All Forum Posts by: Gordon F.

I’ve attended NoteExpo 2018 and the recent Note Camp, and I’ve walked away with a colossal list of vendors for things I apparently need but didn’t realize I need. However, what I still don’t have is knowledge of the basic nuts and bolts of notes investing; although, Note Camp did a really good job of hosting some sessions where they walked through some basics in detail. So Scott Carson did a good job there.

Nonetheless, how do I even price a note? Let’s start there! How do I even figure out the fair market value of the damn thing??

Lots of “abnormal returns” case studies are thrown out, numbers are spouted off at lightning speed, and people are told, “It’s that easy.” Okay. Then why can’t anyone stop to talk about something as basic and supposedly “easy” as simple pricing? Let’s walk through that first before you tell me how easy I’ll apparently become a gazillionaire.

This seems like a basic thing, and I can’t find a good source for some of this. And no, I’m not paying someone thousands of dollars to show me how to present value a future cash flow expectation. I can do that all day long myself, and when I do, none of the note prices I’m seeing come remotely close to making sense. That’s what I’m missing, and it’s what I get the feeling a lot of others are missing too.

For example, I brought up Fed rate increases to one guy and asked how they’d affect the fair market value of notes, and he said, “It won’t really; that’s not how the notes market works.” Uh what? Since when are debt instruments traded in a secondary OTC market not rate sensitive? So you’re telling me duration and convexity don’t apply to fixed income instruments anymore? lolwut

THAT’s the sort of thing I’m talking about. Some of these supposedly simple things are not making sense.

Is there a basic guide out there that explains some of this at a low level? I’m not opposed to buying a well written technical book or article, but I’m not doing the whole, “Give me $2,000 and we’ll talk basics” thing.

My impression of the notes market so far is there is limited market transparency with zero to limited price discovery. Basically, people are making up what they want it to be, and a few have gotten lucky doing that. Maybe that’s accruate and maybe it’s not.

Any recommendations from the smart people on here on where to go to bridge these knowledge gaps? I’m looking for solid technical references, as I’ve not been able to find myself (so I’m clearly not looking in the right places).

Any help would be appreciated.

How do I sign-up?

Originally posted by @Scott Carson:

Hang out at Quest IRA's offices as they have a lot of note investors that show up there. We'll be starting an Austin Note Meetup the first of the year...

Actually, this the third time this week I've been told to check out Quest IRA, so that's definitely something I'll do. Thanks for the suggestion! So do you just hang out, like loiter at Quest's offices, or do they have regular meet-ups?

Well certainly that property is worth more than the tax lien?  Is it developed land, since it had a house on it prior?   

Thank you, Victor and Mike.  Your answers were very helpful.  To clarify, this would be for non-judicial states.

I happened to come across some info that was augmentative to what you guys posted; see below.  I’ll copy and paste as an FYI to others who may have the same question

In Alliance Mortgage Co. v. Rothwell(1995) 10 Cal.4th 1226, the Court held as follows:

“At a nonjudicial foreclosure sale, if the lender chooses to bid, it does so in the capacity of a purchaser. [Citation.] The only distinction between the lender and any other bidder is that the lender is not required to pay cash, but is entitled to make a credit bid up to the amount of the outstanding indebtedness. [Citation.] The purpose of this entitlement is to avoid the inefficiency of requiring the lender to tender cash which would only be immediately returned to it. [Citation.] A ‘full credit bid’ is a bid ‘in an amount equal to the unpaid principal and interest of the mortgage debt, together with the costs, fees and other expenses of the foreclosure.’ [Citation.] If the full credit bid is successful, i.e., results in the acquisition of the property, the lender pays the full outstanding balance of the debt and costs of foreclosure to itself and takes title to the security property, releasing the borrower from further obligations under the defaulted note. [Citation.]” (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1238.)1

Under the “ ‘full credit bid rule,’ when a lender makes such a bid, it is precluded for purposes of collecting its debt from later claiming that the property was actually worth less than the bid. [Citations.] Thus, the lender is not entitled to insurance proceeds payable for prepurchase damage to the property, prepurchase net rent proceeds, or damages for waste, because the lender’s only interest in the property, the repayment of its debt, has been satisfied, and any further payment would result in a double recovery. [Citation.]” (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th at pp. 1238-1239.

Let's say the worst case scenario has happened, and now you're at the auction for the property you had to foreclose on. How can an investor afford to open the bidding at the price of the UPB and costs? If you win, don't you need to be able to pony up that cash to buy the property, and wouldn't this be significantly increasing what you have into that property? I guess I'm not understanding why you'd pour more money into the house and shrink your P&L.

As an example, you hold a $100,000 note, and a few years later, the person defaults with an $80,000 unpaid balance (UPB). If you end up in foreclosure and you open the bidding by making a bid for $80,000, don't you then have to cough up that $80k in cash to get the property? And now you're $160,000 into a $100,000 note ($80,000 upb that was defaulted on plus the $80,000 cash you just bid for the property at foreclosure)? And what if you don't have that sort of cash to be able to buy back the property on any note you foreclose on?

Can someone explain this to me like I’m five years old, because I’m clearly missing something here? 

Originally posted by @Natasha Hunter:

Most transaction fees I have seen are roughly 1-1.5% of the note. For servicing, As for servicing it ranges from $15-95  monthly depending on if it's performing or non performing and whether you elect to have escrowed taxes and insurance. Also keep in mind this doesn't include workout costs. I utilize Madison Management and they have a fees sheet you can take a look at on their website to see what some of your fees may be. 

 Thank you, Natasha.  By work out costs, do you mean fees paid to the servicer to negotiate modifications or other terms in the scenario of non-payment, default, or other adverse situation?

Thank you to everyone who replied! This is what I was looking for. @Chris Seveney This is what I is what I suspected, and you confirmed it. I‘m trying to get to my bottom line and having never bought a note before, it was proving difficult.

Hi everyone, so what does buying and selling notes actually cost in terms of transaction fees? Certainly there are transaction fees... What do brokers usually charge for a buy or a sell?  Also, what do note servicing companies or banks charge to service the note?  

The answer may be “depends”, but humor me with some specific numbers you’ve paid, even if it’s a range.  I’m trying to get an idea of a pro forma P&L, and I honestly have no idea what the costs are, outside of the costs of the note itself and legal expenses.

Originally posted by @Chris Seveney:

@Gordon F.

There are plenty of deals out there for Main Street investors who buy one-offs like most of us. But Texas (and California) are difficult because people are paying near par for assets (meaning no discount). You need to decide where you want to invest and have a team in place. 

 Let investing contrary to what others say is a business about building wealth through “singles and doubles” - some may seem like every deal they have is a home run but that is just not the case. You definitely can still have them in this economy but your focus should be on a return that meets your objectives

Some people are happy with 10% which has low risk and some want 30% which of course has much higher risk portfolio

 Thanks for the replies, Chris.  Like the OP, I’m new and trying to learn.