[renotime]

For the last two years I have invested sporadically in mortgage notes. I think it's a great way to invest because all you need is a computer and a phone. I currently own 2 performing notes on mobile homes and one non performing note on a single family residence.

A performing note is where the borrower is making payments on the mortgage and a non performing note is where no payments are being made.

Basically as a note investor I own the mortgage on a property, making me the bank. Once a month the borrower will send me a check.

The first performing note I bought for 10,800. I will receive a monthly payment of
361.80 for 41 months, making a profit of 3,310.

The second performing note I bought for 7,500. I will receive a monthly payment of 153.00 for 89 months, making a profit of 6,117.


So what is the risk? The borrower could stop making making payments, forcing me to foreclose on the home. I don't think this will happen, as both notes were performing for at least a year before I bought them.

Non performing notes are a little trickier. Like I said, the borrower is not paying on the mortgage. Since it is a delinquent asset, they can be bought for much cheaper than performing notes.

Once you acquire the note you have to figure out what your exit strategy will be. Here are a few exit strategies:

1) Discounted payoff. The borrower owes 100k but agrees to pay you 50k on a note you bought for 15k.

2) Flip the note.

3) Loan Modification.

4) Cash for keys. Give the borrower some money to leave the house so you don't have to foreclose.

5) Foreclose

6) Reinstate the loan

I purchased my non performing note for 7,100. It is a second mortgage The borrower currently owes 26,400 on the mortgage and 20,000 in back payments.

Currently the house is worth 90k and they owe about 102k on the first, which they are paying down.

Since there is no equity in the house the borrower could potentially file for bankruptcy and have the lien stripped.

So right now I am going to wait for the borrower to pay down the loan. Once there is equity in the home I will call him to try to work something out. If he refuses to work with me I will have to initiate foreclosure and it will turn into a game of chicken.

[cardguy]

Will come back in here later.

But thanks for posting on this. One of the best things about the forum is when people talk about some of the more unusual investment opportunities floating around.

I didn't even know this was a "thing" until you mentioned it the other day in the chatroom.

[El Chinito loco]

(05-20-2014 11:48 PM)renotime Wrote:  

The first performing note I bought for 10,800. I will receive a monthly payment of
361.80 for 41 months, making a profit of 3,310.

The second performing note I bought for 7,500. I will receive a monthly payment of 153.00 for 89 months, making a profit of 6,117.

No offense but this doesn't seem that great for the risk:

10,800 for a profit of 3,310 (30.65% profit) over a period of 41 (roughly 3.4 years) is a 9% annual return on your investment. You could have the same performance with a lot less risk by just putting your money into a balanced portfolio 50/50 total U.S. stocks & bonds index with reinvested dividends and compounding.

The problem I see here is that you're basically taking on the role of a bank or loan company with seemingly far _less_ legal recourse to chase after defaults than those institutions would have.

[CaP7]

$7,100 Sounds like a lot for a $20k note that has no equity.

Non performing bad credit card portfolio debt goes for $.07 to .10 on the dollar. It looks like you're one step above that.

[jamaicabound]

Where does one buy these notes?

[renotime]

(05-21-2014 12:02 AM)El Chinito loco Wrote:  

(05-20-2014 11:48 PM)renotime Wrote:  

The first performing note I bought for 10,800. I will receive a monthly payment of
361.80 for 41 months, making a profit of 3,310.

The second performing note I bought for 7,500. I will receive a monthly payment of 153.00 for 89 months, making a profit of 6,117.

No offense but this doesn't seem that great for the risk:

10,800 for a profit of 3,310 (30.65% profit) over a period of 41 (roughly 3.4 years) is a 9% annual return on your investment. You could have the same performance with a lot less risk by just putting your money into a balanced portfolio 50/50 total U.S. stocks & bonds index with reinvested dividends and compounding.

The problem I see here is that you're basically taking on the role of a bank or loan company with seemingly far _less_ legal recourse to chase after defaults than those institutions would have.

In my opinion you should be looking at the internal rate of return, which is 16.7% for that note and 19.4% for the other one.

I have the same legal recourse as the bank. When the borrower bought the home they signed a security agreement and promissory note.

Both of these borrowers have put a lot of money into their respective homes, making it fairly unlikely that I will have to foreclose.

(05-21-2014 09:22 AM)CaP7 Wrote:  

$7,100 Sounds like a lot for a $20k note that has no equity.

Non performing bad credit card portfolio debt goes for $.07 to .10 on the dollar. It looks like you're one step above that.

It's a 26k note. I don't think it will take any longer than a year before their is equity in the home again. I paid a little more than I should have for it.

Have you invested in credit card debt? I'd be interested in hearing about that.

Jamaica:

Notes can be hard to find. I bought the performing from a lawyer and the non from a hedge fund. I had to sign an NDA before they let me look at anything.

If you live in a big city you can join your local real estate club.

A decent website is FCI exchange, but their stuff can be priced kind of high.

[El Chinito loco]

(05-21-2014 11:39 AM)renotime Wrote:  

In my opinion you should be looking at the internal rate of return, which is 16.7% for that note and 19.4% for the other one.

But it's still like investing in a junk bond. You get somewhat high yield with uncertain risk profile. At the end of the day you're still hoping that person makes their payments.

Quote:

I have the same legal recourse as the bank. When the borrower bought the home they signed a security agreement and promissory note.

I'm curious to know how you would go through foreclosure though? If you were to take them to court how long would it get caught up in legal wrangling etc.. and what could they do to delay that.

Don't get me wrong, I'm not shitting on your investments btw. It's kind of interesting to learn about even if it's not the sort of thing I would go into it.

[sammybiker]

The return on your performing notes doesn't look bad, especially that it's truly passive income. The big question is: How much equity do your performing properties have? Given that they are mobile homes, I can only imagine it's not much (if any?). If they stopped paying, your recourse and end result would be:

1) Foreclosure (and all of the attorney fees that go with kicking someone out of their primary residence)

2) After said attorney fees and kicking this person out, you're left with a mobile home that is probably not worth the remaining balance of the note? Even if it is, you get to deal with renovation, selling it, etc...

Help me out here. 9% ROI is great for passive income. But you have to figure what your win/loss ratio is and what your quantifiable loss is. From the looks of it, even winning 9 out of 10, that one property that you have to foreclose on is going to wipe out the profits of several others...bringing your net cash on cash return down considerably...4-6%? And that's only if you can get by with no issues on 90% of your notes.

And when you're paying an attorney to kick someone out of their primary residence, you're no longer passive.

Looking forward to your feedback. I admittedly don't have any in-depth knowledge of this but from what I know, it's never appealed to me.

If you want true, passive income with lower risk, go into hard money lending. You're lending on properties that IF you had to foreclose, you're still making money. Worst case, you're breakeven/small loser. And the projects are typically 3-9 months. And your cash on cash ROI is much higher, typically 12-15% (annualized can be 20%+, depending on how fast you can get your money reinvested).

[renotime]

(05-21-2014 11:59 AM)El Chinito loco Wrote:  

(05-21-2014 11:39 AM)renotime Wrote:  

In my opinion you should be looking at the internal rate of return, which is 16.7% for that note and 19.4% for the other one.

But it's still like investing in a junk bond. You get somewhat high yield with uncertain risk profile. At the end of the day you're still hoping that person makes their payments.

Quote:

I have the same legal recourse as the bank. When the borrower bought the home they signed a security agreement and promissory note.

I'm curious to know how you would go through foreclosure though? If you were to take them to court how long would it get caught up in legal wrangling etc.. and what could they do to delay that.

Don't get me wrong, I'm not shitting on your investments btw. It's kind of interesting to learn about even if it's not the sort of thing I would go into it.

Both of the performing notes are in Texas, which handles foreclosures fairly quickly. They are usually handled out of court. As long as you have all the proper paperwork, it can be handled within 90 days. However, I have never had to foreclose. I attribute this to the fact that the borrowers put a lot of money down and have too much money tied up to just walk away.

(05-21-2014 12:19 PM)sammybiker Wrote:  

The return on your performing notes doesn't look bad, especially that it's truly passive income. The big question is: How much equity do your performing properties have? Given that they are mobile homes, I can only imagine it's not much (if any?). If they stopped paying, your recourse and end result would be:

1) Foreclosure (and all of the attorney fees that go with kicking someone out of their primary residence)

2) After said attorney fees and kicking this person out, you're left with a mobile home that is probably not worth the remaining balance of the note? Even if it is, you get to deal with renovation, selling it, etc...

Help me out here. 9% ROI is great for passive income. But you have to figure what your win/loss ratio is and what your quantifiable loss is. From the looks of it, even winning 9 out of 10, that one property that you have to foreclose on is going to wipe out the profits of several others...bringing your net cash on cash return down considerably...4-6%? And that's only if you can get by with no issues on 90% of your notes.

And when you're paying an attorney to kick someone out of their primary residence, you're no longer passive.

Looking forward to your feedback. I admittedly don't have any in-depth knowledge of this but from what I know, it's never appealed to me.

If you want true, passive income with lower risk, go into hard money lending. You're lending on properties that IF you had to foreclose, you're still making money. Worst case, you're breakeven/small loser. And the projects are typically 3-9 months. And your cash on cash ROI is much higher, typically 12-15% (annualized can be 20%+, depending on how fast you can get your money reinvested).

These are mobile homes, so there really isn't any equity to be had. If I had to take back the home, I'd just sell it again via seller financing. People that buy mobile homes have shit credit and are unable to secure traditional financing.

The one that I might foreclose on is a single family residence, so it's a little different. Yes, if I do foreclose it would be a bust. The borrower is current on his 1st mortgage so obviously he wants to stay in the home. Foreclosure would just be a means to open up a dialogue and work something out. Foreclosure is not the end goal.

Hope that answers your questions.