Mortgage Note Buying

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renue74
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Mortgage Note Buying

Post by renue74 » Wed Jun 03, 2015 9:07 pm

Does anyone have any experience purchasing mortgage notes? (Performing or non-performing)

If so, what are the key performance indicators and pitfalls?

Carefreeap
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Re: Mortgage Note Buying

Post by Carefreeap » Thu Jun 04, 2015 8:52 am

Are you talking about individual note buying or buying into a pool of mortgages?

Negatives of individual note buying is the quality of both the borrower, the security and interest rate risk (if rates go up). It's basically a very risky bond. You also have the risk of early pay-off if there's no pre-payment clause. Unlike institutional mortgages pre-payment clauses are allowed. An early pay-off not only means your cash flow is affected but you might have a big tax burden with a large mortgage pay-off.

Finally, do you have the courage to foreclose on a family that can't pay its bills? Because that very well could happen. Sure you can (and probably should) hire an attorney or professional Trustee service to make sure proper procedure is followed but it's still a very personal situation. And don't forget that the collateral could be severely damaged and you might need to make up senior loan payments and unpaid real property taxes.

Back in the early 80s we saw a lot of sales and note hypothecation because there were a lot of seller carry backs as a way to off-set the high interest rates. Most of these folks actually needed the cash and probably would have been better off discounting the property. But some did really well. A 10 year 14% second on a property you know well and are willing to recover could be a very lucrative situation.

FWIW I wouldn't do a carry back sale on any of my properties in this low interest rate environment for the above mentioned reasons. But I'd love to hear the back story on the investment you're considering.

renue74
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Re: Mortgage Note Buying

Post by renue74 » Thu Jun 04, 2015 9:07 am

Background: I have 3 rental properties that cash flow fine and I recently sold an office condo and did a seller finance deal, so I own a 25 year note, 6.875% on a $250K office condo in a really nice class "A" area. So I think I'm safe servicing that note, but you are right, the thought of early payoff is not good for me.

I went to a local REI meeting last night and the roundtable discussion was on note buying. I've never really considered that. Right now, I'm a buy and hold rental investor, but the local inventory is horrible.

So...I'm doing my due diligence on note buying. I have no deals in mind, but did peruse the FCI Exchange list of notes for sale last night. The number of of intangible metrics is a lot!

Carefreeap
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Re: Mortgage Note Buying

Post by Carefreeap » Thu Jun 04, 2015 9:57 am

renue74 wrote:Background: I have 3 rental properties that cash flow fine and I recently sold an office condo and did a seller finance deal, so I own a 25 year note, 6.875% on a $250K office condo in a really nice class "A" area. So I think I'm safe servicing that note, but you are right, the thought of early payoff is not good for me.

I went to a local REI meeting last night and the roundtable discussion was on note buying. I've never really considered that. Right now, I'm a buy and hold rental investor, but the local inventory is horrible.

So...I'm doing my due diligence on note buying. I have no deals in mind, but did peruse the FCI Exchange list of notes for sale last night. The number of of intangible metrics is a lot!


I've heard it's tough to finance small commercial properties so a seller finance may be THE way to sell an office condo. And emotionally it may be a lot easier to foreclose on a business than a family. Are you in 1st position?

Most of the note selling that was done back in the early 80s were seconds, some 3rds. I don't remember HELOCs being that common; mostly home improvement type loans. Today given how high prices have gotten (again) I'd be concerned about having enough equity behind a second and being able to service a large first. In my state (CA) foreclosure used to be a pretty quick process via Trustee's sale but now it's a minimum of 7 months; probably closer to a year. I can see even a $100k note being chewed up pretty fast between back payments, taxes, property damage, foreclosure and realty fees.

I think there are easier and less stressful ways of making money like an S&P index fund! :wink:

renue74
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Re: Mortgage Note Buying

Post by renue74 » Thu Jun 04, 2015 12:28 pm

I am in 1st position with the office condo note. I only started serving it in March and the new owner actually bought my office to expand the one she is in next to me. So it was a good deal for her as well. She owns a growing chiropractic practice.

I financed the whole $250K (100% property value) and she has already had contractors come in and renovate and tie the 2 offices together.

She has an SBA loan on her current office that was at 6.5%. You know how commercial loans, everybody loves to put the screws to you. My rate to her was 6.875% and I'm hoping with the eventual rise in rates that it will deter her from refinancing.

I remember when we bought the office condo in 2006, we got 6.875%...but I refi'ed in 2011 for 4.75%, which was a really good rate for commercial.

I think I'll skip note buying. It does seem like a big hassle if they become non-performing. At least with rental property (here in SC), the eviction process is only 30-45 days and pretty landlord friendly.

Carefreeap
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Re: Mortgage Note Buying

Post by Carefreeap » Thu Jun 04, 2015 3:28 pm

I don't know your asset allocation but if you're like me you're probably over invested in real estate (including the TD you carried back). If so you are wise to stay away from such a potentially risky investment.

jerrygarcia1
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Re: Mortgage Note Buying

Post by jerrygarcia1 » Fri Apr 15, 2016 12:35 pm

Just wanted to see if anyone else has bought real estate notes. Pros and cons? I read about the buying these in your ira and making enormous tax sheltered gains. It seems too good to be true.

Articles like this had me interested, but doing due diligence and value the boglehead opinions.
http://www.marketwatch.com/story/forget ... 2016-04-11

Thanks

MikeZ
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Re: Mortgage Note Buying

Post by MikeZ » Fri Apr 15, 2016 12:41 pm

I can't give specific advice, but instead I would suggest spending a few hours on your local clerk of counts website and do a search for all mortgages recorded and just filter out the ~95% that are the Fannie Mae mortgages and read over them. A lot of the scans I've seen include things like the interest rate, period, etc (unlike the conforming stuff). Look at the assignments too to see who is buying them and contact to discuss.

For example, doing that I learned about a local guy that is doing 10-12% hard money loans to flippers.

3DTV
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Re: Mortgage Note Buying

Post by 3DTV » Tue Nov 21, 2017 6:24 pm

Has anyone invested in Notes in the IRA? Love to hear about anyone with experience doing so.

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Abe
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Re: Mortgage Note Buying

Post by Abe » Wed Nov 22, 2017 5:35 pm

Yes, I have invested in mortgage notes for many years. I'm not actively buying paper now, but I still have a few mortgages that I receive payments on. It can be very lucrative. At one time my average yield was around 24%. Those days are over now. I started out reading Jimmy Napiers book titled "Invest in Debt" and I took his basic paper course. I would buy owner financed mortgages at discount. The discount plus the interest rate would give me very high yields. Later I started buying mobile home paper and I even bought some furniture paper which was a lot riskier. I came close a few times, but I never lost any money investing in paper.

Edited to add: Although I didn't do it, I had a friend who bought mortgages in his IRA. It is more complicated than a regular IRA. As I remember he had to have a special custodian and it was rather expensive for that, but he was making so much money on the notes that he didn't care that much about the cost.
Slow and steady wins the race.

denovo
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Re: Mortgage Note Buying

Post by denovo » Fri Nov 24, 2017 5:26 am

I figure banks can better assess risk and return than me, so I'll never do this. I think it's like a table, if you don't know who the sucker is , it's you.

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Abe
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Re: Mortgage Note Buying

Post by Abe » Fri Nov 24, 2017 12:24 pm

In the past I have posted on this forum about my experience buying mortgages at discount. I thought there might be some interest in it, but for the most part there is not. Most Bogleheads are not interested in anything except traditional types of investments like stocks, bonds, CD's or maybe rental properties. Some of the responses I get are: "It's too much work" or "It's too risky", etc. All I can say is that once you buy a mortgage there is not much work at all except for going to the post office and picking up the checks every month. Since I go to the the post office every morning anyway, I don't consider that to be much work. As far as risk, there is risk in everything. A lot of the risk can be mitigated if you do your homework and you know what you are doing. I'll admit I was skeptical myself at first, but I decided I would try one little deal just to see how it turned out. I figured the worst case would be that I might lose some of my money but probably not all of it. It turned out that I did very well so I just continued to buy mortgages after that thinking that if something really bad happened I would quit, but that never happened. So I guess my point is, to use a cliche, that there is nothing wrong with thinking outside the box. I'm not saying that everybody should invest in mortgages or any other investment, but don't automatically assume that an investment is bad without at least checking it out. You might be glad you did.
Slow and steady wins the race.

GibsonL6s
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Re: Mortgage Note Buying

Post by GibsonL6s » Fri Nov 24, 2017 3:36 pm

For a part of my career I was a hard money loan broker originating and buying paper for investors. I was mentored by a person I met doing my first few deals. This can be a great way to make money. Sadly most people loose money due to fraud as opposed to bad deals. I would be happy to discuss more via pm.

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