All Forum Posts by: Mike Hartzog

I have tapped IRA funds as a private placement, i.e., the IRA receives shares of an LLC in return for capital. That's a fairly clean way to do it. I think you could do a loan with as little as a promissory note. I think that whether you use a security agreement at all would be something negotiated between borrower and lender. The custodian should be able to provide some guidance here though.

Bob - Have you thought about ordering a field call to verify occupancy? Strange that the HOA is non-responsive.

Good job on the DD @Mark K. Contacting boots-on-the-ground is essential.  I have looked at a few notes on FCI and other exchanges have had no luck with it. It seems that most sellers are looking for that greater fool.  IMO it is far better to establish relationships with larger sellers and review their offerings when they become available.  The quality of their notes is better, some provide BPO and O&E which helps with DD, and their pricing is generally more aligned with reality.

I can give you an example from a real note deal of mine.

• Note Purchase Price: 27500
• Property Value: 60K
• 1st lien 180K + 100K in arrears
• 2nd lien 40K (the owners kept this current for some reason)
• Taxes due: 1500

In this case, the owners had been in the house for nearly 30 years and refinanced in 2006, putting a ton of debt on their property.  They could not afford the $1400 payment on the 1st so they didn't pay that but continued paying the 2nd which they could afford.  They very much want to keep the property.  I forgave the arrears and modified the 1st position loan to 75K at 9% over 30 years.  (I don't own the second.)   That provides a P&I payment of 603.47.  With my 27500 investment, that's a yield of 26.3%.

I plan to season this for a year or two before considering selling it to give it a payment history, thus improving the value of the note. When I do sell it, I would likely sell a partial to give the buyer a minimum 20% equity margin (80% LTV). So let's say I sell it at a yield of 12%. I could sell the front 110 payments (just over 9 years) for 40K, retaining the back payments. That would give my investor a 12.1% yield and a 67% LTV, which is quite comfortable, and I still own the back 250 payments.

When you purchase real-estate through normal channels, HOA details are part of the disclosures you see in the paperwork. When looking at potential note investments, HOA can be a real concern in the super-lien states. I generally avoid condos altogether, but that doesn't cover the bases completely. I have not yet found a way to quickly and reliably determine if a property belongs to an HOA as part of DD. Sometimes it shows up on BPOs but this is not reliable IMO.

I am sure some of the long-time veteran note investors out there have some insight here.  What are your thoughts?

Modification is my first choice exit as well. Many notes are so far underwater with respect to value, you end up purchasing at a very low % of UPB and can therefore afford to reduce principal as part of the mod, helping the homeowner, and end up with a performing note at an excellent yield. You can then sell that note at a more modest yield after some seasoning or just hold it in your portfolio.

Deed in lieu and short sale are second choices, and quicker than foreclosure.  They can be feasible in cases where there are no junior liens in place and you can make contact with the borrower.

Foreclosure is the exit of last resort for me, due to the expense and long timeframe in many states.  However, it can be the only option if other exits are not feasible.  Because foreclosure has the greatest cost associated with it, it makes sense to use it as the primary yardstick for evaluating an investment, i.e., if the investment does not work under a foreclosure exit scenario, its not viable because you cannot rely on the feasibility of other exits.

Example 1 - Don't forget about the arrears. When a borrower has not been making payments for some time those back payments stack up and add to amount owing, but they are not reflected as part of UPB. If you bid on one of these FCI notes you will have access to these details for further DD.

Example 2 - Yup.  Most notes available on online exchanges are garbage.

Example 3 - It might be a good one, but chances are good that there is a problem.  Don't forget to check current taxes due (directly with the county), and consider this part of your investment because delinquent taxes are in a senior lien position to your note.  Also, check the level of crime in the area on Trulia.  Get your own value analyses as well before you pull the trigger.

I like the idea.  Haven't tried that.  If you have a FCL in progress I think that would help to mitigate the piano music.  Another thought is to get a DIL signed as part of the contract which could be executed if a purchase and sale is not signed by a certain date.

My skills at understanding legal language are questionable at best, however, the below seems clear to me.  If you are purchasing solely as an investment you don't need a license.  If you are a servicer you would need one.

Any person who purchases mortgage loans from a mortgage broker or mortgage lender solely as an investment and who is not in the business of brokering, making, purchasing, or servicing mortgage loans is NOT required to have a license to own the loan.

That makes sense in Texas, but in some states you will wait for over a year to get a foreclosure completed.  Loan mod or DIL can be much quicker exit in many states.