- What is the best alternative investment?
- What is note investing, and why should we do it?
- How to start it?
- What to do after buying a note?
These (among some are quite common questions) are often asked by budding investors. We have already covered the first three questions, and now we will move to the fourth one.
Why? Because this question is not answered on most websites and forums. But we think learning this is important if a person wants to maximize the potential, and it’s a part of investing fundamentals.
Notes are subcategorized into active and passive notes. Active notes are the non-performing ones or the ones that are not collecting revenues. I know it sounds confusing, but it’s not.
If you have to make these performing, you need to make some changes to it. In other words, you need to be actively involved in them, thus they are termed active.
Performing notes are just the alternative option. These are already collecting, so you don’t need to get involved in them as actively as in the first case.
These are the steps to follow after buying a mortgage note:
- Notifying the borrower and the office
Immediately after buying the note, you need to visit the mortgage office. This process is known as the assignment of mortgage, a way to record your purchase in public records. If you didn’t buy the note firsthand, you must check if it is properly assigned.
After the assignment is done, it’s time to inform the borrower. It’s the legal responsibility of the note owner, according to the TILA (Truth in the Lending Act, 1968), and RESPA (Real Estate Settlement Procedures Act, 1974) laws.
The lender must inform the borrower about the transfer within a month. Also, if you have changed some terms and conditions, you must inform that too. Similarly, if you are using a different payment processor, you need to tell that too, to avoid unnecessary and unintentional delinquency. This is according to the aforementioned RESPA law.
- Start providing loans
Now that you are registered with the office, and have informed the borrower, it’s time to dive into business. You can start providing loans against these notes.
However, it’s not as easy as you would think. You need to establish a regular communication channel with the borrower, demarcate the money into principal, interest, and escrow, and receive payments.
Apart from that, you need to issue monthly statements, and keep an eye on the taxes, and other legalities. You can choose to manage all these procedures by yourself or hire different people for the same purpose.
For a beginner, it can be difficult to do all that by themselves, that’s why we would recommend the second option. It will also look good for the portfolio.
If you are done with the setup, it’s time to start providing loans.
- Performing and non-performing loans
With performing real estate notes, there’s not much to do. Well, of course, you need to check the payments from time to time. If there are no problems, you will get the entire payment on time.
For non-performing notes, you need to need to make some adjustments. This will make them perform, and you will start getting regular payments.
- Property management
We have often said that note investing does not require any property management. While it’s true, we still think investing a little bit in the property can do wonders.
Check if the taxes and insurance are being paid on time. If you don’t check these facts, you can end up losing the home and the note.
And think for a moment, accidents do happen. What will you do, if the house is severely damaged by natural calamities, beyond repair? Would you get a good value for it? What about fire damages? You would have to pay a substantial amount to repair it.
Paying insurance on time can certainly help in these cases. Sometimes, the property can be vacant, and it’s your responsibility to prevent theft and criminal activities from happening inside it. Otherwise, you may need to pay fines, and much worse.
- Communicating with the borrower
Ask any note investing training gurus, and they will say it’s an important step. You need to send the TILA and the RESPA letters towards the beginning of the service.
But then, you may need to send notifications about pending payments and completion of it. Sit with the borrower, and discuss why the payments are irregular. There can be genuine reasons behind them.
Maybe you need to make other adjustments to ensure both parties are benefitted. If you are still not receiving payments, don’t immediately jump to foreclosure and forfeiture. Try to think of other options such as retail, short sale, payoffs, forbearance, and further adjustments.
Believe us when we say that foreclosure is just as problematic for you, as much as for the borrower. It should be used as a last resort. These processes take a lot of time, energy, communication, and money, but it’s worth it.
By doing all these, you are taking every possible thing to make the note performing again.
- Consider legal options
Always seek the counsel of a legal expert while providing these services. But you will need it even more if you are considering a foreclosure.
You will have to send a demand letter dictating the status of delinquency and contact the essential parties to avoid this from happening. How the borrower responds is crucial (after a time being) for this matter. If he does respond, you can start the negotiations. But if he doesn’t, even after the time went for delays, you are free to move forward.
- Vendor management
It goes without saying; you need to check on the vendors regularly. See how they are doing within the given deadlines. If you are unsatisfied with their performance, consult others.
Here we end the session on note investing fundamentals. So, do you have a clear idea now? We hope you do, and we will be back with yet another blog next time.