NUTS & BOLTS
NOTE INVESTING
LESSONS LEARNED FROM THIS “NOTE GONE BAD” LESSON LEARNED #1 ALWAYS GET A LOOK AT THE PROPERTY OR HAVE A TRUSTED PROFESSIONAL DO SO FOR YOU. The first time we ever saw the house was on Nov. 19, 2016 , seven months after we purchased the note. We were shell- shocked. The house was in horrible condi- tion with multiple holes in the walls, ceil- ings and floors. That day, we hired local realtors to sell the house “as is.” We had sold our two previous houses with realtors and this is what we were accustomed to. We set our sales price to take a small loss of approximately $2,500. Unfortunately, only one person even looked at the house over the next six weeks, so we took it off the market. However, the realtors went above and beyond to help make our lives easier by letting in utility workers and arranging contractors to make bids. Remember I noted earlier that the gas and water were not in service? We learned why. The borrowers had been stealing water from the next-door neighbor. The water meter was lying disassembled in the base- ment. The gas was disconnected because the house did not have a furnace or any heating source, despite freezing winter temperatures in Ohio and a large broken window. LESSON LEARNED #2 BE VERY CAREFUL WITH CONTRACTORS. Use a draw schedule with milestones and have someone you trust check that work is done well before you pay in advance. After pulling the house off the market, my next plan to was hire a contractor to repair the house so I could sell it at retail to an owner-occupant. I received four bids from four different contractors and chose a contractor that seemed the best fit. He had done similar projects before and was available immediately (in retrospect, this should have been a caution sign). I asked for three references, called them, and received
good reports. I interviewed him twice in person and twice more over the phone. The contractor began work in January 2017. He started off well and did good work from January through early March 2017. For example, he installed a hot water heater and a furnace which worked well. However, after that he did progressively less work and be- came increasingly harder to communicate with. I eventually realized he was lying and stealing fromme and ended up overpaying him by approximately $8,000. To prevent this, I should have verified progress more closely before “getting ahead” on payments. I ultimately fired him July 2, 2017 . I learned from this experience and took stock of the project. The first contractor had not repaired the front porch, which was very unsafe and a potential liability. I hired another contractor in a very limited capacity just to repair the front porch. This contractor did a good job, so I hired him to repair all the interior drywall. However, he injured himself on another job before he could start it. He communicated well, and I understood but was now back at square one. At least this didn’t cost me money! LESSON LEARNED #3 GOOD PROPERTY MANAGEMENT IS VERY IMPORTANT, EVEN IN NOTE INVESTING. Note investors do not usually have to deal with the nitty-gritty details of proper- ty management like “traditional” real estate investors do. It’s very possible for a note investor to buy a note and enjoy a healthy return without spending a single dollar in house repair. However, when you take pos- session of the house, it’s important to make sure certain activities are done properly. Immediately after taking possession of the house, I called the city and had the wa- ter turned off at the street. I also winterized the property. However, the water was not properly shut off by the city and the base- ment flooded. It cost me $500 to have the basement pumped out. The basement later flooded a second time after the first con-
My Series of Unfortunate Events Begins
MORTGAGE NOTE: Also referred to as a note. A written promise to repay a specified sum of money plus interest at a specified rate and length of time with a piece of property held as collateral. Failure to repay a mortgage note can result in foreclosure and repossession of the piece of property by the lender. Mortgage notes can be bought and sold like other assets. LAND CONTRACT: A form of seller-financing wherein a buyer makes payments to the real estate owner until the purchase price is paid in full. The buyer does not receive legal title until the note is paid off.
APRIL 2016
Purchased the note and began servicing transfer.
Case Study: ASeries of Unfortunate Events in
JUNE 30, 2016
Due to delays and oversights from the old servicer, the transfer took approximately 30 days longer than it should have. I minimized the delay through calls and emails or else it likely would have gone on much longer.
Note Investing A TRUE-LIFE LOOK AT A “NOTE GONE BAD” AND THE LESSONS LEARNED.
JULY 1, 2016
The borrowers missed their monthly payment. In fact, the borrowers never paid my company a single penny throughout the process!
by Bill Griesmer
hen I started note investing, I wondered how investors with ex- perience made it look so easy. Recently, I found the answer: experience from mak- ing a lot of mistakes. This is the story of a “note gone bad” and how I am a better note investor for it. W THE STAGE IS SET In April 2016, my company pur- chased a note in Zanesville, Ohio, from a hedge fund for $21,000. The note was performing when we bought it, mean- ing the borrowers were current on their payments. It is worth noting this was a land contract, which means the legal title remains with the lender until the debt is satisfied. We made two basic mistakes before we
even bought the note:
In this case, I used none of these. If I had, I likely never would have bought the note because the property needed extensive repairs. Not buying the note in the first place would have saved me a lot of difficulty.
MISTAKE #1 PURCHASING SIGHT UNSEEN
AUGUST 9, 2016
A home inspection was completed (from the outside only), and the home inspector noted that people could be seen inside the house.
Solution: Always, always get physical eyes on the property before you close.
MISTAKE #2 NOT CHECKING UTILITIES
Solution: Call utility companies before you buy a note. Before you close on buying a note, make a call to the local utility company to check the status of the water, electric or gas service. If these services are not connected, it’s likely the house is vacant or has even greater problems. In this case, the borrower did not have water or gas service. Why? Read on…
One thing that differentiates note investing from “traditional” real estate is that note investors buy assets all over the country. It is imperative to know the current “as is” condition and value of a property before you buy the note. Hire a realtor or doorknocker service or ask a local colleague to take a look at the property to verify the current value if you cannot get there in person.
AUGUST 20, 2016
We sent a Notice of Demand (NOD). This an official legal notice from an attorney and the first step to foreclosure (or eviction in this case since it was a land contract).
> Continued on next page
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