All Forum Posts by: Mike Hartzog

I tried it a couple of times as I was getting started years ago.  Bad idea.  I ended up working with the attorney directly anyway because the servicer was not managing things at all.  Just a bad idea.  My advice, hire your attorneys directly.

Interest is regular income, so no tax advantage. Best to hold them in a self directed IRA. If you are selling with owner financing, that approach can help you spread the gain out over multiple years, so there can be advantage there.

If it’s a foreclosure sale purchase, the foreclosure will clear all but tax and municipal liens.  

All our consumer loans are serviced by a 3rd party servicer.  We originate a fair number of commercial loans, which we self service.  Most are pay at end of term arrangements so there is not much to do in terms of servicing.

I think this is probably one to let go. Typically you would determine a bid price for the note without taking tax and municipal liens into consideration, then reduce the bid by those amounts. But with this one, there is really no value in the note because the taxes due are greater than the UPB. So the seller is completely under water on this one, and probably trying to find someone to buy it that has not done their homework. It is sometimes possible to negotiate these down with the county but it is a low percentage thing, and not something you would want to gamble on.

I look at 3 things, yield, equity/security, and performance.  As @Chris Seveney stated, the yield is the yield, regardless of remaining term.  I would add that calculation of yield should include servicing overhead, i.e., the monthly payment component of the yield calculation should be reduced by the monthly servicing fee.  So the effective yield on loans with small P&I payments will be more negatively impacted by servicing expense.

With regard to remaining term, a long term first position loan that is closer to end of term can provide a greater level of equity/security to the lien holder.  Also, with regard to performance, the borrower has a lot of skin in the game after paying the loan down that far and so the borrower is more likely to continue paying.  

@Gil Ganz mentioned a concern about ratio of UPB to foreclosure expense. On a loan with sufficient equity, the ratio of UPB to foreclosure cost is immaterial because foreclosure costs become part of the recoverable debt in a foreclosure sale situation.

One benefit that a longer term provides is that invested capital is not returned as fast, but I think that is less important than these other aspects.

Systems help when you are doing a lot of volume and need to keep track of what is going on with each of the assets you own and those you are working to purchase.  You don’t need all of that to get started.  Most important at the start is a system to help you weed through all of the trash notes out there and find the good deals.  Most investors do this with spreadsheets.

As Chris had indicated, you need to read the agreement to understand where the payments are applied.  From an asset value perspective I would not be too concerned about 3 payments on a 25 year plan.  The borrower is expected to continue making monthly payments for the next 25 years, so plus or minus the 3 payments at the end of the term has very little impact on value, due to the time value of money.  You can prove this to yourself with a little financial math.  

I think the concern over a short trial period here is related to how much the borrower is really proving themselves.  Two payments thus far on a trial plan demonstrates that the borrower wants to keep the property and that they are capable of paying.  These are both very good things, however, this does not qualify the loan as a performing loan, so the price you pay here should take this lack of "seasoning" this into account.  I would calculate the yield you would get on the investment as a performer, and would be looking for something upwards of 15% given the risk level here.  I would also ensure that I could exit via foreclosure with a meaningful profit. 

Recorded documents are public by definition.  That’s what makes title searches possible.  When you purchase a loan, you should record the assignment.  This ensures that you receive a payoff if the property is sold.  That assignment is public.  Best to own loans in a business entity name.  That is what will show up in the public record.

I try to avoid REOs.  My experience is that there are no good surprises to be found in the inside of these properties.  You can sell pre-foreclosure to simply get out to recover your invested capital.  One good exit in foreclosure is to create a situation where the asset sells as the sheriffs sale.  If you have a good equity position you can set the opening bid at a level that returns your investment plus a profit and still leave room for an investor to pick it up at the sale at a good price.  If the market is active, you can do well.  Has to be a decent asset which is not in a high crime area etc.  local investors are better equipped to deal with these anyway.