​How Do You Narrow Down a List of Notes?

A spreadsheet full of information about notes is commonly called a tape. We receive these tapes frequently and they can range in size from just a few to many hundreds. How can we find the needle in the haystack, the few diamonds in the rough when there are so many to look at?

What follows is an explanation of how I do this, using a recently acquired tape of 27 non-performing notes. By the end of the exercise, I have four that I would like to investigate more thoroughly for possible purchase.

First of all, here’s a map showing where the houses are that are on this tape. As you can see, most of them are in the midwest and along the east coast, with a few outliers. Often, we see them in the southeast as well, but not on this tape.

One of the exit strategies for non-performing notes is to work with the borrowers to create a new mortgage and note that they can afford. Since the longer they have been in the house without paying, the less likely they are to be able to perform, we first of all eliminate assets where the last payment was more than a year or two ago. Yes, it is amazing, but some folks have avoided foreclosure for years, but the odds are against us being able to help them.

Getting rid of these older pay histories dropped this tape down by 16, so now we’re down to 11.

The next thing I look at is crime in the neighborhood. You can have decent looking houses in high crime areas, and I ferret them out using trulia.com. When you put in an address at this website, it will have a picture and often an estimated value. Further down the page is a crime map of the area around the house. The map is graded from green for little or no crime to red, which is an area you wouldn’t want to live in. Here’s a picture of a house and a crime map of its neighborhood. This one is obviously off my list of finalists.

I also eliminate houses that are too small. If a house is under 950 square feet it would have to have other redeeming qualities to remain in consideration.

If there are property taxes due, that has to be taken into account as well. I assume I’ll have to pay those off and so put them into the total cost of the note. Depending on how much is owed, that could be a deal breaker.

Next, I look at the size of the town the house is in. One of these in Pennsylvania was in a town of 202. I generally only consider assets in a town of 10,000 or larger to ensure that there is enough of a real estate market that I can sell the property quickly if I get it back in foreclosure.

Finally, the price I will have to pay will determine the yield the property will pass on to my investor. If it doesn’t meet their criterium I take a pass.

So after all that, we got it down to four properties to look at in more detail. In the final round we’ll see what information we have about the borrower, and look at rentometer.com to make sure the payments we will get are below the local rental market rate. That way, a borrower will try extra hard to stay in the house since moving out will cause their monthly payment to go up.

Here’s the final map:

It took about a half hour to get through this process on this tape. Now I’ll spend some more time running through the numbers, looking at the due diligence files (if I can get them) and if they pan out I’ll offer them to my investor list and move into the next phase of the business.