Okay, LOL.
All these investor making comments and then Max comes along with the blinding flash of the obvious, good job @Max T., that's thinking out of the box!
Mike hit on it as well in his last post. Jay had some wild throws, but all good.
The difference is....who holds the note? An institutional lender or broker or someone in the business or an individual, non-investor type who took a note to get a deal done?
I'm not suggesting predatory dealing, but who is the more sophisticated seller?
Next, institutional types, broker/dealers have pools of investors, reserves to tap into to conduct business, they are "built to trade" they command they yield offered.
Ma and Pa note holders, sold the farm and carried a note back, they have also been collecting payments, paying their tax guy to send out 1099s, compute tax on the principal, take phone calls if the borrower thinks they might be late one month (a good borrower or they just wait) they know one of the borrowers lost a job, now they are shaking if the place has to be taken with them out of town now. Most seller financed note holders are doing servicing, when they probably shouldn't be, but they try to save a dime.
The difference between an entity and an individual is that the individual is exposed to more life occurrences, death, divorce, incapacitation they become ill, go to a nursing home, go nuts, bankrupt, get sued, they have other financial obligations they must meet, their prize dog needs surgery, as Jay mentioned, the grandchild needs a good attorney for a drug charge. The needs for individuals are endless, institutional types are positioned to avoid many of these personal type matters. An individual going to a nursing home may well be qualifying for state benefits, that means spending down the assets to qualify, you can't pay a nursing home bill on $600 a month! There are also ways for them to save money by selling at the FMV assessed....anyway.
As I mentioned in the other thread, I'm repeating myself again, institutional loans are originated under strict guidelines, not seller financed notes, yes, there are exemptions now to Dodd-Frank which may mean Ma and Pa did the deal. Seller financed notes lack origination and qualifying standards, they are often made with overpriced collateral, servicing records are sloppy, in all, a lack of professional management and due diligence which the note holder takes a big hit on in the discount.
The discount is not just a yield factoring process, it does produce the yield desired, but what is that based on? Many simply shoot for a yield, a blind shot blindfolded, but the discount represents the risk assumed that places the subject investment in line with similar investment alternatives that carry different levels of risk, it is a risk based analysis. If you're just looking for a 16% return, you're not underwriting your investment.
There are millions of dollars worth of these notes within 40-50 miles of you, so many you can't buy them all, even half of them. About 25% will hold the note, about 20-25% need to sell, the rest will take an offer.
You can find these notes at the courthouse, or you can learn how to work with other professionals, attorneys, accountants, medical staff, bail bondsmen, funeral homes and others who end up dealing with such investments and they will call you for a solution! I didn't spend much time looking for them, people called me!
Yes they will take a 40% discount, after you explain what they are holding, sometimes more. You might buy with a 15% discount, depends on the note, the history, the documents, the collateral and the seller's motivation.
These private notes are dealt with one on one. You can also contact a seller tactfully with offers to refi. You can pretty well tell if they can refi before you ever close on the note purchase. I pre-qualified borrowers for a refi and new my risk was about zip before I bought the note!
Want to make money, look up "velocity of money" refi notes and you can buy 3 or 4 times as many with the same dollars, the computed yield will smoke your calculators.
You don't have to buy the whole cake either, buy a slice. If you want bigger juicier notes, look at small business transactions, Ma and Par retired from the motel business, sold the car wash, sold the cafe or the auto garage, it's not just houses. Yes, this takes some business knowledge.
Nothing wrong with playing with Excel or your calculators, but there is a world of notes beyond institutional notes being dumped or getting into investor groups trading in some closed circuit or bucking brokers for a better deal. Just need to learn note fundamentals, the basics of underwriting, risk assessment, collateral assessments, understanding credit issues and secondary guidelines. Might sound like a lot to learn but it's sure worth it!
Thththat's all folks :)
