All Forum Posts by: Michael Rosenson

This is all great!  Just the kind of stuff I was looking for.  Obviously there are always exceptions to the "rules," but the pieces you mentioned about drilling down a large asset list and having a clear process/consistent buying criteria definitely resonate with me.  There is only so much time in the day!

Any other "rules" that I didn't specifically mention in my original post that you think are worth considering?

Touche!

Originally posted by @David Faulkner:

I'm not an expert in the note space, so grain of salt ... however, I'd back into what "sufficient equity" is ... for the state the property that the note is in, how long will it take you and how much will it cost you to foreclose and sell the property and at what price will you be able to realistically and conservatively be able to sell? So, you then have your time, you have your costs, and you have your exit price ... what sort of ROI would you expect is fair for the risk you are taking with the note and the amount of work you are putting in? ... with that last piece of data, you should be able to back out how much equity you need in the deal to realistically come out with that ROI. That will vary greatly with the type of property, the geographical state it is in, the physical shape it is in, the price point, etc ... that requires real analysis, there won't be any rule of thumb that will tell you if you have sufficient margin or not.

I totally get what you're saying in terms of your evaluation steps, and I think that those are important steps to perform when seriously considering an investment.  However, I was thinking of rules of thumb as a "top-down" approach to narrow my scope a bit.  There are thousands of investments out there and I don't have the time (unfortunately) to do a deep analytical dive on each of them.  The way I'm thinking about it is that a rule of thumb is the first step to get you from thousands to hundreds or even tens of possible deals, and then to use a method such as the one you describe above as the second step once I've gotten it down to a manageable number.  The rule of thumb is purely intended to be a (very) basic first step to make the real analysis actually doable from a time perspective.  Thoughts? 

@Brett Goldsmith that was perfect!  Exactly what I was looking for thank you.

I definitely hear the caution bit.  I think having multiple exit strategies mitigates this risk to an extent, but I agree that starting off with 1st liens before thinking about 2nds is probably a good move.

So what are some thoughts on rules of thumb then?  For example, @David Faulkner what would you classify as "sufficient equity"? 

@Alex Deacon I understand that the 1st lien holder has priority once foreclosure actions have already been taken, but are there any limitations to the actions a 2nd holder is able to take simply because they're in a junior position?

A newbie question here but I'm having trouble finding this information clearly spelled out somewhere:  What exactly happens when a 2nd lien is established on a property?  Does the borrower now pay two separate mortgage payments each month--one to the 1st lien holder and one to the 2nd lien holder?  Does a 2nd lien holder need permission/approval from a 1st lien holder to take certain actions on the property (for example, things like a loan mod or a foreclosure)?  Anything else worth mentioning on the topic?

Thanks!

@Darren Eady fair point!  I think since I'm just starting out it may be smarter (safer) to get my feet wet with performing notes first.  That being said, I would still be interested in rules of thumb for NPNs since I would like to be able to identify a "good" opportunity should one come along.

I was wondering what some rules of thumb are that people use when evaluating note investing opportunities to narrow the focus. Obviously these would only be guidelines but I'm curious what others use to limit the scope of their search. Some ideas that came to my mind were things like:

1) Borrower's credit score over XX

2) Borrower's equity in the property (something like XX% of principal having been paid off)--this would support the "emotional equity" argument that I've seen around

3) Interest rate over XX (gives wiggle room for a lower rate for a loan mod)

4) Senior status needing to be current (if 2nd lien)

5) Needs to earn over XX% of a returns (IRR, ROI, etc)

Do people use any of these?  If so, what is the rule and how did you come up with it?

What other rules of thumb do people consider?

@Account Closed thanks for the suggestion!  How did you get to $6000?  Is that based on experience?  A conservatism?

Thanks for the replies!

@Chris Seveney I am more interested in IRR, with the reason being that having my calculator broken down into months will give me more transparency into when/where/how manipulating certain variables will impact my ultimate return. (I misnamed the title of the discussion to be ROI rather than IRR so I'll try to change it--my bad!). Thanks for all the suggestions of what to include and I've got a PM coming to you to learn more!

@Bob Malecki Why did you specify NPNs here?  My initial instinct was because performing notes would be current with their property tax payments, but this isn't necessarily true since the borrower could still be late on payments with a performing note (it's just that they would be <90 days late).  Am I reading too deep into it?  Could you please elaborate?