All Forum Posts by: Mike Hartzog

@Alin Toncz

Hi Alin,

Not sure of the context here but I assume you are reviewing title as due diligence for a note purchase.  That being the case, one thing you need to look at is which liens are junior to yours and which are senior.  If you foreclose, the juniors, except for municipal liens, will be eliminated in the foreclosure process.  Property taxes and associated liens are not eliminated.  Here's an article which may help.

Due Diligence for Notes - Tax and Title

Mike

You will do better with passive SD IRA investors IMO. If you go that route I would suggest offering a warranty on the notes you sell. These types of investors are not prepared to deal with a default.

There is a market for these.  In some ways land contracts are more desirable than promissory notes.  PM me and I will hook you up with a couple of contacts.

Just to complicate things further for you  :-), if you are looking to pull some cash out but don't want to suffer that large of a discount you could sell some of the near term payments and retain the remaining payments, i.e., sell a "partial".  For example, building on John's 15 year amortization example, let's say you sold the next 60 payments (5 years) at a 12% yield to the buyer, and retained the remaining 9 years of payments.  The price for those 60 payments would be  31,689.71, however,you would have 52,050.09 in principal remaining at the end of the 60 payments (end of year 6 on the loan) when the buyer is paid off and the payments revert back to you.

This type of arrangement is advantageous for both buyer and seller.  The buyers position is very secure because their investment relative to the collateral value (ITV) is low.  It is good for the seller (you) because payments way out in the future are not worth nearly as much as payments in the near term, so you sell the high value payments and retain the low value payments until they are more valuable.  This leaves you with a large percentage of the principal balance remaining when the partial term is complete.

@Julian Buick

I'm not going to the note expo this year.  I do plan to make the meetup this Friday.  See ya there...

@Troy Zsofka

Hi Troy,

You run into all kinds of situations in distressed note investing, and the outcome for borrowers depends heavily on how the investor approaches the business.  You have your hardworking folks who unfortunately purchased at the top of the market and are now stuck with an underwater mortgage.  You have deadbeat borrowers who have been living free for years, refuse to pay a minimal payment, will play the bankruptcy game with you as long as they can until you get them checkmated.  You also get those that are in between the two extremes, i.e., they have life difficulties such as medical issues and can't really afford to pay even a reduced mortgage payment.  These are the tougher ones to deal with, but generally speaking you can usually find a way to make the investment work and help the borrower too. For example, a cash for keys DIL deal where you provide enough cash to get them moved into lower cost housing.  Personally I feel that on balance my company has been able to improve the situation for borrowers 90+ percent of the time.  Many borrowers are profoundly grateful to have had our help to resolve their mortgage issues.  Compare that with what a bank would be able to offer and I feel that on balance we have helped make the world a better place in our small way.  

Hi Pari,

It looks correct, but needs a 3rd schedule.  The common terminology and approach in the industry for partials is to define schedules A, B, and C:

• Schedule A: Borrowers Schedule - The total remaining payments on the note at the notes rate. This is what the borrower is paying too.
• Schedule B: Purchasers Schedule - The payments purchased by the buyer/investor at the notes rate.
• Schedule C: Purchasers Basis - The payments purchased by the buyer/investor at the sold rate. 

You currently have schedules A and C in your sheet.  Schedule B is important because your partials contract must call out how to handle early payoff, and the PV can be different between schedules B and C.  The contract would define one of these schedules to govern early payoff distribution between buyer and seller. 

So for example, if the investor purchased the partial at a discount to get a higher yield than the rate of the note, schedule C would have a lower PV than schedule B (because of the discount).  If the contract calls for schedule C to be used, the investor would receive a payoff that is lower than if schedule B were used.

Hope that makes sense to you.

@Patricio Tellez-Giron

I have a spreadsheet I use which I am willing to share with you.  Email me directly.

I generally look at investment yield rather than IRR for notes. I get a yield of 23.317%, using 33 payments of 950.67 with a 23K investment. If you are using a servicer, you may want to find your actual yield by using an adjusted monthly payment which removes the monthly servicing charge, i.e., the net payment to you.

If the borrower is living in the property, you will have to wait out the redemption period.  However, you have not yet firmly established occupancy one way or the other.  I would recommend using a property preservation company here.  They can send someone out to knock on the door and determine occupancy.  If the property is vacant, they can secure it for you.