NUTS & BOLTS
NOTE INVESTING
Note Investing is the strategy of creating, servicing, buying, and/or selling mortgage notes or trust deeds secured by physical property.
ASimple, Passive Investment Strategy (Case Study) A CLOSER LOOK AT HOW TO INVEST IN PERFORMING REAL ESTATE NOTES.
by Bill Griesmer
t first, investing in notes may sound like a complicated strategy. In reality, however, if you do your due dili- gence correctly, note investing can be one of the simplest and most passive forms of real estate investing out there because it provides consistent monthly cash flow without the hassles associated with tenants. A Breakdown of the Basics A performing note is simply a mortgage where the borrower is paying consistently every month. When you buy the note, you look through the collateral file. You should be able to see the following: Unpaid Balance (UPB): the amount left on the loan Term: the number of remaining payments Interest Rate (IR): the interest paid on the borrowed money. Investors typically buy notes at a discount, which raises the investor’s yield higher than the IR on the note Monthly payment: investors collect the principal and interest payments Pay History: a record of how much and when pay- ments have been made.
STEP-BY-STEP DUE DILIGENCE FOR NOTE INVESTORS
If a note is performing , that means that the borrower is pay- ing on time and in full. Sounds like you’re ready to go, right? Wrong! You still need to do some due diligence to find out just how long that borrower has been making those payments.
For a performing note, ask:
1. How long is that borrower’s pay history? A third-party statement is better than information direct from the note-seller, since that party has the ability to alter that history to make the note look more attractive. 2. Does the borrower pay on time? Late payments often indicate a lower likelihood that the note will continue to perform. 3. What is the current state of the collateral (the property)? Work with a local realtor to get a fair market value of the current or “as-is” condition of the property. This is important for your security since if you have to foreclose, you may have to take the property back and re-sell it.
4. Are all taxes paid? If they are not, the county could take that property!
64 | think realty magazine :: september 2018
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