Hello Note People. I just wanted to stop in and share some of my takeaways from the Note Buyer's Boot Camp held by American Home Preservation in Chicago last week. This post might be useful to newbies like me thinking about entering the note space and will give me an opportunity to consolidate my thoughts after this intensive two day affair. A little about me. I own two SFH's in CA, which are providing steady cash flow, but are underperforming as assets due to the significant amount of dead capital they hold. I'm looking for ways to deploy this capital and thought why not learn about note buying? As some of you may know, AHP has a fund that offers 12% preferred returns with the promise of best effort liquidity and a socially progressive mission of keeping homeowners in their homes. I have a good college friend in Chicago I wanted to visit, so I decided this would be a great opportunity to check out AHP to see if I want to invest with them and maybe even enter the note space myself.
As a raw recruit with zero note experience and limited investment experience, I came away with a broad understanding of how the business works and was able to hear from industry insiders about their general processes. I was impressed by the professionalism and wit of the panels. It was anything but boring which I think is an accomplishment when it comes to something as abstract as note buying. I also came away with a perception of high integrity from AHP. I got positive vibes from every member of AHP that I met, and also made some great connections with other boot camp participants. In my opinion the tuition to the camp was money well spent.
On day two of the boot camp we were able to look at an abbreviated tape of notes AHP was offering for sale and allowed to choose one and browse through its file after we signed a NDA. We were walked through some of the thought processes that go behind what might make for a good deal and what constitutes red flags. I came away with a cautious understanding of just how many pitfalls there are in this business and much less clarity on what to actually look for. Like I said, I’m a newbie to this, so I may have missed the golden formula, but it makes sense that no one wants to give away too much in this competitive space. Also, everything is so state specific it’s impossible to generalize other than "red" states are generally easier to foreclose in than "blue".
I also came away from the conference feeling that I was at a significant disadvantage as a single note investor because I am not able to adequately spread my risk. As you probably know single note buyers are at the bottom of the food chain searching for undervalued nuggets that have filtered down through the funds (like AHP) who have full time teams devoted to analytics and access to capital to buy large pools of notes at a discount. The winning notes are there to be found, but they are surrounded by a lot of dogs. What is frustrating to me is that during my early enthusiastic analysis all the notes seem to be priced like winners. There doesn’t seem to be much of a discount for taking on the large amount of risk carried by these filtered down notes. Within the course there was a call to develop relationships so that you can better negotiate bids. But on notes that I’ve subsequently looked at, there seems to be very little difference in initial note pricing between notes in judicial vs. non judicial foreclosure states, or differences in bankruptcy status or occupancy status. It seems like they are all priced off of BPO’s, or worse random estimates at around 50%+ of value. My extremely unqualified advice is to not pay that unless you have some sort of inside info on the property or significant experience in this game. I have yet to enter negotiations on a bid for a note, so maybe there is more pricing flexibility than I am aware of, but after the boot camp I do not feel knowledgeable enough yet to qualify my bid if challenged. I do know; however, that I don’t want to pay 50% of BPO on a note in foreclosure in a judicial state with a high tax rate and a cloud on the title. We learned that there are no bad notes, only bad prices, but many of these notes on exchanges should be sold for a dollar in my newbie opinion.
It might seem tempting, as it was to me at first, to buy one of these notes if you are looking to move up the food chain and acquire a property for a BRRR deal. But, if you do, make sure you have a full handle on the costs which I still do not have after attending the boot camp. Note buying is a business that is very difficult to predict costs and evaluate exposure to risk on individual notes. After the boot camp I still have so many questions on how to evaluate risk when costs can vary so widely. As a result, I see a lot of value in teaming with someone with experience and raising enough capital to buy a pool of notes to spread out the risk.
All in all, I’m glad I did it. Going to this thing got me out of my comfort zone and inspired me to take a closer look at this space and reaffirm my commitment to my education as an investor. I feel like I now have a solid general understanding of the business and an appreciation of the tremendous amount of nuance and caution note buying requires. I am also aware of the tremendous upside to this business, if done correctly with systems in place, but don’t let anyone tell you that it’s easy money.
