Buying your first note

[Telless Cade]

I'm looking to purchase my first note and I was wondering how did you acquire your first one? I'm currently cold calling banks and I'm putting together a list now for mailers. Also I'm looking in my network to see exactly if any lenders I know could sell me some.

Am I missing anything?

Also, I have about 5K to spend. Is that enough?

[Terrence Evans]

A few things...

1) The only banks who would consider selling distressed assets to individuals would be small/tiny local and regional banks. Larger banks are extremely unlikely to sell one offs.

2) You would be better off approaching owners of owner finance notes if you are putting together mailers.  You are in TX and TX is the largest source of seller finance note originations.

3) $5K is small.  What kind of note are you looking for? (Performing or nonperforming?)(What state(s) and why?) My first note was on that order but that was just the note.  You also have to budget for legal, any DQ taxes, possible force place insurance, and the unexpected.

4) I personally use brokers and relationships with folks in the space developed over the years.  You can also look at portals like notesdirect and Paperstac.

[Joel Hutchinson]

Hi Terrance Evans,

I'm curious and completely new to note investing. Are there any Note funds that you like? Or do you only purchase individual notes?

Thank You 

[Telless Cade]

@Terrence Evans

NPN for that price. Off market ones so I'm guessing they most likely will be 2nd position. And yea the mailers are for off market.

I've seen some notes for sale on sites like FIXnotes and some are sub 1k in price. Should I avoid these?

[Telless Cade]

@Terrence Evans

Also I have been cold calling small banks and credit unions.

[Telless Cade]

I really just want to broker the first few notes I get just to build up cash to buy some.

[Terrence Evans]

Originally posted by @Joel Hutchinson:

Hi Terrance Evans,

I'm curious and completely new to note investing. Are there any Note funds that you like? Or do you only purchase individual notes?

Thank You 

 No i purchase individuals.

[Terrence Evans]

Originally posted by @Telless Cade:

I really just want to broker the first few notes I get just to build up cash to buy some.

 So what kind of broker do you want to be? Do you just want to blast deals to potential buyers? Do you want to be able market one-offs effectively to potential buyers?  Not an either-or.  But just a question.

Those who can do the latter to me provide more value.  That is, if you are able to look at a note for sale, analyze it, and distill the important stuff to a buyer -- the same stuff that you would use to eval a note... then that is better to me and a useful skill.

You said this was your first one... so I am guessing you haven't gotten note specific training yet.  Is that true?  If it is, please get it.  There are a lot of nuances to note investing.  Not the same as physical real estate investing.

[Telless Cade]

@Terrence Evans

I went to analyze and then sell notes for now.

I've read some books on notes and currently going through the FIXnotes stuff. But the most teacher is experience tho and at a certain point I have to pull the trigger.

[Terrence Evans]

I HIGHLY suggest you practice (using a sample note deal) with an investor whose opinion you trust before doing this for real with actual note investors.  Because to be quite frank those of us who have been in the game for a minute can tell when someone is not knowledgeable which ends up hurting their credibility.  This is a trust business and a small community that talks to each other.  You can get blacklisted and ignored.

This is not necessarily directed at you but anyone who is new and following this thread.

[Bob Malecki]

Hi @Joel Hutchinson we operate a private equity fund that deals mostly in 2nd position residential mortgage notes. Right now the performance is surprising since most of the assets in our portfolio have equity above both the senior and our loan, so borrowers are either refinancing us out or coming to the table to negotiate a loan mod to protect their equity. Feel free to contact me if you would like more info.

[Joel Hutchinson]

Thanks Bob Makecki, I will message you.

[Telless Cade]

I've been practicing running numbers on the notes and doing due diligence. My calculator and Excel have been pretty busy. 

[Andy Mirza]

@Joel Hutchinson My company creates and manages funds that invest in non performing notes as well :)

[Joel Hutchinson]

Hi Andy Mirza,

I'm interested in note investing but a little overwhelmed with sorting it all out. There are so many funds and so many options. It's hard to get the big picure. Who are the major playors with established track records? What IRR is reasonable to anticipate for note fund investing? What third party administrators are reputable and have the lowest fees (I'm a Vanguard guy...and of the opinion that small management fees can kill your long term returns). Sorry for all the questions. Thanks for reaching out to me.

[Chris Seveney]

@Joel Hutchinson

There are many fund operators in the note space, there are the very large ones like PPR which is run by Dave Van Horn, a contributor here on bigger pockets. Many in this post also run funds including Andy Mirza, Bob Malecki and myself (not self promoting). Funds can offer anywhere from 6% IRR Up to double digits depending on the operator and the type of fund. performing note funds are on the lower scale of 6-8% because lower risk, non performing funds can be slightly higher and be have a pref with a percentage of excess distributions back to the investors. One thing to be aware of is if you invest in MF deals a typical waterfall may be 6 or 8% with a 70/30 split, (70 to investors), in notes it is usually the opposite as there are lower management fees involved and lower expenses as most of the management is done by the sponsors team and if they were only to collect mgmt fees it would not be worth their effort.

[Daniel Chun]

@Terrence Evans do you have any good resources for note investing?

I’ve heard of people willing to mentor you but it’s hard to know who to trust

[Bob Malecki]

One thing to also note is if an investor is using IRA funds to invest in a MF syndiation where leverage is being used (which is typical), there will be UDFI tax imposed on the portion of the profit that was attributed to the leverage ratio. So if for instance there was 60% leverage on the property, then up to 60% of the profit for the IRA would be subject to UDFI tax 

[Terrence Evans]

Originally posted by @Daniel Chun:

@Terrence Evans do you have any good resources for note investing?

I’ve heard of people willing to mentor you but it’s hard to know who to trust

You should follow many of the people who comment on this thread.. or in the notes forum.

Myself, Chris Seveney, Andy Mirza, Chad Urbshott, and so forth.  Many of us have podcasts or webinars.

[Joel Hutchinson]

Thank You Bob Malecki. I was not aware of the UDFI tax.

And thank you Chris Seveney for providing an overview of the note investing landscape.

At the end of the day, its going to take some time foe me to digest all this and decide whether or not to invest in notes. From my perspective, note investing would make the most sense from within a self directed IRA. Otherwise, the capital gains tax would be prohibitive. Another issue I need to resolve is how does one keep all of the money invested (when you revive distributions and between note funds, etc.)? Even if the IRR is high, having money on the sidelines won't exactly help overall returns.

Also thank you to Terrence Evans and Andy Mirza. You’ve all been extremely helpful. 

[Chris Seveney]

@Joel Hutchinson - You hit the nail on the head. If you are investing and a note investor using deferred retirement account $ is the way to go. If you grow to have a note business I find it to be not worth it unless you have over $500k min. to invest if you are raising funds as below that you will find the effort vs profits to be very low. It does make sense if you are fully committed and want to grow it larger but running it around that amount per year there are better options.

[Andy Mirza]

@Joel Hutchinson Keeping your money working as much as possible is an issue to think about. The best thing would be to look at the different funds and what they offer. Some will allow you to roll over distributions so that you can compound. Others don't. 

Currently, the best way to do that with our funds is to roll over distributions from prior funds to the next open fund. For sure, this has its limitations but we're working on setting up a pref only, open ended fund so that investors can park their money in between our close ended funds.

[Ben Lake]

I have a question regarding note seller prospecting that I have not yet found a clear answer to.  Is it a violation of any kind for a note buyer to approach someone listing an asset for sale and offering seller financing, and ask that person if they would be willing to sell the note once it's sufficiently seasoned if they do go the seller finance route?  I've done a fair amount of searching to see if I can find any regulations prohibiting this and so far none have come up, but something in my brain is telling me that I'm probably missing something here.  Of course I'm aware that regulations differ from state to state, but if anyone has any insight on this I would like to hear it.

[Chris Seveney]

@Ben Lake

Can you restate that with examples as I cannot follow it.

[Ben Lake]

Sorry if my question was hard to follow.  Basically, I am prospecting for potential note sellers and considering doing the following:

1) Look for property ads where the seller specifically says that they are offering owner carry agreements.

2) Reach out to those sellers and ask them if they would be interested in selling their note if/when they end up going forward with creating one in the process of selling the property, after a seasoning period of course.

I'm wondering if this would be considered improper in any way, to reach out to potential note originators before the note has actually been created.  Perhaps my difficulty in wording this question more concisely would explain why my independent searches on the subject have yielded few to no conclusive answers.

[Chris Seveney]

@Ben Lake

Nothing wrong with it, but they most likely won’t want to discount it.

Another option would possibly be to reach out to people who are for sale by owner and tell them you would owner finance the property if there was a buyer who needed financing ?