Investing In Notes - Why Seconds Make Sense!

It is interesting that so many people are talking about investing in notes.  We started our discussion of this strategy in our newsletter last year and as I watch the industry more and more people are entering the note business.  Of course I am talking about notes backed by real estate also referred to as mortgages.

Real estate notes come in two primary forms, firsts and seconds.  A first is the note in the first position, which is a superior lien position to the second note.  Almost everyone I speak to these days favors investing in firsts over seconds, whereas we actually like certain seconds more than firsts.

The primary reason I think people prefer firsts is that they erroneously believe that it is easier to foreclose from the first position.  The fact is any lien holder who is not being paid can initiate the foreclosure process.

If a second forecloses, the holder of the second receives the deed and then has control of the property.  All subordinate liens are then wiped out, but the first still has rights.  When a second forecloses it does not remove the obligation of the original borrower to pay the first, nor does it remove the holder of the first's right to foreclose on the same property.  In other words, the property remains collateral to the first note holder.

Today, in real life practice, when a person in second position forecloses, the person or company holding the first position note will almost always work with them to allow them to perform on the first.  They really don't want the property but they do want to be paid.

The seconds we really like are those where the first is performing, the payments are up-to-date, and the second is not performing and the property is owner occupied. This indicates what we call emotional equity in the property which increases the likely hood that we can get the second performing again.  Once the second is performing it will greatly increase the value of the second.

More reasons to like seconds:

1. The underlying asset, the property, is often more valuable at the same price point.  For instance if you buy a second representing a loan of $40k the collateral property is most likely valued high above that price.  Whereas if you buy a $40k first the property may not be very impressive.
2. Competition for firsts is higher, therefore they are priced higher, especially for quality properties.
3. Non performing seconds that meet our criteria (owner occupied with a performing first) can sometimes be bought where there is equity in the property.  In other words, the property is worth more than the amount owed on the underlying first and the amount paid for the second.  This is a great position to be in!
4. Due to the lower price point for seconds you can buy more of them for the same investment dollars thus allow spreading of the risk over more properties.
5. Once you have the second you have a "position on the account" and can use that position to get the other lien holders to talk directly with you.  With this you may be able to negotiate an option on the first.

Just to be clear, buying a second where the first isn't performing and the second isn't performing is not our preferred position but these notes can be bought very inexpensively and it is still possible to make money.  If the first forecloses the subsequent second would be wiped out but if the property owner/borrower qualifies for certain government programs the second may be paid or partially paid. Also if the property owner "short sales" the property all liens must be cleared and you can often negotiate a profitable position clearing the second that you paid a very low price for.

Mentor Shares His Lessons Learned in 2012

One of our mentors, a real estate investing expert, Mr. Phill Grove, who has really taken his business to the next level so he is certainly worth paying attention to, shared some of the lessons he learned during 2012.  We liked them so much we thought we would share them with you along with some of our own thoughts and observations.

Focus is probably one of the most important factors in determining success.  It is certainly more important than intelligence.  Everyone knows people that they think aren't as smart as they are but who make more money than they do. In fact, I have known people who make twice, three times, what I have made.  These people certainly weren't two or three times smarter than I am.  What they did understand is their goals and then they focused on achieving those goals.

Relationships are extremely important to determining success.  

Embrace change by learning how to do new things.  Doing the same thing over and over again and expecting different results is insane.  If you want different results you must take different actions.  Learn from those that have gone before, get a mentor or two who have been there and done that.

Have a plan and stick to it. There is an old saying that if you fail to plan you plan to fail.  Improving yourself and/or making money is not complex when you have a step-by-step plan, especially a plan that has already been proven to work.  

Consistency in key.  Most of us think of ourselves as being very busy yet it appears that it is the busiest people who implement change effectively and get more accomplished.  How is this possible since everyone has the same 24 hours each day?  It is the consistent execution of their plan that propels them ahead and helps them accomplish their goals.  Whether it be 30 minutes a day or 10 hours a day consistency will help you achieve any goal.

May you all have a great 2013 and achieve all your goals!  

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