I am fairly new to the concept of buying/selling mortgage notes and I have been reading about it. From what I understand (to put in simplistic terms):
- Lenders (could be banks, financial institutions, private people) lend money to borrowers for purchasing properties. They do this in the form of recording a note between the lender and the borrower by having the property as the collateral.
- Lenders then sell the note to investors (institutional, private) online or through loan servicers, brokers and other channels. Now, the buyer of the note for a property becomes the lender as far as that property is concerned. Any P&I payments that the borrower makes go to the new buyer lender. Satisfying escrow, tax and other legal requirements of the mortgage are now the new buyer lender's responsibility.
- If the mortgage is paid as per the terms till the end of the loan term, the new buyer lender will get the P&I payments from the borrower for the remaining months of loan term from when he/she bought the note.
- If the borrower defaults on the payments, it is the new buyer lender's job to evaluate various avenues like loan restructure, deed in lieu, refinance, foreclosure and arrive at the best possible action by discussing with the borrower. If it goes to foreclosure, the buyer lender will incur additional costs for notice of default, auction, follow up, lender-own, repair, sell/rent the property.
My questions are:
For a performing note, why would anyone sell it at any cost less than unpaid balance? For example, if the unpaid balance is $150k, LTV is 45%, why would a seller want to sell it for $147k, even a difference of 3k ?
If a performing note stays performing till the end of the loan term, it is almost as if we did a CD or high yield savings account with the loan interest rate for the loan term - of course, in a CD, you will get interest only for the term and get your principal at the term end. When we buy a note, we get interest and principal throughout the term so that principal diminishes over time. If this is the case, why don't investors flock to buy the mortgage notes instead of buying an investment property?
Assume we buy a performing note for full UPB of $150k with 6% rate for 240 remaining months, we get $899 per month of p&I throughout 240 months. It seems like a safe earning of $10k per year for $150k investment. In the worst case if the borrower defaults, we could choose to profit by helping the borrower continue to pay or foreclose.
- If I buy a house with the same $150k and assume it rents for $1500, we got to deduct about 40% of the rent (=$600) for all the repair/propmgmt/capex/vacancy expenses, we get $900 per month. If the expenses are a bit lesser, we may get $1000.
- If the difference is only $100, why would it make sense for someone to buy an investment property rather than buying a performing note? Performing note will be more liquid than buying the property too - we can hold the note as long as we want the cashflow. If we want to get the cash out, we can sell the note. What am I missing?
If I want to start buying performing notes, where do I start? FCI exchange site is not working. I could see one site paperstac, that I will register with. But, it has about 177 listings when I checked, seems less pool of notes.
As an individual person, can I buy a note without any license? Does it vary from state to state?
If I want to buy a house, the team that I would be looking for is - buyer's agent, prop mgmt, prop inspector, prop appraiser, attorney, title company. Similarly, who are the partners that I should look for if I want to buy a note?
Do you have any platforms that you use to know the new performing/non-performing notes that are added from multiple lenders? I will do my due diligence once I come across a listing, but, where do I see these listings in the first place?
I am sure I will have more questions as I learn more. Appreciate inputs from experience note investors.
