10 reasons not to buy a note

© 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

© NoteSchool 2013

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

© NoteSchool 2013

Actu

al V

alue

$16

5,00

0


IRA Investor57%


Higher Risk

© NoteSchool 2013

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

© NoteSchool 2013

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

© NoteSchool 2013

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

© NoteSchool 2013


Strict CodeEnforcementEvansville, IN

w

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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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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

© NoteSchool 2013

• 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

© NoteSchool 2013

Property taxes

YourNote

$100,000

21

Lien PositionzFirst position lien is shoved into 2nd when property tax lien is

created.

© NoteSchool 2013

Property taxes

Lien Position

1st LienNote

JudgmentsMechanicsIRS Liens

HOA?

21 3

z

notify

verify

© NoteSchool 2013

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

© NoteSchool 2013

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?

© NoteSchool 2013

Analytics / Rural

Charlo, MTPopulation 379Median Income:

$26,704

Unemployment rate in Charlo is 9.7% (US avg. is 8.6%)

www.BestPlaces.com

{

© NoteSchool 2013

Analytics / Rural

http://www.city-data.com/income

71% make less than $40K/yr

39% below poverty line

{

Analytics / Rural

© NoteSchool 2013

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?

© NoteSchool 2013

Analytics / Traffic{

© NoteSchool 2013

Analytics / Traffic

http://www.plano.gov

{

© NoteSchool 2013

Analytics / Traffic

3Bd/2.5BaSingle

Family:2,214 sq ft$144,000

{Should you consider a house in this spot?

Coit Road in Plano

© NoteSchool 2013

Price Points

$350K - $650K

$125K - $350K

Under $125K

$650K +Asset Classes by Distressed Debt Industry Current

Value of Collateral

|

© NoteSchool 2013

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

© NoteSchool 2013

|

© NoteSchool 2013

Who Sells “Toxic” Loans? Lenders

Banks Credit Unions Mortgage Originators

Mortgage Service Companies Auctions On-line listings Hedge Funds

|

© NoteSchool 2013

Valu

e $

60,0

00

Note Investor Paid $10 K - $15K

Cost of Note

HEAVY DISCOUNT!

© NoteSchool 2013

Pricing LoansCollateral Value

Type of property Condition Location

State laws Area economy Comps

© NoteSchool 2013

Valu

e $

205,

000


IRA Investor46%


Risk?

© NoteSchool 2013

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.

© NoteSchool 2013

© NoteSchool 2013

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

© NoteSchool 2013

Non-Performing Notes

Modify

RE-Performing Note

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

© NoteSchool 2013

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!”

© NoteSchool 2013

Case Study – Anxious $ Deal

Property: Flower Mound Texas (Dallas/Ft Worth)

Current Market Value: $205,000

© NoteSchool 2013

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


Good Payment Record


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

© NoteSchool 2013

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

© NoteSchool 2013

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

© NoteSchool 2013

Budget for legal and some

workout for mod

Prop

erty

Val

ue

Price for Note

Budget for mod

Lack of Capital

© NoteSchool 2013

$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

© NoteSchool 2013

$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

10 reasons not to buy a note

Real Estate