All Forum Posts by: Joshua Andrews

Some great advice from @Mike Hartzog and @Patrick Desjardins

Richmond Monroe does an excellent job of this and many other services, many of which are time consuming. Pricing is fair, given the time spent. It also depends how much free time you have, and what your time is worth. I don't enjoy filing documents and filling out forms, so I don't do it.

Another company that does this is CSC Global, although I have not personally used them. You can soak up a lot of time shuffling around paper and doing the busy work if not careful. Streamlining whatever you can will go a long way once you start to work more files.

- Josh

An important item to consider when deciding if a note is worth buying has to do with equity. I am talking about equity in the property being used as collateral. Typically, this will be a single-family home (or a building of one to four units). Equity is the additional amount the property is worth over and above the loan(s), liens, or encumbrances on it. Or, stated another way in the context of real estate: the difference between the current market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off all mortgages.

Here’s an Example

A home is worth $100,000.

The borrower owes a first lien of $50,000. This is a note and mortgage secured by the home. There are no other liens on the property.

In this scenario, the equity, or remaining value above the loan(s) is $50,000. So we say there is $50,000 of “equity” in the property. This $50,000 is your cushion as a lender or note owner. It helps provide that sleep-well-at-night feeling. It is no coincidence that banks look for equity when you apply for a home loan. Typically, they are looking for 15–20 percent equity in the property (often your down payment). This means they will only lend up to 80–85 percent of what the home is worth. This 15–20 percent equity protects them in the event of default, ensuring they will have enough left over to cover any attorney’s fees, real-estate agent fees, or associated items should they need to foreclose, sell the home, and recover their money.

Here's Another

A home is worth $100,000.
The borrower owes a first lien $50,000. This is a note and mortgage secured by the home. The borrower also owes a second lien of $25,000, which is also a note and mortgage against the home.

In this scenario, the property has two mortgages. Combined, the borrower owes $75,000. If the home is worth $100,000, the remaining value “left over” after both mortgages are paid is $25,000. This means there is $25,000 worth of equity in the property. In this example, we are not accounting for real-estate agent fees or commissions should the home be sold, or any attorney’s fees for a foreclosure, etc. This is simply to illustrate the equity concept. Again, this $25,000 is protection or “cushion” for the lender or note owner.

General Rule of Equity

• More Equity = More Safety for the Lender
• Less Equity = Less Safety for the Lender

Loan-to-Value and Combined-Loan-to-Value

Loan-to-Value (LTV)

This is a calculation used to evaluate risk on secured assets, typically a home mortgage. You calculate it by dividing the mortgage amount by the property’s value.

Example: John's home is worth $300,000. He has a mortgage secured by the home for $200,000. Simply divide the mortgage amount by the property value. In this case the answer is 66.66 percent. So the LTV is 66.66 percent. This means John has 33.34 percent, or $100,000, of equity in his home. This $100,000 is protecting the mortgage owner in the event of default.

Combined-Loan-to-Value (CLTV)

This is just like the LTV calculation, but it accounts for all secured loans on the property. Many homes have one, two, or even three secured mortgages on them. In these cases, it is important to know how much real equity is protecting the lender(s).

Example: Steve's home is worth $150,000. He has a first mortgage secured by the home for $100,000. He also has a second mortgage secured by the home for $40,000. He owes $140,000 total. Again, simply divide the combined mortgage amounts by the property value. In this case, the answer is 93.33 percent. So the CLTV is 93.33 percent. This means John has 6.67 percent, or $10,000, of equity in his home. This $10,000 is all that's protecting the mortgage owner—bank or note owner—in event of default.

Obviously, this is a much thinner margin of protection than the previous example and probably not enough to cover a real estate agent’s commission should the home be sold.

A good place to review general requirements per state is here: http://www.insidearm.com/state-laws/

Most states require collections efforts to be backed by a license, while some states require licensing to even own a note as a passive debt buyer, regardless if the note is performing or not. States like KY, GA, and Arkansas. 

It's not overly burdensome yet, but I imagine as time goes on more states will get involved to get their pound of flesh. Bob Malecki makes a good point about asking your servicer, and running absolutely all communications through them. It's good practice.

- Josh

This is unusual for ProTitleUSA. I would recommend just calling the number on their website. I have used them dozens of times and had great success and communication. I also know the owner Alex personally, and he is a wealth of information and all around genuinely good guy. 

The fee may not be helped, but if you are unable to reach someone PM me. I can connect you with someone easily.

- Josh

@EJ Concepcion thank you! I'm glad you found it useful. The actual borrower's interest rate on the note is important, but a variety of other factors play into the actual rate or yield you will receive as an investor. It depends on what you pay for the asset, among other things.

I would highly recommend studying all you can about the auction process as well as reading title reports. While deals can be had, this is territory where you can lose money quickly. Most who bid at auction regularly are professional and have done their homework. 

Hi Chris,

Hope you are well. 12% yield is $15,151. 

We are selling a few mortgage note partials to recapitalize and roll over funds for re-investment. The note below is for sale via a partial purchase.

• Current Balance: $54,765.30
• Last Payment Received: 3/21/17
• Next Payment Due: 4/1/17
• Payment Amount P&I: $412.54
• Remaining Payments: 285
• Escrows: None
• Lender Advances: $722.31 (For 2015 taxes)

Amount of payments for sale - Next 46 payments. (longer term available if desired)

Property Address:

1771 FORD BLVD, LINCOLN PARK, MI 48146

Background:

• Performing 1st position note covered in equity.
• Listed at 12% yield to investor.
• Home is single family, borrower owned since 1999. FMV $60,000 per recent BPO. Title is clean. Borrower pays on time. Original collateral including BPO, assignments & allonges in house and to be provided during due diligence period.

PLEASE NOTE: This is a partial purchase. This means you are purchasing full ownership of the note and mortgage, and collecting the next 46 payments only. After you have received the next 46 payments, or the equivalent amount owed, full ownership of note and mortgage, and all remaining payments revert to seller. This is outlined in detail in the purchase and sale agreement which will be reviewed prior to purchase.

If interest please contact me directly, thanks!

Some great comments here and good thread.

Outside of buying just one or two notes, it's a business, and all businesses have problems and obstacles to overcome. Notes by themselves, regardless of your particular business model are an awesome opportunity. You can quite literally create money from nothing in some cases.

Two things I wish I knew years ago:

1. About how to buy, negotiate, structure and sell notes - years ago. The earlier the better.

2. Working knowledge of partials. These are incredibly powerful, and when structured correctly you build an incredible backlog of future profits, while freeing up chunks of cash to buy more notes, while building an incredible backlog of... well you get the idea.

- Josh

Hi David,

I am in Austin and we have a small note meetup in the hill country area. PM me for details, I'd be happy to help you.

Josh