Posted by IB (NJ) on November 16, 2006 at 24:00:31:
Hi Brian.In addition to the answers you get here you may want to also post this on the ‘Cashflow’ board:
Buying discounted notes - Posted by Brian_wa
Posted by Brian_wa on November 15, 2006 at 23:34:03:
An investor offered to sell me a note secured by a deed of trust, with a 1 year balloon, at a discount. Based upon what I could tell, he lend the money to a distressed homeowner and set up a deed of trust plus the promissory note (this note is in 2nd position). The note face value states $25,000 with 12% APR. He wants to sell it to me for 22k, which makes the effective APR much higher than 12% of course. This note is a performing note and he has proves to show that the borrower has been paying for this note, which was created about 2 months ago. The 1st is also current as of now.
Based on the return rate and the combined LTV, I feel comfortable buying it. However, I’d like to know whether there are things I should be looking out for… For instance, if this guy created the note for 25k but in truth gave the borrower only 20k, what would happen?
Please help. He has a lot of such opportunities and I have available capitals but not sure how to proceed properly.
Thank you for your help!
Brian
Re: Buying discounted notes - Posted by Jim FL
Posted by Jim FL on November 16, 2006 at 21:44:41:
Brian,
As others have said, paying $22k for this note, would be to over pay for it.
I bought a second last year, with a face value of $25k, for $2500.
It was 6 months old, and had been paid on time for the entire life of it, even though that was short.
The thing was, there was $40k in equity behind it, solid equity.
Two months after buying it, the barrower on the note called me saying they could not afford the house any longer.
They said they saw on my letterhead that I buy houses, and wanted to know if they could deed it to me, instead of having me foreclose.
I paid them another $1500 to move.
The place was in great shape, and with the payment on the second extinguished, it cashflows REALLY well as a rental.
I also own a few seconds, from properties I sold, and carried back some of my profit, to help get them closed easier.
Frankly, my real profit, came out and left the note as a bonus.
Thankfully they perform, but, it’s gravy in my mind.
You CAN do better than this one,
Jim FL
Re: Buying discounted notes - Posted by Bill H
Posted by Bill H on November 16, 2006 at 13:07:51:
Brian,
In additon ot all the other advice that the posters gave…this smells a bit fishy to me…how do you know that the “distressed Owner” did not get just enough to pay the first few notes and will be back in “over his head even more” shortly. 2 months is certainly not a well seasoned note.
Good Luck,
Bill H
Re: Buying discounted notes - Posted by Sailor
Posted by Sailor on November 16, 2006 at 09:50:34:
This is not a good deal for you. There are lots of much better
notes available. If this is your 1st paper deal, I recommend you
buy a less expensive partial so that the seller is motivated to
collect the $$$ himself–some for you, some for him. I also
require full recourse; i.e. the note seller has to guarantee to me
that if the borrower defaults, the seller still pays me the full
amount.
There are some real pros on this site you can assist you in finding
good paper deals (I’ll send your the names of some folks off-list).
I suggest you check the Ca$h Flow Forum + the MH Forum. I
stick to MH homes for my own paper investing because the
returns are so high. Start small, maybe $3500, then you can
spread your risks over several notes. ALWAYS require full
recourse. If you haven’t read Lonnie Scruggs “Taking the Mystery
Our of Money,” that should be your 1st investment (a mere $30).
Plan to read it 6 times in the 1st 60 days & keep it on your desk or
bedside table as a ready reference.
Paper is a profitable part of my own investment strategy, but it
can be a quick way to love your nest egg if you don’t do it right.
Start small, start smart.
Good luck!
Tye
Re: Buying discounted notes - Posted by Levi
Posted by Levi on November 16, 2006 at 09:03:50:
2nd liens behind a large first have little value. No one in the note industry would pay anywhere near $22k for that note unless there was a very strong equity position.
HUD Statement available? - Posted by Wayne-NC
Posted by Wayne-NC on November 16, 2006 at 07:25:05:
First of all, how was this loan closed and by who? There should be an attorney or a title company escrow involved somewhere. Secondly, check out the past credit and credibility of the borrower. Ask the investor what he has as far as a credit report is concerned. Lastly, is the note interest only, amortized? Over what period? For our curiousity, what is the CLTV? What is the condition of the collateral and its’ position in the market. Top, bottom, rising, declining?