Part II: Non-Performing Note Investing 101: The Basics

In my most recent post I outlined some of the more common questions I receive when explaining that my company, Seasoned Funding, LLC invests in Non-Performing Mortgage Notes. (You can read that post by clicking here.)

Part II of the 101 Guide to Investing in Non-Performing Notes is focused on explaining how we invest in defaulted mortgage notes and summarizes what happens once we buy the note. As I mentioned in the first post, this is the 101 Guide to Investing in Non-Performing Notes and is meant to be a simple explanation for someone who is unfamiliar with this industry. If you enjoy what you read here or are interested in finding out more, take a look at some of our past posts or contact us to find out how to work with us in the future. We’ve had large amounts of training, education, and practice in this field and understand the in’s and out’s that aren’t explained in detail here.

Where do you buy these notes/assets? 

As trivial as it sounds, the average banker and most mortgage lenders have no idea that this niche of investing exists, nor can they point you in the direction of loan sales for their bank. It would be great if I could simply walk into a bank and ask for a list of their defaulted loans, but in reality only a handful of people from each regional/national branch handle the sale of notes (a small branch or bank may only have one person handling these sales).

With that being said, relationships can be built with the person in charge of bank NPN sales, but is typically done over phone or email and rarely has success. Most banks sell their assets in bulk (1-5 million +) to private funds that then sell them off for a slightly higher price to individual investors such as myself.

We purchase most of our assets from small private entities for around 35 – 55 cents on the dollar. Pricing expectations are typically based off of the Unpaid Principle Balance (UPB) or the Current Market Value (CMV) of the property securing the note.

Once you buy the note what happens next? 

This is a multifaceted process that can take on many shapes depending on the borrower’s current condition and needs. I like to boil down our “workout” options to 3 main strategies although there are many more:

  1. Modifying the Loan
    This means we take the current mortgage loan and promissory note and modify the terms to meet the borrowers current capabilities.  This can be a modification in term (timeline of repayment), raising/lowering the percentage of the previous/current interest rate, adding legal fees/arrearages (back payments), or doing a principal balance reduction.  The most important element in getting a successful modification is finding out why the borrower defaulted in the first place, and reassessing what they are capable of paying now.  *Modifications are a passive form of investment.  As cliche as it may sound, when we modify a loan and get the borrower successfully repaying, it is truly a win-win situation.  The borrower is able to stay in their home and build back their credit while we passively collect their monthly payments, including interest, over an extended period of time.  I also enjoy the fact that since we are not the “Home Owner” there are little to no responsibilities once the borrower/home owner is successfully repaying. No need to worry about repairs, maintenance, or vacancies. I love asking my inquisitors, “When you’re a homeowner and your toilet breaks do you call the bank to have them fix it?” No way! It is TRUE passive income!
  2. Deed In Lieu of Foreclosure (DIL)
    This exit strategy can be a great solution for homeowners who have moved on from their debt and are ready to leave it behind them. Often times the borrowers have already moved out or may have inherited an unwanted property/debt. A Deed In Lieu of Foreclosure is a deed instrument (a legal document that passes ownership, right, or interest to) in which the borrower grants the lender all interest in the real property. In return, the lender releases the borrower of their remaining debt. Essentially the lender gains title to the property in return for absolving the borrowers remaining unpaid debt. If a DIL appears to be the best option getting one can happen quickly and inexpensively. It can typically be written up by an attorney for around $300- $350. Many homeowners are unaware of this option and feel there is no other way out of their debt than foreclosure. A DIL can be a tremendous opportunity for both the borrower and lender. The lender is able to acquire the property at a much faster rate than traditional foreclosure (for much less cost as well) and the borrower is able to move on with their life, leaving their debt behind them! Not to mention, you do not have to report anything to credit bureaus or agencies as you would in a foreclosure that could further worsen the borrowers credit.Thus, a DIL option is not always the best solution. If a property has various liens or judgements (a lien that attaches to your property without your approval) providing a DIL can be an issue. Second mortgages, unpaid taxes, code violation liens, or judgements need to be taken care of prior to getting a DIL. If the borrower or the lender does not pay these or get a release, a foreclosure is the only way to “wipe” the debt from subordinate lien holders in order to clear title.
  3. Foreclosure
    When people hear that someone has defaulted on their mortgage, their initial thought is foreclosure. In most states, and this is definitely the case in Florida, foreclosure is a long, costly, and daunting experience. Luckily, on average, foreclosure is executed about 20% of the time as a means of an exit strategy. Foreclosure is typically carried out when the borrower simply has no desire to work with the lender in a modification or Deed in Lieu. It can also happen if a DIL is not a viable option. In this instance, the lender can initiate a “friendly foreclosure” in which the borrower does not contest (fight) the foreclosure. This greatly shortens the timeline of the foreclosure process. It is important to understand that every state is different and the process of foreclosure and laws vary from state to state. Knowing the laws of the states you are investing in is extremely important and no workout should be done without consulting an expert/attorney in that region or market.

After you modify the loan or get title to the property, what happens next? 

If a successful modification is produced, we hold the note in our portfolio, until the borrower satisfies (pays off) the mortgage in full, sells the property, or refinances. This could be 5 years from now or up to 30 years.

There are also many creative solutions that I won’t discuss in my 101 guideline such as partials or selling the note as a re-performer that can yield high return on investment (ROI) in shorter periods of time.

If I gain title to the property either by DIL or foreclosure I can sell the property on the retail market using a realtor or to an investor  for a “short term” cash-out. Another alternative is keeping the property as a rental or create an owner financed note to create a more “long-term” passive investment.

Either way, money is coming into my favorite bank, me.

What’s the catch? 

We’re typically asked “what’s the catch?” or “what’s the negative?” after explaining how we make a profit with non-performing notes. To be honest, there really is no “catch”. If your educated in the due diligence process and purchase the assets at the right price there very rarely is a negative side.

In our most recent investment, we purchased a note with two of our private investors in Orlando for $17,750. The property value was priced at $50,000 in great condition and $45,000 quick sale price. The unpaid balance (UPB) on the property is $62,950.

Because we bought the note at 36% of Current Market Value and 28% of the UPB there is an enormous amount of profit to make regardless of the exit strategy. THAT’S WHY THERE IS NO CATCH!

Image

So there it is. The 101 Guide to Investing in Non-Performing Notes. I hope this helps you have a clearer understanding of the basic aspects of investing in Non-Performing Notes.

If you’d like information or are interested in speaking with us about potential investment opportunities please fill in your information below

.

Non-Performing Note Investing 101: Understanding the Basics

Image

If you invest in real estate you’ve probably heard about this “new” investment strategy; Notes. Over the past few years, investing in Non-Performing Notes (NPN), has becoming increasingly well known. The recent surge in popularity is due to current market conditions. You can read more about why the current market lends is self to such success in buying non-performing notes by clicking here. Although this concept is new to some investors, note buying and investing has been around for decades and is really not that “new” at all.

I often find myself reading various posts from assorted blog platforms, social media sites, and company websites discussing different topics involved in note investing. There are numerous articles on the benefits of note buying, the risks involved, and topics such as “the top 10 things to know before buying notes” but amongst those great articles I struggled to find a post that did a good job of explaining note buying and investing in NPN’s using laymen terms.

My company is a privately funded investment group that works with individuals looking for a higher return on investment.  Some of these individuals have never invested in real estate before, and because of this I’ve had to develop an “easy” way to help our partners understand and feel comfortable with investing in non-performing notes. Now that I’ve built up my experience I wanted to share the basic process of investing in non-performing notes and some of the common questions or concerns I encounter in a manner that anyone can understand.

Now I know this is a simplified 101 Guide and there are a lot of caveats to this industry that a “new” investor needs to be aware of. I suggest that any interested party work with someone who is experienced and well versed in this area of investing before venturing out on your own. As I said before, the process outlined below is what I typically use when I meet with private individuals who are interested in working with our company, Seasoned Funding, LLC. There is a lot that goes into buying a NPN that can positively or negatively effect your experience in this industry and if you are not knowledgeable and prepared you can easily end up losing money or worse, your investors money.

With that being said, and without further adieu:

The 101 Guide to Non-Performing Note Investing!

Image

What is a note?

A promissory mortgage note is a signed document that stands as a promise to pay a specific mortgage loan. This document outlines the terms, dates, and requirements to fulfill the promise. 

Image

What is a mortgage?

A mortgage is a loan document that is secured by real property. This document is used as collateral for the promissory mortgage note, in essence it is the security for the promissory note debt (it gives the bank/lender the power to take your property in the event of default).

Image

Is a mortgage and a note the same thing? 

This is one of the most common areas of confusion for someone starting out and the answer is NO.

A mortgage and a note are two separate documents that reference the same property and loan, but outline very different things. A mortgage can be anywhere from 10 – 25 pages and outline important issues, rules, and regulations for both the lender and borrower. This can be anything from payment of principal, escrow, late charges, to taxes, insurance, the right of forbearance, and transfer of property of beneficial interest.

A note is typically a 2 – 5 page document that specifically outlines the terms on which the mortgage loan is written. This document explains the interest rate, term of the loan (typically 15 or 30 years), prepayment, time and place of payment, and explicitly states the obligations of the borrower in signing the mortgage (including in the event of default).

Basically, the mortgage references the responsibility of the property and the note references the payment of the loan.

Image

Why buy a mortgage note that isn’t paying?

This is a customary question I am asked after explaining what I do and I love getting the opportunity to answer this question.

My answer is simple; “Because buying a mortgage note that isn’t paying allows me to step into the shoes of the bank and find a more creative solution than a commercialized formal institution ever could. Sometime this means I modify their current loan and get them repaying, and sometimes this can be relieving them of their debt by getting a Deed In Lieu of foreclosure or through the foreclosure process itself.”

I also love adding the fact that I’m able to acquire these non-performing notes or assets for a deep discount, typically 35 – 55 cents on the dollar, leaving an enormous margin of profit no matter what my exit strategy.

If you found this post informational take a look at Part II of Non-Performing Note Investing 101.

The Power of 72: Prepare for Retirement by Making Money Work for You

The-Rule-of-72-poster

I first heard of the rule of 72 at my local County Chapter REIA monthly meeting. We had a guest speaker from a local Self Directed IRA Company, NuView IRA. I was excited to hear his presentation because I love hearing new ways to shelter and grow my wealth using alternative methods such as solo 401Ks and Self Directed IRA’s. During his speech he showed us a very odd-looking chart that had the numbers 1 – 65 on them. There were 7 consecutive squares of the chart blocked out in white instead of the bold blue color of the remaining 58 blocks. He began to explain what we were looking at and the “Rule of 72“, a simplified method that helps you determine the amount of time that would be needed to double your investment  (72/interest rate = time to double).

3211

“The most powerful force in the universe is compound interest” – Albert Einstein 

The 7 white blocks on the chart he showed us was demonstrating the doubling period or 7 years time it would take to double your money if you were receiving a 10% interest rate, which let’s be real – the average person is nowhere near receiving. The point of the chart was to emphasize how important time is when investing money.  With that being said, your age can greatly affect your ability to double your money or not.  The chart below should give you a better idea of that timeline.

rule-of-72

So let’s give an example. If you are 25 and you are receiving a 5% interest rate on the $100,000 you have in your IRA (which is a higher than average rate of return, even for investing in stocks/mutual funds). That means it would take you 14.4 years to double your money and you would have $200,000 in the IRA by the time you are 39. If you did nothing additional to the money and continued to receive that 5% interest rate, by the time you were at retirement age (65) you would have around $775,000 in your IRA. That’s not a bad amount of savings if you have a good pension plan with benefits from your previous employer. If you have no additional pension plan; with the average life expectancy rate rising, you will be living on a $51,000 year salary that will disappear at the age of 80 (15 years from retirement).

Can you imagine what your rate of return would be if you started with $100,000 at 5% interest at the age of 45, or 55…You’re ability to double your money is greatly diminished in return affecting your ability to retire at the age you desire.

So what’s the solution?

To be honest, there is none; but there are ways that you can grow your wealth at a much faster rate than the annual contribution limit (which is $5,500 for anyone under the age of 55) or from putting your money into a savings account (current national average 0.21%), CD (5 year CD average 1.34%), or  Mutual Fund/Stocks (current average yield 3.4%).

selfdirected-iraA Self-Directed IRA (SDIRA) is similar to a traditional IRA with the exception that you as the individual owner are allowed to choose and direct what investments you would like to pursue with your IRA such as real estate, gold, promissory notes, and even limited liability companies (LLC) or partnerships while receiving the traditional tax benefits such as tax deferment and even tax-free growth within your IRA.

When used properly, SDIRA’s can be an incredible vehicle for building wealth inside your retirement plan although there are regulations when using a Self-Directed IRA that should be closely followed and understood prior to making any investment decisions (you can see some of those rules and regulations by clicking here).

Our company, Seasoned Funding, LLC  is a privately funded real estate investment company that works with private individuals who often have money sitting idle in IRA accounts, 401Ks, or even saving accounts. After becoming an approved  investor, we assist the individuals in the process of rolling over their current IRA or 401K into a Self-Directed IRA. We then form a LLC or partnership with their SDIRA and invest in various forms of real estate such as residential and commercial properties and/or promissory notes.  We give the individuals the opportunity to build their wealth at a much faster rate by giving a higher than average rate of return on investment and it’s all done legally, passively, and tax deferred or tax-free. The IRA owner can make their annual contribution while putting their existing IRA money to work with a higher annual rate of return. The chart below is a great demonstration of how we work with SDIRA’s (click on it to make it larger);

self-directed-ira-1024x631

There are endless ways to build your wealth using solo 401K plans or Self-Directed IRA’s. There is no need to fear retirement when you can learn alternative methods for investing and can take control of your future. Check out our website to see how we are getting higher than average rate of returns for our partners.

*This is not an offer to purchase or sell securities. This overview is for informational purposes only and is not an offer to sell or solicitation of an offer to buy any securities, and may not be relied upon in connection with the purchase or sale of any security. Interest in the fund, if offered, will only be available to parties who are “accredited investors” (as defined in the Rule 501 promulgated pursuant to the Securities Act of 1933, as amended). Any offering will be made only to qualified prospective investors pursuant to a confidential offering memorandum and subscription agreement, all of which should be read in their entirety prior to investment.

CRM: The Key to a Businesses Success

Image

Have you ever gotten off the phone with a client and jotted down a quick note about your conversation or maybe something you need to follow up with, then a week later realize you’ve completely forgot about what you jotted down or lost the note completely? Do you have spreadsheet upon spreadsheet of contacts that you try to organize with important information, yet still feel your not reaching your clients to the best of your ability? Do you use 3, 4, or 5 programs to help you manage and run your email, online marketing, website, and social media outreach? If you said yes to any of the above take a second to read this blog and see how CRM is the answer to all of your problems and is essential to helping organize, manage, and build your business.

CRM is an acronym for Customer Relationship Management a system that stores and manages information about any and all contact made within your business. Whether you own a local dog grooming business or you’re a real estate investor like me, CRM is the key to your success.

Image

We began using a CRM system to help our real estate investment business run more efficiently and effectively about a month ago. We were tired of keeping track of phone calls, contact information, marketing emails, and the constant “to-do’s”. The system we had in place simply wasn’t working, and with our business growing at a rapid rate we knew something had to change.

Although CRM offers a number of solutions which can be seen above, the two components of CRM that I like the most are the Marketing and Sales components. These two components are crucial to our businesses success and in my opinion are the easiest to neglect or misuse without an efficient system in place.

The sales feature helps manage your client relationships, build profiles and keep track of your relationship as it grows. Profiles are built for each of your contacts and can be organized into various groups to help you manage your relationships. For example, I have 3 main groups; buyers, sellers, and partnering investors. Their individual profiles have their contact information, states what they are interested in purchasing/selling, where they are interested in purchasing/selling, and amount of capital they have to work with. You can also keep track of how often you contact them, how you contacted them, and what was discussed. This helps you keep record of the mandatory “3 points of contact” from the SEC (Securities and Exchange Commission). It also helps you target your leads and track your opportunities.

The second feature I find most useful is Marketing. CRM does a great job of encompassing all of the components to an effective marketing campaign and automatically managing it without constant support. You can create automatic emails to be sent (drip campaigns) such as monthly newsletters, monthly inventory request emails, or squeeze page responses. For example, prior to using Zoho CRM we were using the website host, Weebly to manage our website. We had a squeeze page on there that helped us capture interested clients information. We would receive in email to our gmail business account then have to send an email campaign from a third party marketing website, MailChimp. If we did not stay on top of this process, any leads that were generated from our squeeze page would be lost. In addition, we would need to keep a record of our new contact on an excel spreadsheet (profile) stating how we contacted them, their contact information, and anything else we felt was relevant. That’s a lot of work for only one lead!

CRM helps bring all of the aspects into one automated motion.  If someone fills in their contact information into our squeeze page (now generated by Zoho CRM that has been inserted onto our website) an automated email replies to them immediately after being filled out. In addition it automatically creates a profile for them that can be updated at any time if any pertinent information is communicated after.

The best part of our CRM system is that it’s created for real estate investors. I can set automated emails to the sellers after 30 days, and also receive reminders to send 2nd, 3rd, or 4th mail campaign letters or postcards to specific leads. In addition, I can store as much information on the person or the note/property as I need  including; Current Market Value, After Repair Value, Estimated Repairs, Property Appraiser Link, Back Taxes or Liens, and any other information I would find useful. I can also auto calculate my offer price using a formula within the system, so once the UPB or CMV/ARV is entered it automatically gives me an “offer price” and keeps track of when I submitted an offer or last contacted the seller.

I can also organize my contacts into different fields and subgroups, making my marketing drip campaigns deliberate and effective. For example if I have a deal in California I can locate my “buyers” group and send an email to only the buyers that have indicated they like to purchase in California. I can target my efforts to only those who are interested. The marketing system also keeps track of who my most active clients are. It tracks how involved they are with our business via drip campaign adds, personal or email contact, and rates them to help you better target your interested clients.

In addition, many of these systems offer additional resources like finance integration with QuickBooks, calendar management, reminders for “to-do’s”, automated follow up tasks, and tracking tools to see how your mailing campaigns, lead conversions, and closure rates are doing per month or per campaign.Image

If your tired of trying to keep track of who you spoke to and when, how often you stay in contact with various clients, or who is interested in purchasing what and where, I highly suggest looking into different CRM programs. Start helping your business grow by using an effective system that capitalizes on your relationships. After comparing various CRM programs, we decided to go with ZohoCRM because it best suited our businesses needs and we were working with the company, Only For Investors, which created a back end to make the CRM completely user friendly for real estate investors.  There are a number of other great resources that I suggest you explore before choosing your CRM system. Here are a few we explored before moving forward; InfusionSoft, SalesForce, HubSpot, Sage CRM, Green Rope. Most companies have a 30 day free trial that lets you explore their features and see what programs works best for you.

Google Adwords

I recently got a promotional card in the mail from Google Ads stating if I spent $50 on Google Ads, I would receive $150 in free advertising. I figured with that kind of deal, why not give it a shot? I mean hey, $200 worth of advertising for the price of $50…I can’t really go wrong.

Image

I started to build my Google Ad watching various video tutorials and reading side note suggestions and tips to help improve my ad from the google site. When I was finished I felt pretty confident in the end result and was excited to see how many leads would come from it. After just two days I had over 100 views to my website! I couldn’t believe that the traffic to my site was increasing at such a fast rate but was disappointed in the number of leads that came from it. Although traffic to my site increased, I had not gained a legitimate lead from it.

About two days later I attended a local meeting through my REIA, where I got the opportunity to speak with the owner of the nation wide wholesale company, IBuyHomes.com. He is not only an extremely successful real estate investor but has an incredible internet marketing system that organically brings him leads daily across the nation! After discussing my recent Google Ad I created, he started asking me questions about our use of “Negative words”,   and “traffic estimator”. I quickly realized that maybe I hadn’t created the “great” ad I thought I had.

He suggested I put an immediate pause on my campaign until I get the opportunity to read Perry Marshall’s book(s) on Google Adwords. I immediately went home and paused my campaign then downloaded Perry Marshall’s Ultimate Guide to Google Adwords and began reading it the next day. Needless to say I was doing everything wrong! I was initially paying per click with no limit as to who was clicking my link and how many times. Wether it was an actually lead or is was for an unrelated “negative” search tool. I don’t know why it surprise me that even with Googles “help” my ad was not a lead generator, but a marketing pit hole.

ImageIf you are are even attempting to create a Google Ad or have already created one without reading these books I urge you to stop and read this! Save your self some money and get the leads that will produce income, not the leads that cost you money!