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Where The Mortgage Notes Are Now

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By Fuquan Bilal

Where are the mortgage notes for investors now?

The last few years saw some compression of yields and increased challenges in finding profitable notes and attractive returns for investors. There are deals out there, and there could be many more coming up, if you know where to look.

Biggest Multifamily Servicers

Multifamily loan originations have been setting new records over the past few years. For those seeking to tap into bulk pools of notes, these are the largest commercial loan services in the multifamily space now.

  1. Wells Fargo $682B
  2. PNC $655B
  3. Keybank $273B
  4. Berkadia $268B
  5. CBRE $208B

New York

Every real estate market in America is unique. Each is at its own phase in the larger cycle and has its own dynamics. New York unfortunately, appears to have fallen over a cliff into a new mess.

In the long run people from all over the world will always want to live in NY. Yet, whether it is crazy new mansion taxes, transfer taxes, sky high and rising property taxes, and taking away tax breaks, or overbuilding and lack of fit for the market, certain segments of the Empire State’s real estate market seem to be in free fall mode.

Retail vacancies are turning once popular shopping strips into apocalyptic looking ghost towns. 25% or more of new condos built since 2013 still aren’t sold. Median residential sales prices have fallen 17% year over year.

Some very big dealmakers have recently lost properties worth tens of millions of dollars to foreclosure. There may be more individuals who decide it is easier to walk away than to stomach owing far more on their homes than they are worth. So, from commercial mortgage notes to residential ones, there is plenty of opportunity to grab assets and debt at a discount.

Hot Flipping Cities

Watch the cities which have been among the hottest for flipping houses over the past few years. In some cases property prices tripled since 2008, with modest homes going from $50k to being flipped for $150k. There may be some substantial roll back in those prices coming. Those stuck with inventory may present prime opportunities for acquiring the property or debt at a discount.

Many new investors have tried to jump on the house flipping bandwagon inspired by ‘reality’ TV shows. Most new investors struggle with the big learning curve, and make way less than expected. They don’t have the expertise, teams, and systems to do it efficiently and are getting stuck. There will be plenty of private money loans up for sale that are backed by these properties.

The economy we live in is changing rapidly too. We are going through one of the most massive shifts in history. 80% of jobs are changing. Many property owners and buyers have over leveraged themselves in the past few years, and have been relying on outdated industries and jobs to pay the bills. Those who don’t adapt fast enough will lose their homes, unless they are fortunate enough for a new note holder to come along and provide a reasonable and attractive workout.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund

Fuquan Bilal

Fuquan Bilal founded NNG in 2012 with the principal mission of capitalizing on the growing supply of mortgage notes in the interbank marketplace. Mr .Bilal utilizes his 17 years of residential and commercial real estate success to identify real estate opportunities and capitalize on them. To date, he has successfully managed three private mortgage note funds that primarily invest in singlefamily performing and non­performing mortgage notes. His financial acumen and proprietary set of investment criteria enable him to purchase underperforming real estate assets at a deep discount of face and market values, thereby increasing the value of the assets. This, coupled with his ability to maximize the use of leverage, enables him to build strong, secured portfolios with solid passive income flows.

Can You Micro Flip Mortgage Notes?

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By Fuquan Bilal

There’s a lot of talk about micro-flipping real estate out there. But can you micro-flip mortgage notes?

The Micro-Flipping Craze

If you’ve Googled anything to do with real estate lately, you’ve probably been inundated with ads for micro-flipping. Almost every podcast, email and social post out there is talking about the same micro-flipping stories.

It’s a great twist of phrase on a very old strategy. Some people have been doing extremely well at it for years. So, what is it? What are the pros and cons? Can you apply it to notes instead? If so, why should you?

What Is Micro-Flipping?

Micro-flipping is the new term for wholesaling real estate. Wholesaling means buying or contracting to buy a property, and then assigning your contract or flipping it as-is, without doing any rehab work. If you have a good buyers list and connections, or can do this effectively online, you can be in, out and paid fast. It’s a high volume sport.

This has been made a lot easier thanks to all the access to data and software and online platforms we have today.

This form of real estate investing is made to sound super easy. That may be luring in a lot of people who think it is a lot easier than it really is. Not everyone is going to get the results they were sold on. Some will find it the easiest and fastest money they’ve ever made.

The real con of this strategy is that everyone is being sold on trying it. At least tens of thousands of people are sold on using the same software, data and marketing to do this. So, what you get is a lot of people bidding on the same deals, trying to sell them to the same buyers, and engaging in long broker chains. You don’t make money when you are running with the herd.

How To Flip Mortgage Notes

So, what if you could apply the same benefits of micro-flipping houses to the less crowded mortgage note space?

There are at least four ways to try this:

  1. Acquire individual mortgage notes and flip them as-is for a reasonable markup
  2. Buy pools of mortgage notes at deeper discounts than others can, and sell the individuals notes for more
  3. Acquire non-performing loan notes, work them out, resell them as more valuable reperforming notes
  4. Use non-performing notes as an avenue to acquire the collateral property and wholesale that to all of these new micro-flippers

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund

Fuquan Bilal

Fuquan Bilal founded NNG in 2012 with the principal mission of capitalizing on the growing supply of mortgage notes in the interbank marketplace. Mr .Bilal utilizes his 17 years of residential and commercial real estate success to identify real estate opportunities and capitalize on them. To date, he has successfully managed three private mortgage note funds that primarily invest in singlefamily performing and non­performing mortgage notes. His financial acumen and proprietary set of investment criteria enable him to purchase underperforming real estate assets at a deep discount of face and market values, thereby increasing the value of the assets. This, coupled with his ability to maximize the use of leverage, enables him to build strong, secured portfolios with solid passive income flows.

Seller-Carryback Note Terms

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By Bruce Kellogg

Introduction

It is well known among real estate investors that some of the best deals occur when the seller is persuaded to carry some, or all, of the financing. This article introduces the seller-carryback note, and provides a menu of terms that can be negotiated into the note. So far as drawing up the note is concerned, most closing agents ( i.e., escrow offices and attorneys) have what they call a “cookbook” of legally-correct note terms, so buyers and sellers need not be concerned with such details.

For reference, a sample installment note is attached. Additional terms can be added off the menu as desired.

Installment Note

1)        “Request for Notice of Delinquency” – This is actually not a term in the note. It is prepared in escrow and recorded, instead. Its purpose is for the senior lienholder(s) to notify the carryback seller in the event the owner is not paying them. It protects the seller by allowing them to jump in early to protect their interest.

2)        “Unsecured” – This also is not a term of the note. It should be inserted at the top of the note to indicate that there is no security instrument (i.e., mortgage or deed-of-trust) securing the note to the property. Its use is not recommended!

3)        “Late Charge” – Most notes have a “late charge”, such as 3% of the payment after 10 days past due. Some states have regulations for owner-occupied properties. Most investment transactions are not regulated in this way.

4)        “Due on Sale or Transfer” (“Alienation”) Clause

This term is included to protect the seller from the property being sold or transferred to a party other than the original buyer. After all, the secondary buyer might not be creditworthy.

This term has an enforcement feature wherein the seller can force a payoff or foreclose to recover the property. However, in order to be enforceable, this term must also be included in the security instrument (mortgage or deed-of-trust). Other note terms do not need to be included in the security instrument, but this one does.

5)        “Assumption” – If the parties desire for the note to be assumable, this can be included in the note. Usually, some criteria are included to protect the seller. Often, the note says that the seller’s approval “cannot be unreasonably with-held” when there are protections included.

6)        “Balloon Payment” – When a note is not “fully-amortized” such that a balance remains at maturity, this is called a “balloon payment”. If this applies, the note should be written to clearly include this feature to protect both parties from misunderstanding.

balloon payment

7)        “Option to Extend” – If a “balloon payment” is involved, writing an “option to extend” into the note could prevent a rough ending if refinancing or selling conditions are unfavorable. It could extend for a year or two with a fee paid to the seller, or a “partial-paydown” made.

8)        “Interest-Only” – describes the arrangement where the payments consist only of interest, and a “balloon payment” occurs at maturity.

9)        “Zero Interest” – involves payments of principal only, with no interest being charged. This term is a sweetie for buyers!

zero interest

10)    “Deferred Interest” – involves interest accruing to maturity, when both principal and interest are due. Although this helps cash flow, unlike zero interest it is very risky. Rapid appreciation will be essential for this to succeed, and losing the property is a realistic possibility!

11)    “Skip a Payment” – Sometimes, if the parties are relating well, it is possible to include a term allowing the borrower to skip a payment in the event of job loss, rental vacancy, or other misfortune. This can be made part of the note, or dealt with at the time. Including it ahead of time is preferable for a more stable transaction.

12)    “Substitution of Collateral” – Sometimes, an enterprising buyer will negotiate with the seller the right to move the note and secure it to a different property. This is usually done to sell, exchange, or refinance the property. There should be criteria stated to protect the note-holder, but approval “should not be unreasonably with-held” if the criteria are met.

13)    “Right of First Refusal” –Sometimes, an enterprising buyer will realize that the seller might decide to sell the note at a discount to raise cash in the future. Including this term gives the buyer first shot at buying their own debt back at a discount, effectively lowering the purchase price.

mortgage-4235937_1280

14)    “Graduated Payment Mortgage (GPM)” – is a note engineered such that interest and/or payments start low, then increase gradually over the years. It makes for easier ownership but can become a trap in the later years. For this reason, the Dodd-Frank legislation prohibits this type of loan on 1-4 unit owner-occupied properties, but it is still legal for investment property transactions of all kinds.

15)    “Shared Appreciation Mortgage (SAM)” – is a popular note term when prices are high and still rapidly rising, or when interest rates are high. The note is written so that the seller receives payments that are “sub-market”, but also receives a percentage of the property’s appreciation upon sale or maturation of the note. It is useful, but not very common.

Conclusion

Clearly, these note terms are not appropriate for every transaction, nor would sellers agree to all of them. The objective is for buyers to negotiate as many that are advantageous as they can!

Good luck!

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Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 36 years. He has transacted about 500 properties for clients, and about 300 properties for himself in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches. He is available for listing, selling, consulting, mentoring, and partnering. Reach him at [email protected], or (408) 489-0131.