hold a note to maturity you won't realize this gain or loan.  But notes don't have the opportunity for appreciation that real property does.

    Additionally real property can usually be fairly easily leveraged, which notes cannot.  So, if you borrow 80% of the purchase price at say 4% interest, and your return on the investment total cost is 6 %, your return on your invested dollars will be increased by approximately 8%, turning your 6% return into a 14% return.  Of course, any use of leverage entails additional downsized risk.

    Also, real property ownership has tax benefits that notes do not.  Real property can be depreciated, at an amount thats greater than the real loss of value for improvements thats occurring.  In fact, most real property does not incur a loss of value if properly maintained, so depreciation allows some of the net income to be tax deferred; tax strategies are available which may lead to the elimination of having to pay the deferral.

    So, as a consequence real property also acts as a store of value in times of high inflation.  As currency loses its value and purchasing power, ownership of real property can be a safe haven equaling or even exceeding loss of purchasing power.

    Another point I'd like to emphasize is that their is substantial difference between various categories of notes; the note universe contains many different investment types and lends itself to many different strategies.  The first difference is between residential mortgage notes and commercial mortgage notes.  Within residential you have owner occupied notes and investor notes.  Within owner occupied you have primary residence and secondary residence.  Notes can also be classified as conforming or non conforming, Dodd Frank compliant or exception, performing or non performing.  

    For individuals, buying performing notes from a lending institution is not a possibility.  These notes if conforming are sold to Fannie Mae or Freddie Mac, if non conforming are packaged and sold as mortgage backed securities.  So for performing notes this leaves notes that were done as owner financing when a property was sold.  The good ones are bid up by mortgage pools; the lesser quality ones often find their way onto the note exchanges that seem to pop up all over.  These are often reperforming notes, and while some peoples experience with these has been good, I think we will hear quite a different story after the next recession.  My advise: take any advice with a grain of salt if the person giving the advice was not an active investor prior to 2009!

    As for non performing residential notes, well thats where most of the note players on BP play.  The most successful ones are able to pick through the over priced garbage out their and identify the few gems hiding in the pile.  To do this successfully takes A LOT of knowledge, experience, analytical ability, negotiating smarts and hard work.  

    Lastly, you can invest in either performing or non performing, residential or commercial, either through a note broker or as a participant in a mortgage fund or pool.  The quality of these notes, as well as the mortgage funds are all over the board, good, bad and ugly.  As in any investment due diligence is a necessity.

    Lastly, my observation after 40 years as an investor, broker, fund manager and syndicator of both real estate and of mortgage notes: Notes are the more difficult investment to get right.  I've seen many investors who didn't know what they were doing get bailed out of a bad situation because over time the property they purchased increased in value.  A property increasing in value 5-15% per year covers a multitude of sins.  However, people who made bad note investors don't get bailed out by capital appreciation; their mistakes are compounded by their lack of control over the property, by a court system that assumes the note holder is a bad guy and the borrower a victim; by foreclosure laws requiring a note holder to jump through loops and pay huge legal fees to repossess a property for non payment, by not obtaining title insurance and discovering that their are superior liens on the property, by note sellers who provided incomplete or misleading information, etc.  IMO, investing in notes successfully requires a lot more knowledge than investing in real property.  

     Kudos to Don as usual.  Likely the best answer about note investing I've seen to date!    

    2Reply
  • Haritha N.
    OP
    Member since 2020 · 22 posts · 10 votes
    6y

    @Andy Mirza got it

    0Reply
  • Haritha N.
    OP
    Member since 2020 · 22 posts · 10 votes
    6y

    @Jamie Bateman Agree. Time value of money, opportunity cost and the risk appetite - all make sense.

    0Reply
  • Haritha N.
    OP
    Member since 2020 · 22 posts · 10 votes
    6y

    @Don Konipol

    Thank you for such a comprehensive answer. The way you explained both buying properties and notes and the differences - it gave me a definitive understanding of pros and cons of both.

    1Reply
  • Justin Lee
    Realtor · Atlanta, GA · Member since 2018 · 103 posts · 28 votes
    5y

    @Chad Urbshott thank for the info. What do you recommend as a good starting point for someone that’s new to note investing? What are some good sites ?

    0Reply
  • Liz Brumer-Smith
    Specialist · St. Petersburg, FL · Member since 2013 · 114 posts · 49 votes
    5y
    Originally posted by @Haritha N.:

    I am fairly new to the concept of buying/selling mortgage notes and I have been reading about it. From what I understand (to put in simplistic terms):

    • Lenders (could be banks, financial institutions, private people) lend money to borrowers for purchasing properties. They do this in the form of recording a note between the lender and the borrower by having the property as the collateral.
    • Lenders then sell the note to investors (institutional, private) online or through loan servicers, brokers and other channels. Now, the buyer of the note for a property becomes the lender as far as that property is concerned. Any P&I payments that the borrower makes go to the new buyer lender. Satisfying escrow, tax and other legal requirements of the mortgage are now the new buyer lender's responsibility.
    • If the mortgage is paid as per the terms till the end of the loan term, the new buyer lender will get the P&I payments from the borrower for the remaining months of loan term from when he/she bought the note.
    • If the borrower defaults on the payments, it is the new buyer lender's job to evaluate various avenues like loan restructure, deed in lieu, refinance, foreclosure and arrive at the best possible action by discussing with the borrower. If it goes to foreclosure, the buyer lender will incur additional costs for notice of default, auction, follow up, lender-own, repair, sell/rent the property.

    My questions are:

    For a performing note, why would anyone sell it at any cost less than unpaid balance? For example, if the unpaid balance is $150k, LTV is 45%, why would a seller want to sell it for $147k, even a difference of 3k ?

    If a performing note stays performing till the end of the loan term, it is almost as if we did a CD or high yield savings account with the loan interest rate for the loan term  - of course, in a CD, you will get interest only for the term and get your principal at the term end. When we buy a note, we get interest and principal throughout the term so that principal diminishes over time. If this is the case, why don't investors flock to buy the mortgage notes instead of buying an investment property?

    Assume we buy a performing note for full UPB of $150k with 6% rate for 240 remaining months, we get $899 per month of p&I throughout 240 months. It seems like a safe earning of $10k per year for $150k investment. In the worst case if the borrower defaults, we could choose to profit by helping the borrower continue to pay or foreclose.

    • If I buy a house with the same $150k and assume it rents for $1500, we got to deduct about 40% of the rent (=$600) for all the repair/propmgmt/capex/vacancy expenses, we get $900 per month. If the expenses are a bit lesser, we may get $1000.
    • If the difference is only $100, why would it make sense for someone to buy an investment property rather than buying a performing note? Performing note will be more liquid than buying the property too - we can hold the note as long as we want the cashflow. If we want to get the cash out, we can sell the note. What am I missing?

    If I want to start buying performing notes, where do I start? FCI exchange site is not working. I could see one site paperstac, that I will register with. But, it has about 177 listings when I checked, seems less pool of notes. 

    As an individual person, can I buy a note without any license? Does it vary from state to state?

    If I want to buy a house, the team that I would be looking for is - buyer's agent, prop mgmt, prop inspector, prop appraiser, attorney, title company. Similarly, who are the partners that I should look for if I want to buy a note?

    Do you have any platforms that you use to know the new performing/non-performing notes that are added from multiple lenders? I will do my due diligence once I come across a listing, but, where do I see these listings in the first place? 

    I am sure I will have more questions as I learn more. Appreciate inputs from experience note investors.

    There are a lot of reasons note sellers are willing to take a discount off the face value, but it always comes down to needing to sell for whatever reason. Maybe they are discounting because of challenges or defects relating to the loan, or they have a strong preference for cash now vs having to wait to collect the payments over time. I wrote an article in the Bigger Pockets blog forums about why you can even buy discounted notes (performing or non-performing) this might give you better insight into the logic behind why notes are sold for less than what's owed.

    Paperstac is definitely a good starting place but there are other platforms as well like Direct Source or Notes Direct.

    Licensing requirements definitely varies from state to state, and it's important that you know what your looking at, how to analyze the note and the underlying collateral (the home and the paper) before buying even a performing note.  A lot of notes for sale on Paperstac were once non-performing and are since re-performing, making them a slightly riskier investment. There's nothing wrong with this model, but could increase the likelihood of the borrower re-defaulting. 

    0Reply
  • Joel Florian
    Member since 2019 · 111 posts · 130 votes
    5y

    @Haritha N.  

    I don't claim to be an expert, but I own several notes.  All are performing and average about 10% interest.  I started with a self-directed 401k  and notes are my favorite way to invest in real estate in retirement funds --  boring but predictable and  satisfy "arms-length" transaction rules.

    I purchased a few more notes with non-retirement funds and discovered that the banks don't seem to recognize note income.  Most loan officers don't even want to know about my notes and if I need to count the income to qualify for a loan, they groan and try every other option because of the paperwork required to legitimize the note income to the underwriter.  Interest on notes is taxed higher than rent.  And the cashflow from notes eventually runs out.  And if I need to sell a note, I'll have to sell at a discount.

    Because of the above reasons, my interest has shifted to rentals. I figure that a 6% cash flow that never ends plus the chance of appreciation is better than a 10% return for 15 years (all my notes have 15 years or less remainging) I purchased my first rental in May of 2020. It took a few months to get rented. I'm getting about 7% COC -- and assuming 3% appreciation, the total (unrealized) return should be about 10%. Returns will hopefully increase every year as rent goes up. After I cash out refinance, I'll get 70% of my money back and what is left (I'll call it a downpayment) will be earning about 12% and the chance for appreciation (or risk of depreciation) will be increased to 7%(of downpayment or beginning equity) Assuming homes continue to appreciate, I can sell for enough more than I paid to cover transaction costs. I can write off depreciation and management costs to save on taxes. After 15 years my equity will (hopefully) have more than quadrupled my downpayment (40% of principal paid down and 15 years 3% appreciation). Assuming a 3% annual rent increase, my rents should be about 155% higher in 15 years. But since my equity would have increased more than rents, my return on equity (in 15 years) would only be about 6.5%. I would have the option to keep the 6.5% return, sell the investment (and pay capital gains), cash out refinance, or 1031 exchange into a more expensive property.

    I intend to keep the notes I currently own and possibly buy more. I'm getting interested in the idea of non-performing notes with lots of equity. I'm sure it is riskier, but it could be a better way to buy distressed property. I have not had much success buying REO or foreclosed properties (I have made several offers and even bid at the courthouse for a few) Buying a non-performing note with decent equity could get around some of the frustrations of buying foreclosures. And it could have three outcomes: either the tenant gets current (perhaps through a restructured note) and it becomes a performing note, or I pay to foreclose and the property becomes mine, or another investor bids more than unpaid balance of my note and I a nice cash profit. Sounds like win,win,win. To me, the primary goal would be to foreclose and get a good deal on the house -- and if I miss, I either get a note returning 10% or double my money.

    And there's also tax deeds and tax notes....

    Someone said:  "There are no bad investments, only bad investors (or bad implementations of investments)"

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    5y

    @Joel Florian

    Regarding non performing notes, I would say it is extremely rare that you will foreclose on a property and double your money. The most profitable exit strategy in non performing notes is getting the borrower reperforming and holding the paper and selling later on as a reperformer.

    If the borrower had occupied the property and it has equity, the most likely exit strategy will be a bankruptcy by the borrower.

    I just want to raise caution that if your business model is to foreclose and double your money you will most likely end up with more losses than home runs. Not to say it doesn’t happen as it does, but it’s not often.

    7e investments53 Reviews
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