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A Quick Look At How To Buy Notes

The phone rang today and it was a colleague who wanted to find out more about what I’m doing in the world of finance. She’s in the traditional mortgage industry, and she knows I’m buying notes, but she wanted me to explain how it works and what I do. Let me share with you what I told her.

I’ve spent the past few days poring over new spreadsheets loaded with hundreds of properties that banks and other lenders sold off to smaller hedge funds which are currently for sale to private investors and groups.

note and house and calculatorThat’s where I come in. Naturally, I’m looking for a few jewels in this basket of goodies. Every single one of these can be had for pennies or nickels on the dollar and they are from all across the country. But not all of them work for me – even if they might work for you. These spreadsheets, otherwise known as tapes, are a fascinating glimpse into real estate gone bad. That’s good news though for a self directed IRA investor.

The opportunity is there if you look hard enough, and sort through what you like – and then you can decide what you’d do with it. These tapes sometimes have collateral material linked to the property and you can get a look at the values, assessments, title reports and more.

For instance, one list I have has a number of vacant lots in middle class to upper middle class communities. One of them was a spectacular lot in an exclusive neighborhood with a golf course on a waterfront setting. It was valued at $200,000 but was probably going to sell for somewhere in the $20,000 range.

Obviously these can offer some real value for an IRA investor, since time is on our side, and there’s no building to insure or fix up. As long as you’re willing to wait for the property to sell, or you’re willing to offer it for sale with financing, and that can give you even better longterm cash flow in your account. But there can be pitfalls, and you want to make sure you’re not stepping into a money pit.

Why are they so cheap?

Well, when I’m screening properties, my first questions are these:

Is the property in an area where most of the residences are worse or better?

If I’m buying a property that’s in bad shape (and they usually are), I want it to be the only one on the block in bad shape. If there is graffiti, repairs have been left undone for 50 years and the roof is caving in, I’m out. That doesn’t mean it’s not a good deal for someone, though – just not me.

Are the property taxes unpaid?

If so, how many years have they been unpaid, and does it make sense to make up those back payments? As the buyer of tax liens, I want to make sure somebody hasn’t already bought this property from the county through a tax deed sale.

What are my exit strategies for the property?

I’ll look at it in terms of the time and money involved, and as long as I can solve the problems with each, I’m more interested.

Is the title clear?

While I’m no attorney, I know that property tax liens get dibs when a home is sold, and once that’s cleared up, the first mortgage is treated as the priority lien holder. If there are any surviving liens, it’s best to get an attorney to clear those up.

Basically, if I’m a contractor with a lien on the house, and it’s been sold at a foreclosure for less than what’s owed, then I know I’m not going to get anything. In that case, I’d agree to remove my lien and try to get it another way. This is something I’ll let an attorney sort out, and factor that cost into the deal.

Each property gives me a story- or at least a story that I piece together to give me an idea of the drama that’s occurred. Once I have as much information as possible, I’ll make an offer to buy. There are plenty of properties across America that are under $100,000, and even some under $50,000. When you see these notes – especially on unpaid balances and the note has been sold off at a discount, you can buy the house in some cases for under $25,000 or under $10,000. I’ve looked at half a dozen places today that are worth about $45000 and the note is for sale anywhere from $10,000 to $20,000.

So if you bought a place that ran you $10,000, and you work with a company to spend another $10,000 so that they can clean up taxes and liens and get it ready to sell or rent, do you think you’d be happy to sell it for $45000 with only $20,000 invested? Heck yeah. How many of these deals would you like to do in your IRA?

Nancy Conrad is an asset buyer with Vineyard Funding Capital Group LLC. She’s happy to answer questions here or by email.

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