Posted by David P. Butler on September 03, 2003 at 18:31:07:
Hey… remember the most important principle we consistently repeat here… the first rule of investing is “Know What You Invest In”.
Given the types of questions you are asking, I can’t urge you strongly enough to spend some time learning much more of the fundamental basics of note investing! And even more so if looking to purchase junior position paper! More on that in a minute…
First, let’s take a quick look at your deal here…
When analyzing junior position notes, you need to cover all the same ground that’s been covered here in the Forum in many threads, for all notes. The basics… so to speak…
First, you need to find out all about the note itself. As you can see from the list below, there is nothing too complicated about this, right? Nothing more than a little common sense. You are just asking the seller what he has for sale.
What kind of property is it?
When did the property sell?
What is the property worth now?
How much did the property sell for?
What was the Payor’s down payment?
What was the Payor’s credit score?
What was the original balance?
What is the interest rate on the note?
What was the original term of the note?
What position is the note in?
What is the remaining balance on this note?
How many payments has the Payor made?
When was the first payment made?
When was the last payment made?
How many payments are remaining?
Are there any balloon payments?
What is the balloon payment, and when is it due>
Is the note current right now? (no delinquent or unpaid payments still outstanding)
Has the Payor missed any payments?
Have there been any modifications to the note?
Have any payments been forbeared?
Any special concessions made to the Payor?
What is the Payor’s employment/income history?
Are there other loans on the Property? (if so),
What position are they in?
What is the balance owing on other loan(s)?
What are rate and terms of other loan(s)?
Are there any balloon payments due on other loan(s)?
Then you look at the obvious factors that are going to come into play with a junior position note. You need to know everything about the underlying debt that is ahead of your investment. Rate, terms, status? Assumed or new?
What is combined-loan-to-value? Is there sufficient equity to protect your investment in event of default? Are you financially capable, and mentally comfortable with the idea of having to sink money into riding out a foreclosure and resale of property to recover your invested capital?
Once you gather this important information, you run the numbers yourself, to make sure they make sense. Right now, we already pointed out one anamoly. Seller claims 28 payments made, but only 19 scheduled payments have passed on the calendar. Might be a logical explanation for that - but what is it? You need to find out, right?
If the numbers don’t work out right… interview the seller again. What the heck have you got there? The minute we see the numbers are not matching up, we need to get back with this Note Seller, and find out exactly what the heck he is selling, BEFORE we do anything else.
Now, back to the basics. You can learn an awful lot of fundamentals, simply by searching the archives of previous discussions right here in this Forum, by using keywords such as “note clauses”, “creating notes”, “what makes a note salable”, “note grading & pricing guidelines”, “seconds”, “2nds”, and similar terms, for your searches.
My favorite book on the subject of learning about notes and seller financing, is Bill Broadbent’s & George Rosenburg’s OWNER WILL CARRY. Several other very good books and courses are available right on this website, including Terry Vaughan’s “Paper Into Gold”, and John Richards’ “Profits In Discounted Notes”, both of which can be located at:
You’ll do yourself a huge service by investigating all of these resources BEFORE you invest one cent in a note deal! And best wishes for your success!
David P. Butler