All Forum Posts by: Paul Birkett

Justin - the notes business is great for all the resons you will read here and from the guru's but you cant approach it like RE. There is no single check-list to work from. First, you need a comprehensive education, then buy a small number of notes - say 5 or 10 to learn by doing, then rinse and repeat a few times over 18-24 months. You should know what you are doing at that point.

 In my opinion, you shouldn't buy notes until you know what you are doing.

I switched to notes 2 years ago and I'm delighted that I did - its the most exciting opportunity in the finance space right now (again - in my opinion). The transition was not easy, this is not an easy business and there is no way to make it easy. It takes study, practice, determination and attention to detail.

The fundamental mistake I made was to think that my experience in rental homes/flipping gave me some insight into the note business. That was dead wrong! As Bill says - notes is finance, homes are collateral. Your bank manager doesn't know how to buy, fix and sell a flip....and you don'tyetknow how to originate, underwrite and sell a loan. Whether you are buying performing loans, non-performing, first or second liens - you will need to know quite a lot about the banking business.

The good news is that it can be learned - but before you start the journey have a think about the questions I asked myself before I began:

1. What am I trying to achieve? Do I want a new sideline to replace my buy-and-hold rentals or am I trying to build a new business that was scalable? In my case, I wanted to build a business that could scale. I had about 40 rental homes at the time, they were taking up too much time and the work wasn't very interesting. I knew I wanted to sell the SFH's and do more multifamily or something that was scalable. What are you trying to achieve? Not with notes...but in general. Maybe notes is the answer, maybe its not.

In my case I had a long corporate career and had learned the skills necessary to run a large organization. The question for me was: what type of an organization and in what industry?

2. How much time and effort am I prepared to dedicate to this? I massively underestimated how much learning there is to do in the note space. I took a class, hired a coach and then bought some notes with a JV partner. In hindsight, that was a totally unrealistic approach: the class was good, the coach was excellent and the JV partner was highly experienced. The problem was simple: you can't learn the business in 12 weeks. To gain expertise requires at least a year of dedicated work - working all day every day to learn and experience the business. I say "experience" because knowing the facts is not enough, you need real-life experience. This business is highly systematic. You need a system for every single task from valuing the loan all the way through the hundreds of steps that you may need to take before you sell it, foreclose on it, or write it off. It takes a lot of time and effort.

3. Can I do this alone - do I have all the skills necessary to succeed? I was trying to build a business that could scale...a business almost like a bank. We could scale up over time and eventually own a lot of loans. My corporate career had equipped me for some tasks like setting the direction, managing teams, raising the capital and a lot of the operational elements of running a growing business. I didn't know much about the systems we would need or the actual mechanics of running a loan book. So, I found team members who were expert in those fields. That took a lot of time.

4. What is my role going to be? Should I do this myself of should I join someone else's team? In the end I couldn't find a team to join so I built my own. We are now a team of 7 and we are scaling the business.

It could be that you don't yet know enough about the space to answer these questions. If that's the case, I would go to a note conference and maybe even take a bootcamp.  I don't recommend guru's - but ~$500 for a 2-3 day intensive workshop is money well spent in my opinion. It will be like drinking from a firehose but you will get a feel for the industry in a short period of time. I would also read everything you can find on BP. There is a lot of info here and on youtube and other places too.

good luck with your transition to the note space. 

@Justin Cabral

You can John...just make sure you disclose that fact. Its a good idea to find out where the property is in the foreclosure process too

The last thing you want is to wholesale a property only to find its just about to go to sale and there is no redemption period. Your new buyer loses his money and you look like a shady dealer

good luck!

Ill be there too. Looking forward to meeting some of the people Ive been talking to on the internet these last few years!

@Dion DePaoli is the expert! Get a Servicer!

Sandy, you are doing great homework and this is a great question. The answer, like most things in the note space is "it depends". There are federal laws that suggest that you can self-service a small number of loans. From memory you are ok up to 500 loans but I haven't checked recently. 

However, there are also state-specific rules that govern the purchase and servicing of loans. IL and about 11 other states require a debt buyer to have a licence. Similarly, 14 states require you to be licensed to service a loan. Servicing itself is defined broadly in some states and narrowly in others. 

Enforcement of the rules is very strict in some states and less strict in others.

The compliance risk is simply not worth the trouble in my view, so we made the decision to go to 3rd party servicing on all our loans.

You can try to self-service and then move to a Servicer once borrower contact is made.....but I wouldn't advise it unless you are in a state where self-servicing is allowed. Needless to say, if you are going to self service...make sure you know what you are doing on theRESPA, FDCPA and math fronts

good luck!

@Wayne Brooks and @David L. are completely correct

1. Its much much more complicated than RE - otherwise everyone would do it. Just like building a house is much more complicated than living in one. You cannot learn the note business from free resources or courses or weekend boot camps. You can only learn it by doing. The key question is  - how can you "do" without taking on too much risk. The answer is - do it slowly and carefully and repeat it over and over. Note investing is a career. If you think of it as anything else you are likely to make a serious mistake. You will rush into a bad decision and lose money - ask me how I know?

2. The note business is about the velocity of money. Doing it once is fine....but the magic happens when you do it over and over. Once you have your system for buying, fixing and selling notes, you have created a banking machine that throws off a lot of free cashflow every month. 

It is by no means an easy business, it's tough to learn, it's complicated to operate....but it is doable. You can learn how to run a note business in 12-18 months by practicing every day. I'd suggest you do it with a partner, attend a course (we don't offer courses - there are many fine options out there) and work with the expectation of achieving nothing but an education in the first 12 months.

It took me 12 months to buy my first 200 notes and 9 months to buy over 1000.

Expert knowledge + right team + practice = confidence

when you have confidence you are ready to scale....not before. Scale before you know what you are doing....and you will lose all your money

good luck with the transition!

50% of the value of the property as is. So if the asset is worth $70k today, you might bid $35k. If the mortgage balance is $200,000 that's kind of a "so what"....because the asset is worth just $70k. 

I'm with Rick on this one. You should be paying ~50% of value (asset as-is) for the note. You have to take it through FC for $3k or thereabouts, rehab and sell. The note route is much more profitable than buying the REO...and in TX you are only delayed about 90 days for the FC action (assuming no BK by an owner occupier)

In my opinion, you shouldn't buy notes until you know exactly what you are doing.

I switched to notes 2 years ago and I'm delighted that I did - its the most exciting opportunity in the finance space right now (again - in my opinion). The transition was not easy, this is not an easy business and there is no way to make it easy. It takes study, practice, determination and attention to detail.

The fundamental mistake I made was to think that my experience in rental homes/flipping gave me some insight into the note business. That was dead wrong! As Bill says - notes is finance, homes are collateral. Your bank manager doesn't know how to buy, fix and sell a flip....and you don't yetknow how to originate, underwrite and sell a loan. Whether you are buying performing loans, non-performing, first or second liens - you will need to know quite a lot about the banking business.

The good news is that it can be learned - but before you start the journey have a think about the questions I asked myself before I began:

1. What am I trying to achieve? Do I want a new sideline to replace my buy-and-hold rentals or am I trying to build a new business that was scalable? In my case, I wanted to build a business that could scale. I had about 40 rental homes at the time, they were taking up too much time and the work wasn't very interesting. I knew I wanted to sell the SFH's and do more multifamily or something that was scalable. What are you trying to achieve? Not with notes...but in general. Maybe notes is the answer, maybe its not.

In my case I had a long corporate career and had learned the skills necessary to run a large organization. The question for me was: what type of an organization and in what industry?

2. How much time and effort am I prepared to dedicate to this? I massively underestimated how much learning there is to do in the note space. I took a class, hired a coach and then bought some notes with a JV partner. In hindsight, that was a totally unrealistic approach: the class was good, the coach was excellent and the JV partner was highly experienced. The problem was simple: you can't learn the business in 12 weeks. To gain expertise requires at least a year of dedicated work - working all day every day to learn and experience the business. I say "experience" because knowing the facts is not enough, you need real-life experience. This business is highly systematic. You need a system for every single task from valuing the loan all the way through the hundreds of steps that you may need to take before you sell it, foreclose on it, or write it off. It takes a lot of time and effort.

3. Can I do this alone - do I have all the skills necessary to succeed? I was trying to build a business that could scale...a business almost like a bank. We could scale up over time and eventually own a lot of loans. My corporate career had equipped me for some tasks like setting the direction, managing teams, raising the capital and a lot of the operational elements of running a growing business. I didn't know much about the systems we would need or the actual mechanics of running a loan book. So, I found team members who were expert in those fields. That took a lot of time.

4. What is my role going to be? Should I do this myself of should I join someone else's team? In the end I couldn't find a team to join so I built my own. We are now a team of 7 and we are scaling the business.

It could be that you don't yet know enough about the space to answer these questions. If that's the case, I would go to a note conference and maybe even take a bootcamp. Like Bill I don't recommend guru's - but ~$500 for a 2-3 day intensive workshop is money well spent in my opinion. It will be like drinking from a firehose but you will get a feel for the industry in a short period of time. I would also read everything you can find on BP. There is a lot of info here and on youtube and other places too.

good luck with your transition to the note space. 

Hi Yasmine,

I learned in 2011 that I had no choice but to learn the note space.  Why?

1. Finding motivated sellers was all but impossible

2. Foreclosures were done or being bid up to retail prices

3. Home prices were increasing much faster than rents - so yields got squeezed.

Its even more true today....prices are even higher. I wrote about it a little here:

https://www.biggerpockets.com/blogs/8188/49235-the-new-skill-set-every-re-investor-needs-to-learn-in-2016

My next post will focus on how I made the transition from 40 rental homes to 2100 notes in 3 years. It was a very tough journey.....but it was exciting and much more scalable than landlording (not that there is anything wrong with being a landlord - but after 20 years, Id had enough!)

Paul