A note, or more specifically, a mortgage note is simply a written promise (IOU or promissory note) to repay a specified sum of money plus interest at a specified rate and length of time secured against a piece of real estate. It is a document that is signed and recorded when a mortgage is given on a property.
For my purposes, it is simply an income stream into the future or a lump sum payment at some point in time or both depending on my strategy. It can provide a very steady cash-flow for many years either inside or outside your IRA. It can also provide some very impressive lump-sum windfalls should a borrower decide to sell his home or payoff the loan early.
I've been in this business for about 5.5 years now and my primary strategy has been to invest in non-performing, 2nd position notes. Non-performing mortgages are mortgages where the borrowers have stopped paying for any number of reasons. I get them performing again by working diligently, ethically and honestly with the borrowers, hold the notes for some length of time while receiving monthly payments, and then resell them as performing notes. This strategy has proven very profitable for me and I really enjoy helping borrowers get back on their feet and helping them save their homes.
It's great being the bank, not the kind of bank most of us are familiar with, but a good, borrower friendly bank that's willing and able to work with willing and able borrowers.
I plan on continuing in this business for a long time. I am constantly trying to grow my business by growing my network of buyers and sellers, finding new and better sources of notes and adapting to changing market conditions.
I found this website through my partner, Sheri (www.mamaknowsfitness.com). I think it's a great resource with some amazing members where we can share ideas and strategies, motivate each other and become friends and even business associates.
My goal here is to network, meet other like-minded members, share and learn more about the note business, grow my business and get others involved in this very profitable, niche market of real estate investing. I'm also always looking to network with other investors that want to buy and sell.
I look at note investing as being directly in the real state business but without any of the traditional issues associated with directly owning real estate - tenants, trash and toilets. With notes we control the properties but don't own them. When was the last time you called the bank that held your mortgage to come out and unclog your toilet?
For those of you that still want to acquire the actual properties, note investing can be an excellent back-door strategy to do just that.
I'm looking forward to continuing this discussion with any members that find this interesting or may want to learn more about the note business.
Peter, this is a very interesting post and I found it informative. I like the idea of using notes as an additional income stream. Can you give an idea of how funding these transactions take place. Also can you share what a note buying/selling transaction looks like? Possibly using one of your recent transaction? I am looking forward to learning more. I have created notes in the past using an Agreement for Deed but not a mortgage. Are there advantages to using a mortgage over the Agreement for Deed?
Thanks for your reply. I'm glad you found the posting informative and interesting. As you can probably tell, I'm a big fan of notes. Most of my experience so far has been with non-performers. Working with the borrowers can be quite challenging at times, but can be very rewarding in many ways: 1) we can help a homeowner stay in his home by modifying his payments, interest rate, reinstatement amt's, etc, 2) we can create a very nice, long-term income stream for ourselves and 3) if we decide to sell the note at some point, we get a nice lump-sum payment. There are many other strategies as well, some very creative.
The transaction to buy or assign the note is very simple - usually just a money wire or a cashiers check to the current note holder for some negotiated amt. Keep in mind, like any investment the buyer has to do his due diligence - determine the value of the collateral (the house), location, payment history, value of any senior liens, etc and several other factors.If it's a 2nd lien, it's critical to check the status of the sr lien(s). If a Sr. lien forecloses, all Jr liens get wiped out.
Much of this info is provided by the seller. But always remember - trust but verify, especially the value of the house. Once the wire transfer is received by the seller, a collateral package will be provided. This package will have all of the borrowers docs that pertain to the mortgage and could include the following: assignment of mortgage, original application, the actual note and mortgage or Deed of Trust, payment history, credit report, survey, original appraisal. Some collateral packages are pretty limited in what they contain and it's at the buyers discretion as to what he feels comfortable with. I've had some with just the assignment doc and nothing else.
Once the seller has all of the above, he then needs to contact the borrowers and inform them of the change of ownership of the note. This is all done formally by letter (RESPA) by both the seller and the buyer. If the note is staying with the same servicer, the new buyer may not have to ever communicate with the borrower at all, just sit back and collect monthly payments. It's a great investment for IRA's. Typical returns that I have enjoyed have been in the 20-40% range and sometime significantly higher.
It really doesn't make any difference if it's a deed of trust or a mortgage, it still works the same.
Mike, I hope you found this explanation informative and that it creates some interest among the members in this highly profitable, niche market. I am looking to transition into this business and my multi-family apartment business full time by the end of this year.
I'm always willing to discuss this subject with anyone that wants to talk about it. I always have notes available for sale and I'm always looking to purchase as well. Thanks again.
Peter, thanks for the info. I have a few questions.....When buying a note i.e a 200k note secured by an asset valued at 250k does the buyer typically purchase at a discount? What would a typical discount percentage be? How are purchases funded? On non performing notes assuming that the mortgagee does not come into compliance with payment terms that a new note buyer is trying to work out with them what is the typical time frame for foreclosure of the lien? I belong to a real estate subscription site called valuehoundacademy.com and they are presenting a note buying webinar tomorrow. Check it out if you get a chance. Thanks in advance for your time in answering my questions.
Hi Mike. Sorry for the delay.
Yes, we usually buy at pretty significant discounts somewhere in the range of 16 - 25 percent of UPB (unpaid balance) for non perf 2nds. Performing and re-performing notes are priced much higher - anywhere from 40-78 % UPB. Many times I will buy a non-perf, get it performing and then resell it several months later as a re-performer to an investor looking for good, steady cash flow. Everyone wins in this scenario.
Foreclosure timelines vary significantly from state to state. Ga is 30 days from start to finish, NY and NJ can take up to 2 years. That's why I don't buy in NY & NJ and a few other states. I very rarely foreclose, but unfortunately sometimes it 's the only solution.
Purchases are usually funded by wire transfer or cashiers check.
I hoped I answered all of your questions Mike.
I purchase nationwide with a few exceptions. Yes, It's imperative to know the laws in each state.
As far as equity. I have purchased loans where there is little to no equity and have still been able to make some money on these. Some people just want to stay in their homes even if it's underwater. They will pay their mortgages if given a workable solution which we can do since we bought it at such a discount.
Yes, the biggest risk in buying jrs is the first. If they foreclose, all jr lines are wiped out. So it's imperative that we get the homeowner on board with us and get them to give us permission to speak with the first lien holder so that we can monitor the status of payments.
This is very interesting. How did you come about buying and selling notes? Do you need to be licensed? Do you use your own funding or are your purchases backed by an investor? Sorry for all of the questions or if these were already answered.
Wow! I am excited to discover your post/group! Thank you so much for starting this group and opening up this subject.
I have been settling short sales in a number of different states (as a 3rd party), but I am interested in shifting my focus to discount buying through other methods. Naturally, that has lead to pursuing Multi-family recapitalizations on assets in receivership plus an interest in notes.
Since being exposed to 48days, I am facing my fear and embracing whatever I need to do/learn to close these types of transactions. What I am saying is, I haven't done any deals of this kind yet, but I am looking for NPL in bulk tape. I am finding that servicers want to close within 10 days of due diligence, and of course it's all cash. Do you have private money? or do you always cherry pick? Have you ever bought non-performing 1sts?
I look forward to seeing how we (and some others here) can be a benefit to each other, Peter! :)
I'm sorry for the very long delay in responding to your post. great to see that you're interested in notes. I really like the note business and think it's a great way to be involved in real estate without all of the traditional issues that usually come with it.
I focus primarily on NP 2nd's. I have just recently become involved with NP 1st's and have been trading them for a short while. I have a few good connections for both 1st's and 2nd's. I sometimes buy small pools or just 1 off's depending on my need or objective at that time.
I have used my own money many times and sometimes I use investor money since these are alway all cash purchases with fast closings.
I am always interested in speaking with new investors. One of the most difficult parts of the business is finding reliable, trustworthy sources to acquire good quality notes at reasonable prices. Another part of the business that is essential to master is working with the borrowers. Without mastering this part of the business you'll have a very difficult time achieving success, unless of course all you plan on doing is either brokering or handing them off to a servicer after you purchase them. But if you plan on working your own notes, then you absolutely have to master that part of the process. Always remember, your best exit strategy is working with the homeowner/borrower.
If you plan on working them yourself, I always feel it is better to start off with just a few notes, learn the process step by step and then progress from there. Keep in mind that some of these bulk pools have been out there for a while and everyone and their grandmother has seen them already. That doesn't necessarily mean they're not good notes, but they might be hard to sell if everyone has already seen them and they've been marked up a few times already.
The advantage I and other people that have been actively working in the business for a while have is relationships with sellers. I have several long time, close relationship with a few companies that provide me with exclusivity on note pools before they are released to the general note buying public for a few weeks. This provides me with several benefits that aren't available to most of the note buyers and especially the new players.
Again Melanie, I'm sorry for the delayed response. Please feel free to write me with any other questions or just to discuss notes in general. I always enjoy discussing notes.