History/Overview
A note is a legal document that obligates a borrower to repay a loan at a specified interest rate during a specified period of time or on demand; sometimes also referred to as promissory notes or mortgages. Notes can be associated with just about anything that can be bought and sold – houses, mobile homes, land, cars, boats, condos, consumer electronics, rare books, coins, stamps, antiques, home improvements…the list is almost endless. For our purposes, we will focus on notes attached to real estate, generally referred to as mortgage notes.
A mortgage note is the promissory note associated with a mortgage loan; it is a written promise to repay a specified sum of money plus interest at a specified rate. While the mortgage itself pledges the title to real property as security for a loan, the mortgage note states the amount of debt and the rate of interest, and makes the borrower who signs the note personally responsible for repayment.For the most part, it is the mortgage note which determines the "type" of mortgage, and the varying types have an affect on the amount repaid and the timeline of the repayment.
Types of mortgages:
If the note has a fixed interest rate and payments, then the loan is a Fixed Rate Mortgage (FRM) loan- A fixed interest rate with adjusting payments is a Graduated Payment Mortgage (GPM)
- A floating interest rate and payment amount indicates an Adjustable Rate Mortgage (ARM)
- An amortization schedule longer than the maturity date indicates a balloon payment mortgage
- When the payment schedule calls only for interest and no principal, thus leaving behind the full principal due at maturity, the loan is an interest only loan
- A payment adjustment frequency less than the interest rate adjustment frequency implies a mortgage which allows for negative amortization
Notes are created by banks, and by individuals. Banks hold first and second mortgages (notes.) Over the last 30 years many sellers and businesses have taken back first and second mortgages on property they have sold.
Notes are sold for several reasons, including:
- To raise cash -
- For servicing – some individuals/companies create notes, but do not have servicing capabilities
- To mitigate risk – some individuals/companies are only set up to service performing notes; when a note is non-performing, the note is sold to mitigate risk; there are specific companies specialized in servicing the non-performing notes, with the specific goal in curing them back to performing.
Such notes have a FACE VALUE (the unpaid principal), an INTEREST RATE at which the note is being paid and a TERM (the amount of time left before it is paid off). Buying, selling and trading notes has become big business, and many investors are creating great wealth with this strategy. Due to the "time value" of money which assumes a dollar today is worth more than a dollar at some future time, notes are sold at discounted rates- usually at 60-75 cents on the dollar! Like bonds, mortgage notes offer investors a stream of payments over a period of time. When notes are purchased at a discounted rate due to the time value of money, there is built in equity created immediately, and to improve upon this position even further, every month payments will be made to the owner of that note…creating a monthly cashflow, with no hands-on effort!
Investors – who invests in mortgage notes and how do they do it? Mortgage Note buyers are companies or investors with the capital to purchase a mortgage note. If someone is holding a private mortgage, these investors will give cash and take over receiving the monthly payments that were being paid to the previous owner. A Mortgage Note for these investors are home loans or mortgages that are secured by real estate. Mortgage notes could be anything from $10,000 to $1 million or even tens of millions of dollars. Anyone can be a mortgage note buyer, but there some hurdles to overcome.
Barriers to Entry
Notes are not cheap. They cost thousands, often tens of thousands, or even millions of dollars. Most note brokers, companies who sell notes, will only offer their notes in "bundles;" meaning that in order to have access to the discounts, you must purchase a large group of notes. Clearly this takes a great deal of capital. Mistakes can be very costly. The problems for a newcomer are obvious. Unless you have piles of cash, how do you start? How do you become experienced without making a mistake that could cost you dearly?
Two Pitfalls
There are two pitfalls waiting for the unwary. Some people rush out and buy paper without knowing what they are doing. They have just read a book, attended a seminar or heard a taped course, they get all excited and buy the first note they see. These people quickly get into trouble.
The other pitfall is the "paralysis of analysis." Some people read all the books, take all the seminars, study all the tape courses, but never buy any notes. All they are doing is spending money on an intellectual exercise. They are afraid to take any action.
Finding Notes
The first challenge you will face is how to find notes. Broadly speaking, there are two approaches to finding notes. One is to look for individual note holders. A second is to market your business.
Advertising
The first approach, locating individual note holders, is centered around advertising. Note buyers (I'll be using that as a generic term for both note investors and note brokers) use every kind of advertising method available to them, although every note buyer does not use every method, of course. Examples of advertising methods are: direct mail (including courthouse research), newspaper display and, more commonly, classifieds, Yellow Pages, flyers, brochures, "specialty" advertising (that's the term for things like t-shirts, pens, hats, paperweights, etc., etc. imprinted with your message), even billboards, radio and TV. No doubt you have seen the TV ad campaigns run by some of the large institutional investors aimed at people who own structured settlements, lottery winnings and mortgages. Judge Wapner was even a spokesman for one of them.
I am not a fan of advertising for note sellers, for the simple reason that it brings pitifully few responses and costs a lot of money. You are better off spending that time and money networking and creating your own notes.
Direct Mail
What about Direct Mail? I was told by someone who sells mailing lists of noteholders that note brokers often ask him if they can rent 100 or 500 names. That is a total waste of money. Even the very best direct mail campaigns to a list of this type rarely if ever receive more than a 5% return. And that's when the pros design the package. When it's designed by someone who doesn't know the arcane secrets of successful direct mail marketing -- and there are many -- the
return will fall to 2%, 1% or even less. Do the math: if you only end up buying 1 out of 20 notes you see (and that's a good average for a new note buyer), and you send 500 letters, and you hit pay-dirt and get a 2% response, how many notes will you buy?
Networking
Targeting individual note holders can work if you have the money and knowledge of advertising (or can afford to hire a pro) to pull it off. Most people don't come into the business with both of those assets, particularly the latter.
The second approach is to market your business, a.k.a. "networking." Instead of establishing a goal to target individuals who might be holding notes, the goal of networking is to target certain people whose clients and contacts are people who hold notes. In the words of Hank Harenberg, the hands-down expert in this technique as applied to the note business,
"The theory behind it (networking) is simple and powerful. We contact the businesses that have the clients that we want and convince them to help us contact those clients. Suppose you are a business with a thousand customers. If I make presentations to ten businesses like you, I've touched 10,000 people by calling on ten people."
Networking does not depend upon advertising. It involves a lot of personal contact: one-on-one meetings with people, making presentations to groups both small and large, writing articles for trade publications, attending and even speaking to trade conventions, etc.
Who are the types of people you should target in your networking? Well, who are the people who might know noteholders? When you think about it that way, the answers start flowing: Real estate agents. People in title companies. Lawyers (think real estate settlements, divorces, estates and tax planning). Accountants. Bank trust officers. Who else can you think of?
The principal advantages to networking are that it produces long-term results and it is far less costly than advertising. The major drawback is that it takes a long time to establish the relationships that keep the notes coming in.
PropertyVestors Approach
As you can see, finding discounted notes can be quite labor intensive. In many cases, it may be wise to be a part of a group that purchases these notes together. You then have access to the knowledge of the group, you can get larger discounts because the group can buy in bulk (buying power), your investment is spread across multiple notes (diversification), and you will have the assistance of the group to maintain and service the notes.
PropertyVestors is an international real estate investment group that offers a discounted notes program to it's Premier Members. After researching the various ways to approach note buying in order to address the needs of our Premier Members, PropertyVestors has established a partnership with a top performing note purchaser in order to minimize risk and maximize returns. We investigated only companies that had been purchasing notes for over 20 years had a servicing arm that has a strong track record.
Please keep in mind that the approach outlined below is for our Premier Members that are "accredited investors" only. Our current opportunity is outlined below.
1 – Non-performing mortgage notes are purchased in bulk by a banking "insider"
- 1st Position mortgage
- 80% of home value at time of purchase (the home may have appreciated substantially, depending on the age of the loan)
- Purchased at a discount
- The loans are "scrubbed" and check for legitimacy.
2 – A package or "pool" or notes is sold to private investors
- Pools are sold to private investors at between 50 & 60 cents on the dollar
- Prices run between $5 million and $1 billion or more in sales price
- The investment is secured by real estate valued at approximately 44% Loan to Value (80% 1st mortgage @ 55 cents on the dollar = 44%)
- The servicing company services the loan using non-adversarial tactics to get the occupant paying again.
3 - The loan is modified to make it easier for the occupant to resume payment
- The interest rate may be lowered
- Late fees or other charges may be forgiven
- ARM's can be changed to fixed rate, interest-only loans
- The occupant is taken through credit repair so they can refinance in 1-2 years
4 – The investor receives cashflow until the loan is refinanced.
- Cashflow from modified mortgage payments is remitted to investor through the servicing bank.
- Cashflow equals interest on FULL LOAN AMOUNT
- Once the borrower's credit is repaired, the loan is refinanced and the investor receives the entire loan balance
- In the case of individual loans that cannot be repaid, they are re-sold at a profit.
- The investor has the ability to request the following exits on any of their loans that don't perform:
o Deed in lieu of foreclosure
o Deed in lieu of foreclosure plus cash to get the occupant relocated
o Sell the note back into the market
- The investor will be able to log into a secure website and check their loan portfolio and check their loan portfolio to see which loans have been paid off
Process –
- Visit http://www.propertvestors.com/ to research further on our investment group, get access to our free report "Capitalizing on Real Estate in Today's Economy", and join as a Premier Member to get access to profitable opportunities. The annual cost for membership is $245.25 annually.
- Investor completes Proof of Funds document and has their funds verified by an independent bank.
- The investment bank finds and "scrubs" an appropriate pool of notes.
- Investor is notified of the next pool in their price range.
- Investor opens escrow account. (No money is taken from escrow until settlement. If settlement does not occur, escrow is returned)
- Investors receive pool information (mortgage notes, deeds, etc.) and conducts their own due diligence.
- Contracts executed, settlement completed and funding occurs.
- The servicing company services notes and sends checks to Investor.
- Investor uses secure website to track status of notes.
Build a Discounted Note Fortune with Smart Strategies from PropertyVestors
PropertyVestors is an investment group of CEOs, entrepreneurs and savvy real estate investors that are taking active steps to maximize their profits, while minimizing their risk by creating a diversified real estate portfolio. Investors are able to easily apply diversity in real estate geographically and by asset class through its various investment strategies and types of inventory.
Furthermore, PropertyVestors enables investors to capitalize on different market conditions. The strategies include conservative, private lending options; moderate with preconstruction syndication; and aggressive with developer deals in emerging markets, coastal regions and waterfront properties.
With PropertyVestors, you can take advantage of a new investment model and innovative real estate strategies. Education is also provided on how to take advantage of 1031 exchanges. PropertyVestors' real estate strategies and ongoing education can position you build your net wealth, while minimizing risk.
To learn more about these topics, visit www.PropertyVestors.com, sign up with the investment group by becoming a Premier Member for $245.25 annually and receive our eBook: "Capitalizing on Real Estate in Today's Economy." For general information about PropertyVestors or its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.
About The Author
Sarah Barry is the founder of PropertyVestors (http://www.propertyvestors.com/). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk. Access to PropertyVestors' three smart real estate strategies enables investors to achieve double to triple digit returns on their real estate investments.
