10 reasons not to buy a note
TRANSCRIPT
© NoteSchool 2013
10 Reasons NOT to Buy a Note
Bad Valuationv High Crime Area
Declining Markets / Codes wLengthy Foreclosure ProcessxTitle IssuesyLien PositionzAnalytics{Price Points|Trust but Verify}
Lack of Capital
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How to Evaluate & Due diligence
Bad Valuation
Look at Comparable SalesLook at size, room count,
locationDays on the market?
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BPO
Val
ue $
205,
000
$95,212 Price for NoteCost of Note
IRA Investor46%
Investment to Value ratio
Risk?
Bad ValuationExample 4Bd3Ba 3,100 Ft
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Evaluate & Due Diligence
Bad Valuation
Comp 1 – 1 block away, 3B/3Ba 1,800 Ft Sold $72K after 150 DOM
Comp 2– 2 blocks away, 3B/2Ba 1,900 Ft Sold $80K after 100 DOM
Comp 3– 1.5 blocks away, 3B/2.5Ba 2,000 Ft Sold $74K after 200 DOM
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Actu
al V
alue
$16
5,00
0
$95,212 Price for NoteCost of Note
IRA Investor57%
Investment to Value ratio
Higher Risk
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Market Value = $57,000
Buy Delinquent Note = $25,000
Anniston, AL3/1-Carport : 1,200 SF
v High Crime Area
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High Crime Area
BPO
Looks like a nice neighborhood…
v
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High Crime Area
BPO
vBPO – Broker Price Opinion
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Rated 9
Out of 10
www.BestPlaces.net
99
v High Crime Area
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High Crime Area
PROS• Nice clean neighborhood • Good rental $600/mo. • Possible seller finance
CONS • Weak public schools • Crime (zip code- 9)
Per Realtor (probably- 8)
v
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Declining Markets / Codes
Detroit, MI - Vacancy rate: 12.3%- Unemployment: 10 %- Detroit’s harder hit than most • Highest and lowest point, homes prices dropped 39%. • For every home listing on Trulia, nearly another three are
in some phase of the foreclosure
w
www.247wallst.com
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Declining Markets / Codes
Strict CodeEnforcementEvansville, IN
w
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Declining Markets / Codes
Tucson, AZ- Vacancy rate: 6.9%- Unemployment: 7 %
Similar to markets in Nevada and Florida, the Tucson, Ariz., area was hit very hard by the housing downturn. Housing prices fell 37.3%.
w
www.247wallst.com
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Declining Markets / Codes
Strict CodeEnforcementRichmond, CA
w
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Lengthy Foreclosure Process
ResourcesRealtyTrac.com
or CoreLogic.com
x
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Lengthy Foreclosure Process1. New York: 1,072 days 2. New Jersey: 931 days3. Florida: 858 days4. Illinois: 673 days5. Hawaii: 662 days6. Connecticut: 661 days7. Indiana: 603 days8. Pennsylvania: 580 days9. Maryland: 541 days10. New Mexico: 540 days
Top 10States forLongestProcess
RealtyTrac’s state-by-state statistics
x
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• Tax liens/Tax Sales• HOA fees• Utility Liens• Mechanics Lien• O&E Report Not
Insured
Title Issuesy
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Lengthy Foreclosure Processx
StopForeclosure.com
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y Title Issues
Sold at tax sale!
Buyer has no Ownership!
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Title Issuesy• Bad title can mean you have
no position• Reveals “surprises” that
increase expenses• Other liens like HOA, M&M,
Utility, etc.
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Lien Positionz
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Property taxes
YourNote1st
Says you get paid first…
Me First!!
JudgmentsMechanicsIRS Liens
HOA?
Stay behind 1st lien
notifyverify
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Property taxes
YourNote
$100,000
21
Lien PositionzFirst position lien is shoved into 2nd when property tax lien is
created.
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Property taxes
Lien Position
1st LienNote
JudgmentsMechanicsIRS Liens
HOA?
21 3
z
notify
verify
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Lien Positionz• Property tax liens take first position, moving
1st liens into 2nd
• HOA fees may not or may not be placed into 1st position. Research.
• Utility liens may not or may not be placed into 1st position. Research.
• Judgments, mechanics and IRS liens are subordinate to your first lien
Analytics / Rural
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Listed:$290,000
Charlo, MT4 Bd/4Ba 3,920 Sq Ft
1 Acre of Land
{
Would you buy this for a $100KDiscount of $190,000?
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Analytics / Rural
Charlo, MTPopulation 379Median Income:
$26,704
Unemployment rate in Charlo is 9.7% (US avg. is 8.6%)
www.BestPlaces.com
{
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Analytics / Rural
http://www.city-data.com/income
71% make less than $40K/yr
39% below poverty line
{
Analytics / Rural
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In the area: Avg. is 222
days on market
Twin Ln, Charlo, MT4 Bd/4Ba 3,920 Sq FtOn One Acre of Land
Zestimate: $224,600
{
Would you still buy this for $190K?
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Analytics / Traffic{
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Analytics / Traffic{
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Analytics / Traffic
http://www.plano.gov
{
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Analytics / Traffic
3Bd/2.5BaSingle
Family:2,214 sq ft$144,000
{Should you consider a house in this spot?
Coit Road in Plano
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Price Points
$350K - $650K
$125K - $350K
Under $125K
$650K +Asset Classes by Distressed Debt Industry Current
Value of Collateral
|
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Price Points
$350K - $650K
$125K - $350K
Under $125K
$650K +Cost of foreclosure
$25,000
|
Sell Low Price Band at Deepest Discount
Investment to Value Ratio
$45,000 - $65,000
$25,000 - $45,000
Under $25,000
$90,000 - $125,000
$65,000 - $90,000
Low Price Band . . Under $125K
| Price Points
10% - 25%
15% to 35%
20% to 50%
35% to 55%
40% to 60%
What Percentage of a Loan’s Balance do Loans Cost?
$350K - $650K
$125K - $350K
Under $125K
$650K +
Best BuyMost Buyer’s
10 – 25 cents
30 - 70 cents
40 – 65 cents
50 – 70 cents
| Price Points
Price Points
$350K - $650K
$125K - $350K
Under $125K
$650K +
Best BuyMost Buyer’s
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|
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Who Sells “Toxic” Loans? Lenders
Banks Credit Unions Mortgage Originators
Mortgage Service Companies Auctions On-line listings Hedge Funds
|
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Valu
e $
60,0
00
Note Investor Paid $10 K - $15K
Cost of Note
HEAVY DISCOUNT!
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Pricing LoansCollateral Value
Type of property Condition Location
State laws Area economy Comps
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Valu
e $
205,
000
$95,212 Price for NoteCost of Note
IRA Investor46%
Investment to Value ratio
Risk?
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Esta
blish
As-
IS V
alue
Discount
Price NoteCost of Note
Potential Profit
Cost of Foreclosure What Expense ?
What % ?
Non-Performing 1st Lien – Cincinnati, Ohio
Current “As-Is” Property Value = $30,000FTC DISCLAIMER: While these case studies are REAL DEALS that my students have closed recently, these results are
NOT typical. As with all courses, you should not expect to make this much money or any money with “how-to” advice.
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10495 Adamsville-Otsego Rd
New Concord, OH
Purchased Dec 2011House came with 1 acre
BPO 25,000
Cost of Note - $6,000Quick rehab over weekend- $1,500
Back taxes- $2,000Closing costs- $2,000
Total Cost $11,500 Sold in 60 days for - $38,000
$26,500 profit
All funded with “anxious money”
investor
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Non-Performing Notes
Modify
RE-Performing Note
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2303 Medina AveColumbus, OH
Purchased Jan 2012Owner offered a short
payoff
BPO was $25K
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Non-Performing Notes
Foreclosure
Cash
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$26,000 BPO
Augusta GABPO is $31,500 - UPB is $51,500
Paid $11,000 for the loan - $2,000 back taxes• Borrower might short sale• Locale Cash investor = 23K • 2nd Lien = Augusta Housing and Development. • Initiated foreclosure• Est values: $54k• Estimated market rent $700/m
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Non-Performing Notes
REO Property
Deed in Lieu
Foreclosure
Note or Cash or RentalCost of Note $15,500
?
BPOm45K
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Paid $9,500 for NoteNo Other Liens
• 4/2, 1800 sf • Zillow = $61,864• Comp for sale at
$150,000• Market rent $1000/m
Stone Mtn , GA
“I didn’t need a calculator to pull the trigger on this one!”
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Case Study – Anxious $ Deal
Property: Flower Mound Texas (Dallas/Ft Worth)
Current Market Value: $205,000
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What Determines Note’s Value?
History
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Good Payment Record
What Determines Note’s Value?
• History
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Good Payment Record
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Bad Payment Record
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2010 NA NA 0% 200
%100% 100% 100% 0% 100% 100% 0% 100%
2011 100% 0% 0% 0% 0% 0% 200% 117% 0% 140% 140% 100
2012 100% 100% 100%
Payment History of Borrower
Payment History: Owner had gotten behind due loss of job.
Story…
Hedge Fund bought huge group of loans – modified this loan & they started paying again
Re-Performing Case Study
Big house
Case Study
$138,000
% of ValueMax ITV = 40%
Loan Amount
Property Value
$100,000
Max paid for NoteInvestment to Value ratio
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Valu
e $
205,
000
$95,212 Price for NoteCost of Note
IRA Investor46%
Investment to Value ratio
Risk?
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Valu
e $
240,
000
$124,597 Price for NoteCost of Note
IRA Investor51%
Investment to Value ratio
Risk?
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Trust but Verify}• Check the seller’s information• Catching inconsistencies• Hedge funds will sometimes send out
a tape, and will try to slip in the crappy ones
• Do your due diligence
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Trust but Verify} “I am the principle”
What Seller Says
They are brokering it
You May Verify
D It appraises for $_____
They can’t send you that appraisal for some reason
D
“All the taxes are paid” Tax lien foundD
Cost of Note
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Budget for legal and some
workout for mod
Prop
erty
Val
ue
Price for Note
Budget for mod
Lack of Capital
Cost of Note
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Budget for legal and some
workout for mod
Prop
erty
Val
ue
Price for Note
Budget for mod
Lack of Capital
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$Budget for note
$$Budget for note
Water
Includes small legal, BPO some
overages
$$$Budget for note
Water
Taxes
$$$!Budget for note
Water
Taxes
F/C
Lack of Capital
Prop
erty
Val
ue
Price for Note
Cost of Note
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Budget for mod
Mod turned into taxes, water,
more legal and a F/C!
$$$ in “surprises”
Lack of Capital
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$Budget for note
$$Budget for note
Water
Includes small legal, BPO some
overages
$$$Budget for note
Water
Taxes
$$$!Budget for note
Water
Taxes
F/C
Lack of Capital
Prop
erty
Val
ue
Price for Note
Cost of Note
© NoteSchool 2013
Budget for mod
Mod turned into taxes, water,
more legal and a F/C!
$$$ in “surprises”
Lack of Capital