All Forum Posts by: Doug Smith

Pay attention to @Dion DePaoli 's post. Seldom a day goes by when some hack doesn't try to pitch us on a worthless note pool. I actually had a spreadsheet sent to me a while back that contained 3 notes that our company owned that we had purchased three months prior from a credible National note reseller. Beware of non-institutional notes and daisy-chain broker wannabes. Dion speaks the truth here.

@Michael Beur Welcome to the wonderful world of note investing. It's a different animal from real estate investing, but there are a few things you should think about.

1) Particularly in the case of seller financed notes vs institutionally prepared notes (banks, mortgage companies, etc), you will want a good, real estate attorney with a background in loans and foreclosure to review them for you. Buying a note that is not enforceable is a waste of money.

2) You will need to have a Servicer that is licensed in that State (Texas I assume) service the loan for you. There are very few servicers that will handle small portfolios any more. FCI and Allied are two that will do it (no, I have no affiliation or allegiance to either company...I neither recommend or endorse either company). They will "board" the loan, send out statements, send out the TILA letter, make collection calls, etc. The new changes in Dodd Frank and the SAFT Act make it so you really can't collect for yourself any more. Unfortunately, that is the way of the world these days.

3) Regarding licensing, which several posters will jump all over on this blog, you will want to call the State's department of Banking and Finance to ensure that you don't need special licensing to buy or sell notes in the State. Some States do, some don't. We don't currently do anything in TX, so I can't answer that question for you, but you can make that call and get the skinny. Don't get discouraged by some of the posts you will read regarding licensing. Many seem be credible, but do your own homework and check into it for yourself. It can be done.

4) You may want to think about getting a partner involved that knows lending. Most people that buy notes have never made or collected a loan in their lives. I was recently on a panel at a large conference with other Fund Managers that buy loans and, to my surprise, most of the Fund Managers had never underwritten a loan in their lives. As I mentioned, it is a different animal. Someone with a strong background in lending, loan underwriting, and collections might be a good person to help you review and select the notes you buy.

5) You make your money on notes, just like in real estate, when you buy the note, not when you sell it. Pricing is critical. Bidding too low for notes will simply make you appear to the seller as being "not serious". Bidding too high and you will loose your shirt. We price based on the quality and value of the underlying collateral first and foremost. We first find what we would pay by taking the "quick sale" value of the collateral, subtracting off the time value of money for a foreclosure, foreclosure costs, back taxes and tax prorations on the property sale, servicing costs, closing costs on the sale, and a spread for profit. We also price based on the yield we would need to hit if the buyer paid the loan as agreed. We then bid the lesser of those amounts. It is both science and art, but it is critical to your success.

I'm only really scratching the surface. It took me over 20 years of lending and collecting with some of the country's largest institutions to get where I am. Think about getting a strong, knowledgable partner. Good luck! I wish you much success.

@Account Closed Agreed. Amen Patrick. One must make sure the seller of the partial actually owns the note, the note is enforceable, and the agreements are done correctly.

We have pre-prepared (boiler plate) agreements for partials on the ones that we are involved in. I'm surprised your seller does not have a boiler plate partial (unless this is their first one). The best thing that I can tell you to do is to have an attorney with a ton of experience in loans (not necessarily real estate, but real estate LOANS) help you. Partials are instruments that few people are aware of, so it's a good bet that attorney's you speak with may not know what a partial is. With that said, brace yourself for the 20-paragraph Dodd Frank lectures that are bound to follow my response to your post...

You really need to hire a licensed servicing company regardless of where you are in the process. There are certain steps that they will need to take for you in order to keep you compliant. For instance, they will send out the TILA letter for you. Let me know if you have any questions.

@Justin B. Sure, it can be done. The concern that I have for you, outside of things that others may mention, is that your home market of Ohio is a bear to foreclose in. We actually avoid buying loans in the State unless the deal is part of a much larger bulk buy. You may find that the time value of money is not worth the time you have to wait for the foreclosure to go through. You may get lucky and the borrower may sign the property over to you through a deed in lieu of foreclosure, but this requires relatively clean title and a borrower that doesn't want to fight. Good luck.

Pricing was a huge topic of concern for Fund Managers at a conference I spoke at in early December. Pool pricing dramatically jumped in the latter half of 2013 which trickles down to smaller note buyers. I noticed that larger real estate aggregation funds that only 12-18 months ago had no interest in notes were asking a lot of questions about how they can get into the note game. More capital coming into this sector has already given prices a pop. A flood of new cash from funds that are repositioning their portfolios with a skew toward notes are going to make it harder to make appropriate spreads. 2014 is going to be interesting.

We use Clear Title America for all of our stuff nationally. They cover 48 states and do a really good job for us. They are used by tons of investors including aggregator funds, which is a help for us because they have also introduced us to a lot of buyer for our REO. I also like the fact that they send mobile notaries out to clients for closings. They are based in our home-town of Tampa, but do deals for us in PA. Good luck!

Michael, perhaps you could first go to the county recorder's web site in the county that the property is located in. Search the property records to see who filed the Lis Pendens (the document filed to start the foreclosure process). Start by reaching out to the lender to see if you can purchase the mortgage directly from the lender. They may sell it to you at a discount from the property value. If that doesn't work, reach out to the attorney that filed the Lis Pendens. They may grease the skids. Before you do that, check title and taxes to see if there are other liens against the property, judgements, IRS tax liens agains the owner, or back real estate taxes. I wouldn't reach out to the current owner directly before you go through this process. It is likely that the owner owes more than the property is worth. It is also likely that the mortgage is severely delinquent. A short sale is probably the way you will need to purchase the property, but there is a good chance that you can get the property for considerably less if you can get the mortgage rather than do a short sale. No guaranty, but if you do some due diligence up front, you might find a nice deal.

I do know a few. Let me get you some names.