The Experts Tell Us --
What Makes a "Good" Note?
Here is the question I asked the investors:
"Of course there are no guarantees, but what in your opinion are the priority characteristics of a residential mortgage note that a private investor should look for in order to have as good and safe an investment as possible?"
"The Lower the Investment-to-Value Ratio, the Safer the Mortgage"
"An investor in mortgage notes in the secondary market has one objective...that is, to earn a targeted return on investment. Although in purchasing such notes we evaluate the seasoning, the down payment, the payor's credit scores and other elements, ultimately the most important factor is the value of the property relative to the amount owed.
"Just because a borrower has paid promptly for a period of time or has good credit or put up a sizable down payment does not assure that he or she won't run into future cash flow problems and an inability to make required payments. As mutual fund operators always caution, "past performance may not be indicative of future results."
"However, if an investor holds paper with a low balance owing relative to the value of the property, the investor has a very high probability of "coming out whole" and realizing its targeted return either through receipt of the promised periodic payments, or, if for any reason the payments are not made, through realization of an equivalent amount through foreclosure on the property. The lower the investment to value ratio, the safer the mortgage." -- Rick Gordon, Director - Transactions, Florida Asset Financing Corp.
"How Much Will It Cost To Foreclose?"
"Determining what makes a "safe" mortgage is all a matter of preference in what you are looking to experience. How much pleasure? How much risk?
"We've purchased high-risk notes that have paid off early and made a handsome profit. We've purchased "safe" investments, and lost our asses.
"However, with experience being the best teacher, what any private investor should look for must be measured by how much risk he/she is willing to endure in the event of the need to foreclose, either
for non-payment of either the monthly payments, taxes or "waste" of the property. It as much depends upon who the investor is, their own characteristics, as what the secured property is, the creditworthiness of the payor, and the amount of equity and seasoning in the property.
"All of the following comments overlay large brushstrokes in generalities, so please accept the concepts and not the specifics. For example, an aggressive, young, energetic, "I want to foreclose and fix the place up and sell it for a profit" kind of investor will purchase a higher risk note hoping that he/she can get the place back, and make a killing. A more passive investor does not want the risk of loss and is looking for a note securing a property where the payor has good credit, perhaps some seasoning, definitely some substantial equity, and a property type and location that is in the mainstream. This is the case to minimize the risk that something will go wrong. And if it does, so that if they have to foreclose, there is something worthwhile to work with that, even if from a distance, can be fixed up relatively
inexpensively, and resold in order to cover the financial exposure.
"Personally, my major issue is determined by whether I think I'm going to get paid, and if I am not:
a) how much is it going to cost me to foreclose, i.e. is it an easy to foreclose state, such as a Deed of Trust state where it only takes a few months to get a property back, or am I secured on a Contract for Deed, that is to say, where I don't have to go to court to foreclose? If I have to go to court to foreclose, such as in New York, Florida, New Jersey, etc. (I live in California), I am less likely to personally buy the note. And the truth is I've had many successful purchases in these states. The question is,
however, what my first considerations are, and that is always the first one.
b) What kind of property is it? This is mainly for the purposes of determining my risk upon resale.
c) How much equity is in the property so that if I have to foreclose, there is room to cover all my costs, legal and repair, time since having any payments, and the value that can be gained by expending these dollars? This also takes into account whether it is a 1st or 2nd, and if I will have to carry the 1st in the event of default, and whether it is worth it to do so.
d) Yes, I always look at credit scores. Very important. What I also look at in the credit scoring is how much debt there is on the credit cards and accounts versus the amount of credit available. Someone with good credit can be charged up to the max, which might be an accident waiting to happen.
e) Seasoning is not my type priority, except from the standpoint when any of the other factors above are weak.
f) My sense of smell, and history of eating a lot of terrible properties around the country, that apparently were underwritten properly, but went bad anyway. There is absolutely nothing more valuable than experience." -- Judy Miller, former President, Seller Finances, Inc.
MORE TO COME!
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