Anyone have experience with The Note Factory?

Question

I have been learning about buying mortgage notes and I came across this company "The Note Factory". They have a slick website and high-touch sales process and seem to promise 11.5%+ return on performing notes for properties in San Antonio including all taxes, insurance and servicing.

Do these claims seem reasonable? Does anyone have experience with them?

thenotefactory.com

Do these claims seem reasonable? Does anyone have experience with them?

thenotefactory.com

Mike Arch · Answer

Mr. DePaoli actually gave us some good feedback on a sample loan file.  Even though he did not review 100% of our documents, his feedback was valuable.  We discovered a minor error that the title company was making on the HUD-1 and had it corrected.  Thanks Dion!

The Note Factory is a licensed real estate brokerage firm and also has an on-staff Licensed Mortgage Loan Originator. They are also bonded as a Loan Servicer.  We typically sell loans to people that have already accumulated some cash and are trying to get double digit passive returns.  All loans generated have been generated by a Licensed Mortgage Loan Originator, reviewed by an attorney and closed at a title company.  We continue to strive for perfection on compliance and in all areas of our business.  We have the licensed team and attorneys in place to continue to produce quality loans for our private investors.

Account Closed · Answer

Just want to follow up here as several folks have reached out to me regarding Note Factory

Background & Overview:

Mike Arch and co. manage two firms in San Antonio. The first is Alamo Home Source where they buy, rehab and owner finance properties within certain blue-collar neighborhoods of San Antonio. Owner-finance loans are typically 30-year, fixed rate mortgages, 10% rates and around 95% LTV. Because these loans are to owner occupants and have a high interest rate, they qualify as High-Cost Mortgages under the HOEP Act, so Alamo has to ensure certain things are done like using a licensed originator, confirming the borrower's ability to pay, using a servicer, escrow accounts, etc.

Once this is all set up and completed, Note Factory will market the note for sale. The notes are sold at 100% UPB. All servicing of the note is done in-house by the Alamo/Note Factory team.

I went to San Antonio to meet with Mike Arch a couple months ago. He was a very nice guy and took me on a tour of the areas where they are active, and we went into a couple of the homes currently for sale. I was also introduced to several folks at the firm including the servicing team and one of his partners. Was really nice of him to spend the time educating me on their business and showing me around the city. After the meeting we both had some time to kill, so we went to a local brewery and chatted about travelling and politics.

Conclusion:

All in all I had a very positive experience on that one day visit, and the logic behind the business made sense to me. I also liked the fact that these guys clearly stick to markets they know well and aren’t interested in expanding beyond their area of expertise.

However, in the end I decided these loans weren’t a fit for me given the 10% fixed rate at a 95% LTV. In my mind, at that leverage point you have the same risks as if were an equity investor, but your returns are capped as if you were a lender, so was difficult for me to rationalize the purchase. Clearly some people will have a different view on risk/reward and like the idea of a fixed rate return, so I leave it to you to make the final decision. The decision was not made because I had a bad feeling about the team or other red flags, was purely a view on the numbers.

Of course, please do not rely solely on this review for your end choice. I encourage you to meet with the team yourselves, do your due diligence on the loans, and have backup plans in place in case you have to go through a workout/foreclosure scenario.

Dion DePaoli · Answer

I have reviewed a couple loans from these guys.  The Note Factory is really just a sales platform for the fix and flip with seller finance behind them.  All assets are in San Antonio.  The loans are being made to less than prime borrowers.  When I reviewed them they had some issues with Usury and Qualified Mortgage / Ability to Repay rule compliance.  There were also some RESPA concerns with the settlements.  The company owner and manager was a nice guy.  I did not really make friends with the licensed RLMO who was doing the loan paperwork as I essentially said he was doing it wrong.  Not sure if they cleaned any of the concerns up.   Some of the concerning items would have serious impact on the price and potential enforcement of the security instrument and note.  If they have cleaned some of it up.  They might warrant another look.  If they have not then the small discount they are offering around 10% is not sufficient for the real risk on the loans.

Account Closed · Answer

Hi - just wanted to bring this question up again, has anyone on BP done a deal with Note Factory?

The principals there also run Alamo Home Source, and looks like Alamo fixes and seller finances San Antonio homes, and Note Factory sells those notes. This seems like a reasonable business model to me, and like any other note purchase I would do an independent review of the property value + collateral file. Living in TX, it's also pretty easy for me to go to San Antonio and put eyes on the property + meet the team. On the compliance side, given the notes are to owner occupants and yield 10+%, I think these may be High Cost loans? And if so so would need to also verify the CFPB rules are being met like escrow and pre-counseling.

So assuming the above checks out, just wanted to see if anyone has personal experience with them, and if there are any other due diligence items I may be missing?

Brian G. · Answer

Thanks thats really insightful. I haven't followed up with them yet but if they care to respond to these comments I will post it here.

Most likely I will continue to buy SFRs and save note investing for a later time.

Anyone have experience with The Note Factory?

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