All Forum Posts by: Tracy Z. Rewey

@Anthony Minutoli Welcome to the world of note investing.  There are pros and cons to notes secured by land.  As mentioned, we can get bigger discounts and higher yields/returns.  If there is a default the process to foreclose can be easier.  If you get the property back you don't have to make repairs to a property and there's no one to evict, The holding costs are also lower when it comes to taxes and you don't have to worry about insuring buildings. 

The cons are higher value fluctuations, fewer buyers of the notes on a secondary market, higher chance of default, and a smaller pool of buyers if you get the land back.  Land is also more vulnerable to property values drops than residential properties.   In an ideal world you'd like to stay under a 50% ITV but in an economic downturn that might not even be enough to protect you (ask me about 6 lots I got back through a Deed in Lieu in 2008 that are just starting to recover their value now in 2021).

The equity/down payment, seasoning (payment history) and strength of the payor make a big difference for me. If possible I like to structure a partial purchase and buy additional payments if the note performs well.

There are also differences in land types.  A big parcel of raw land in the middle of nowhere without any improvements can be way riskier than a residential/buildable lot with access to utilities. 

Here are some of the questions we ask when evaluating a land note (in addition to the  normal questions regarding sales price, down payment, terms, buyer, payment history, etc):

Property Description: Residential, Recreational, Commercial, Other

Size: Lot Size or Amount ofAcreage

Completed Improvements (indicate all that apply)

• Road
• Paving
• Curbs
• Sidewalks
• Well or Public Water
• Sewer or Septic
• Fencing
• Outbuildings
• Permits
• Other

Zoning and Allowed Use

Highest and Best Use

Describe the Subdivision, if applicable

• Age of Subdivision
• Total Number of Lots
• Lots Sold
• Lots Improved
• Structures Built
  

What makes this property marketable?

Neighborhood Description and History:

1. Are most neighboring properties homes, land, or commercial?
2. What are similar properties selling for in the area?
3. Are values increasing or decreasing?
4. How long did seller own property (and price paid, if possible)?

I can send you the doc if you want to DM me.

Tracy

I've had good experiences with Quest, NuView, and Equity Trust.  All three are established and can handle note investments.  It's a little easier if you use a servicing company to disburse the payments to the SDIRA. The main differences are pricing, responsiveness, and types of assets they can facilitate.  You can have more than one and for asset protection there can be benefits to that strategy as well (just have to make sure the fees justify the multiple accounts and the returns you are earning).

@Hannah Reichert  I am working to find an attorney that will collaborate on this since they can give legal advise. I have few links that are helpful resources I can DM you.  I want to be sure to follow the BP guidelines on link sharing so let's connect and I will message you.

@Zachary Beach Interesting read and thanks for sharing.  Curious your thoughts on how the understated inflation will impact a note portfolio?  We have bought and sold notes since 1988 so have seen many economies.  I've found that interest rates, real estate appreciation, and the economy as a whole impact prices more than inflation.  Although it could be argued those items also impact the true rate of inflation. Thoughts?

Originally posted by @Zachary Beach:

@Tracy Z. Rewey the CPI is a very misleading number and the actual rate of inflation is higher arguably much higher before the extra money printing of COVID it was closer to 6-12% than 2% the government states. Now who knows how high it will go.

The increases in real estate definitely support that!  What index or site do you like to use to track inflation? 

@Jamie Bateman Great addition.  As real estate prices go up the value of the collateral goes up giving our payor's more equity to protect.  I'm curious, do you balance your portfolio with real estate along with real estate notes?

@Ned Carey Yes, definitely agree.  Higher interest rates can lead to a higher cost of funds.  When rates are low, notes can be sold on the secondary market for higher prices.  We recently sold an existing 0% note (trust me we didn't write it at that rate - it came to us that way) to an institutional investor at a 4% yield because their cost of funds would allow them to buy at that rate.  That same 0% face rate note would have dropped in value by almost half if the required yield would have been higher (say 8%). 

When we are marketing for notes we let the holder know that right now their future payments are worth more since rates have never been lower.  Just like locking in a low rate mortgage loan, the pricing on notes changes as interest rates rise. 

If you buy notes using credit lines you also have to be sensitive to changing rates, especially when notes are long term (20-30 years - and what incentive is there to payoff a 0% real estate loan unless you sell the property?)  As you mentioned, usually there is enough cash flow and yield spread to act as a cushion but an important factor for certain.  

Anyone else getting this question a lot lately?

When we buy notes at a discount our return far surpasses the rate of inflation. In 2020 the average rate of inflation was 1.2%. In the past 20 years the annual average has stayed under 4%. If you are buying notes with an IRR of 8-12% you are pretty protected from inflation risk on your portfolio. While inflation could be on the rise, it is a far reach from surpassing the returns from note investing. You have to go back to the early 80's to see inflation hit 10%.

Would like to get your input on how you like to answer the inflation question.

I like cash flowing investments as they have a better chance of surviving any downturns in the market.  With notes we focus on cash flow protected by equity in a property. 

It is like solving a mystery.  It could be due to delinquency, forbearance, modifications, a mistake in the documents, or a mistake in the servicing records .  Getting copies of the docs and servicing history with notes should solve the mystery.

@Chris Seveney When I read that statement I also wondered if someone was creating a note without any true consideration? We've seen some notes where they created paper just in hopes of selling it that we've declined. We want to see that the note was an arms-length transaction and created either out of the sale of the property or the lending of money.