10 Reasons Not to Buy a Note
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The document outlines key considerations in buying notes, highlighting ten reasons to avoid purchasing in high-crime or declining market areas. It emphasizes the importance of due diligence, including assessing comparable sales, title issues, lien positions, and lengthy foreclosure processes. The document includes various examples and analytics to illustrate the risks and potential profits associated with investing in non-performing notes.
10 Reasons Not to Buy a Note
- 1. 10 Reasons NOT to Buy a Note © NoteSchool 2013 Bad v High Crime Area Declining Markets / Codesw Lengthy Foreclosure Processx Title Issuesy Lien Positionz Analytics{ Price Points| Trust but Verify} Lack of Capital
- 2. © NoteSchool 2013 How to Evaluate & Due diligence Look at Comparable Sales Look at size, room count, location Days on the market?
- 3. BPOValue$205,000 $95,212 Price for NoteCost of Note IRA Investor 46% Investment to Value ratio Risk? © NoteSchool 2013 Example 4Bd 3Ba 3,100 Ft
- 4. © NoteSchool 2013 Evaluate & Due Diligence Comp 1 – 1 block away, 3B/3Ba 1,800 Ft Sold $72K after 150 DOM Comp 2– 2 blocks away, 3B/2Ba 1,900 Ft Sold $80K after 100 DOM Comp 3– 1.5 blocks away, 3B/2.5Ba 2,000 Ft Sold $74K after 200 DOM
- 5. ActualValue$165,000 $95,212 Price for NoteCost of Note IRA Investor 57% Investment to Value ratio Higher Risk © NoteSchool 2013
- 6. Market Value = $57,000 Buy Delinquent Note = $25,000 © NoteSchool 2013 Anniston, AL 3/1-Carport : 1,200 SF v High Crime Area
- 7. High Crime Area © NoteSchool 2013 BPO Looks like a nice neighborhood… v
- 8. High Crime Area © NoteSchool 2013 BPO v BPO – Broker Price Opinion
- 9. © NoteSchool 2013 Rated 9 Out of 10 www.BestPlaces.net 9 9 vHigh Crime Area
- 10. High Crime Area PROS • Nice clean neighborhood • Good rental $600/mo. • Possible seller finance © NoteSchool 2013 CONS • Weak public schools • Crime (zip code- 9) Per Realtor (probably- 8) v
- 11. Declining Markets / Codes © NoteSchool 2013 Detroit, MI - Vacancy rate: 12.3% - Unemployment: 10 % - Detroit’s harder hit than most • Highest and lowest point, homes prices dropped 39%. • For every home listing on Trulia, nearly another three are in some phase of the foreclosure w www.247wallst.com
- 12. Declining Markets / Codes © NoteSchool 2013 Strict Code Enforcement Evansville, IN w
- 13. Declining Markets / Codes © NoteSchool 2013 Tucson, AZ - Vacancy rate: 6.9% - Unemployment: 7 % Similar to markets in Nevada and Florida, the Tucson, Ariz., area was hit very hard by the housing downturn. Housing prices fell 37.3%. w www.247wallst.com
- 14. Declining Markets / Codes © NoteSchool 2013 Strict Code Enforcement Richmond, CA w
- 15. Lengthy Foreclosure Process © NoteSchool 2013 Resources RealtyTrac.com or CoreLogic.com x
- 16. Lengthy Foreclosure Process © NoteSchool 2013 1. New York: 1,072 days 2. New Jersey: 931 days 3. Florida: 858 days 4. Illinois: 673 days 5. Hawaii: 662 days 6. Connecticut: 661 days 7. Indiana: 603 days 8. Pennsylvania: 580 days 9. Maryland: 541 days 10. New Mexico: 540 days Top 10 States for Longest Process RealtyTrac’s state-by-state statistics x
- 17. © NoteSchool 2013 • Tax liens/Tax Sales • HOA fees • Utility Liens • Mechanics Lien • O&E Report Not Insured Title Issuesy
- 18. Lengthy Foreclosure Process © NoteSchool 2013 x StopForeclosure.com
- 19. © NoteSchool 2013 yTitle Issues Sold at tax sale! Buyer has no Ownership!
- 20. © NoteSchool 2013 Title Issuesy • Bad title can mean you have no position • Reveals “surprises” that increase expenses • Other liens like HOA, M&M, Utility, etc.
- 21. © NoteSchool 2013 Lien Positionz © NoteSchool 2013 Property taxes Your Note 1st Says you get paid first… Me First!! Judgments Mechanics IRS Liens HOA? Stay behind 1st lien notify verify
- 22. Property taxes © NoteSchool 2013 Your Note $100,000 21 Lien Positionz First position lien is shoved into 2nd when property tax lien is created.
- 23. © NoteSchool 2013 Property taxes Lien Position 1st Lien Note Judgments Mechanics IRS Liens HOA? 21 3 z notify verify
- 24. © NoteSchool 2013 Lien Positionz • Property tax liens take first position, moving 1st liens into 2nd • HOA fees may not or may not be placed into 1st position. Research. • Utility liens may not or may not be placed into 1st position. Research. • Judgments, mechanics and IRS liens are subordinate to your first lien
- 25. Analytics / Rural © NoteSchool 2013 Listed:$290,000 Charlo, MT 4 Bd/4Ba 3,920 Sq Ft 1 Acre of Land { Would you buy this for a $100K Discount of $190,000?
- 26. Analytics / Rural © NoteSchool 2013 Charlo, MT Population 379 Median Income: $26,704 Unemployment rate in Charlo is 9.7% (US avg. is 8.6%) www.BestPlaces.com {
- 27. Analytics / Rural http://www.city-data.com/income © NoteSchool 2013 71% make less than $40K/yr 39% below poverty line {
- 28. Analytics / Rural © NoteSchool 2013 In the area: Avg. is 222 days on market Twin Ln, Charlo, MT 4 Bd/4Ba 3,920 Sq Ft On One Acre of Land Zestimate: $224,600 { Would you still buy this for $190K?
- 29. Analytics / Traffic © NoteSchool 2013 {
- 30. Analytics / Traffic © NoteSchool 2013 {
- 31. Analytics / Traffic http://www.plano.gov © NoteSchool 2013 {
- 32. Analytics / Traffic © NoteSchool 2013 3Bd/2.5Ba Single Family:2,214 sq ft$144,000 { Should you consider a house in this spot? Coit Road in Plano
- 33. Price Points $350K - $650K $125K - $350K Under $125K $650K + Current Value of Collateral © NoteSchool 2013 |
- 34. Price Points $350K - $650K $125K - $350K Under $125K $650K + © NoteSchool 2013 |
- 35. Investment to Value Ratio $45,000 - $65,000 $25,000 - $45,000 Under $25,000 $90,000 - $125,000 $65,000 - $90,000 Low Price Band . . Under $125K | Price Points
- 36. What Percentage of a Loan’s Balance do Loans Cost? $350K - $650K $125K - $350K Under $125K $650K + | Price Points
- 37. Price Points $350K - $650K $125K - $350K Under $125K $650K + © NoteSchool 2013 |
- 38. Who Sells “Toxic” Loans? Lenders Banks Credit Unions Mortgage Originators Mortgage Service Companies Auctions On-line listings Hedge Funds © NoteSchool 2013 |
- 39. Value$60,000 Note Investor Paid $10 K - $15K Cost of Note HEAVY DISCOUNT! © NoteSchool 2013
- 40. Pricing Loans Collateral Value Type of property Condition Location State laws Area economy Comps © NoteSchool 2013
- 41. Value$205,000 $95,212 Price for NoteCost of Note IRA Investor 46% Investment to Value ratio Risk? © NoteSchool 2013
- 42. EstablishAs-ISValue Discount Price NoteCost of Note Potential Profit Cost of Foreclosure What Expense ? What % ? © NoteSchool 2013
- 43. Non-Performing 1st Lien – Cincinnati, Ohio Current “As-Is” Property Value = $30,000 FTC DISCLAIMER: While these case studies are REAL DEALS that my students have closed recently, these results are NOT typical. As with all courses, you should not expect to make this much money or any money with “how-to” advice. © NoteSchool 2013
- 44. 10495 Adamsville-Otsego Rd New Concord, OH Purchased Dec 2011 House came with 1 acre © NoteSchool 2013BPO 25,000
- 45. Cost of Note - $6,000 Quick rehab over weekend- $1,500 Back taxes- $2,000 Closing costs- $2,000 Total Cost $11,500 Sold in 60 days for - $38,000 $26,500 profit All funded with “anxious money” investor
- 47. 2303 Medina Ave Columbus, OH Purchased Jan 2012 Owner offered a short payoff© NoteSchool 2013 BPO was $25K
- 49. © NoteSchool 2013 $26,000 BPO
- 50. Augusta GA BPO is $31,500 - UPB is $51,500 Paid $11,000 for the loan - $2,000 back taxes • Borrower might short sale • Locale Cash investor = 23K • 2nd Lien = Augusta Housing and Development. • Initiated foreclosure • Est values: $54k • Estimated market rent $700/m
- 51. Non-Performing Notes REO Property Deed in Lieu Foreclosure Note or Cash or Rental Cost of Note $15,500 ? © NoteSchool 2013 BPOm45K
- 52. Paid $9,500 for Note No Other Liens • 4/2, 1800 sf • Zillow = $61,864 • Comp for sale at $150,000 • Market rent $1000/m Stone Mtn , GA “I didn’t need a calculator to pull the trigger on this one!” © NoteSchool 2013
- 53. Case Study – Anxious $ Deal Property: Flower Mound Texas (Dallas/Ft Worth) Current Market Value: $205,000 © NoteSchool 2013
- 54. What Determines Note’s Value? History Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Good Payment Record © NoteSchool 2013
- 55. What Determines Note’s Value? • History Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Good Payment Record Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Bad Payment Record
- 56. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010 NA NA 0% 200 % 100% 100% 100% 0% 100% 100% 0% 100% 2011 100% 0% 0% 0% 0% 0% 200% 117% 0% 140% 140% 100 2012 100% 100% 100% Payment History of Borrower Payment History: Owner had gotten behind due loss of job. Story… Hedge Fund bought huge group of loans – modified this loan & they started paying again Re-Performing Case Study
- 58. $138,000 % of Value Max ITV = 40% Loan Amount Property Value $100,000 Max paid for Note Investment to Value ratio
- 59. Value$205,000 $95,212 Price for NoteCost of Note IRA Investor 46% Investment to Value ratio Risk? © NoteSchool 2013
- 60. Value$240,000 $124,597 Price for NoteCost of Note IRA Investor 51% Investment to Value ratio Risk? © NoteSchool 2013
- 61. Trust but Verify © NoteSchool 2013 } • Check the seller’s information • Catching inconsistencies • Hedge funds will sometimes send out a tape, and will try to slip in the crappy ones • Do your due diligence
- 62. Trust but Verify © NoteSchool 2013 } “I am the principle” What Seller Says They are brokering it You May Verify D It appraises for $_____ They can’t send you that appraisal for some reason D “All the taxes are paid” Tax lien foundD
- 63. Cost of Note © NoteSchool 2013 Budget for legal and some workout for mod PropertyValue Price for Note Budget for mod Lack of Capital
- 64. Cost of Note © NoteSchool 2013 Budget for legal and some workout for mod PropertyValue Price for Note Budget for mod Lack of Capital
- 65. © NoteSchool 2013 $ Budget for note $$ Budget for note Water Includes small legal, BPO some overages $$$ Budget for note Water Taxes $$$! Budget for note Water Taxes F/C Lack of Capital
- 66. PropertyValue Price for Note Cost of Note © NoteSchool 2013 Budget for mod Mod turned into taxes, water, more legal and a F/C! $$$ in “surprises” Lack of Capital
- 67. © NoteSchool 2013 $ Budget for note $$ Budget for note Water Includes small legal, BPO some overages $$$ Budget for note Water Taxes $$$! Budget for note Water Taxes F/C Lack of Capital
- 68. PropertyValue Price for Note Cost of Note © NoteSchool 2013 Budget for mod Mod turned into taxes, water, more legal and a F/C! $$$ in “surprises” Lack of Capital
Editor's Notes
- #3: Could put in a few words about the assessed value, using the pointer (red arrow) to show where you’re looking. Copy paste the shape to point to other sections of the BPO.
- #5: Could put in a few words about the assessed value, using the pointer (red arrow) to show where you’re looking. Copy paste the shape to point to other sections of the BPO.
- #18: Alternative slide
- #21: Alternative slide
- #22: Slide piggybacks the Title issue slide and shows them a tax lien moving to 1st position, etc. Could go into the different lien positions and what they mean as far as getting your money, foreclosure options, etc.
- #23: First scenario: First position lien is shoved into 2nd when tax lien is created. Could put loan amt i.e. $100,000 for 1st/$1,000 tax lien to emphasize impact.
- #24: Scenario #2: Second position lien is shoved into 2nd when tax lien is created.
- #25: Scenario #3 includes other liens that may not be removable…
- #40: Maybe Jeanna can build a quick fade from the short sale and foreclosure sale down to what the note buyer paid?
- #45: This gem was purchased for $9K in December,2011. This is about 30 minutes from our offices so we are very familiar with this market and liked that the house came with 1 acre.
- #46: This property is an hour from where we are so we decided to do a quick rehab on the house. We sent our crew up there for a weekend and put for sale signs in the yard and on the corner of the street. Sunday evening I got a call on the property and a week later, that guy signed a purchase agreement for $38K. He was preapproved with FHA/USDA financing and we are hoping to close next week. There were $2K in back taxes, we have around $1500 in the rehab and we gave the buyer $2K for closing costs. When it closes we will have made a $26,500 profit.
- #48: Purchased in January, 2012 for $2,000. When we evaluated this deal, we saw in the collateral package that this lady was offered a short payoff of $20K. There was another letter in the collateral package where she tried to pay it off but the offer date expired. Soon after, GMAC sold the loan. We thought that we could call her up and there would be a very good chance that she would pay this off for the $20K if we offered that deal to her. This was kind of the redeeming factor for us along with the fact that she had lived in this house for 30 years and probably had some emotional equity in it. After we received the collateral package, we sent the service transfer letter along with the welcome letter. We had a good phone number and email for her so I called a couple of times and she returned my call but was very skeptical of me. I calmed her down and told her that we would honor the GMAC short payoff offer or we could modify the loan.
- #50: Kondaur called me on this deal on a Thursday in early March and told me that there was fire damage in this house, it’s vacant and will go to the foreclosure sale at the end of March (March 28th) and they would sell the note for between $20K-$40K. I saw the picture and pulled it up on the auditor’s website to find out that it was built in 2005 and had a tax value of $210K.
- #61: Where did the 65% ITV come from?
- #64: Show more fees and “surprises” adding to the budget
- #65: Show more fees and “surprises” adding to the budget
- #66: Person can buy the note for… then miscalculated expenses add up…Fill in unforseen fees. Use the spreadsheet to show budget difference
- #67: Show more fees and “surprises” adding to the budget
- #68: Person can buy the note for… then miscalculated expenses add up…Fill in unforseen fees. Use the spreadsheet to show budget difference
- #69: Show more fees and “surprises” adding to the budget