For the last several months our Federal Government has been buying toxic "notes" (think mortgages) from banks and other financial institutions.  They have been buying approximately $80 billion of these notes each month.  Does this sound like another bailout to you?  It does to me.

Banks are also selling these notes to hedge funds or large investment groups who in turn break them into small packages, even individual notes and sell them to investors like Mary Jane and I.  This month I want to share with you the process of purchasing a note.

One of the biggest challenges is getting registered with a reputable company that sells the notes directly.  There are many individuals out there that are selling notes but they may not be the owner of the note and you really should buy from the source whenever possible.  We have set up accounts with three companies.

Once you have signed a non-disclosure agreement with the company they will send you "tapes" as they are released.  I believe they call them "tapes" because in the early days of computers they probably sent this information out on computer tapes.  Today it is an excel spreadsheet that lists certain factors about each note but it is still referred to as a tape.  In addition, they provide copies of all the "collateral" documentation for the investor to review to help determine if the note meets the investor's criteria.

The collateral may include more than 100 pages of related documentation, including things like: digital copies of the mortgage, deed, sometimes the original loan application, and a Broker's Price Opinion (BPO).  A BPO is a local real estate professional's opinion on what the underlying property is worth.  These can often be wrong so we always compare the findings in the BPO to other readily available sources to either support or disagree with the BPO.

Our son Don and his wife Jen generally perform the preliminary review of this documentation and then let me know the properties that look good.  I then get with the seller, establish a price for the note, and decide if we want to proceed or not.

Here's the tricky part and one of the reasons we divide up the labor.  Once the tape is released investors, like us, will start purchasing the notes within hours.  Most of the good notes can be snatched up within 48 hours of the release of the tape.  There are others that will linger and the selling company will begin to lower the prices on these.

In the early days of our purchasing notes we got in a hurry and bought one for around 14 cents on the dollar that had an estimate BPO value of $10,000.  On the surface that seems like a great deal 14 cents on the dollar; however, once we had the note, we ordered an inspection of the property, which you can do even if it is occupied.  The inspection came back that the property was not habitable the way it sits.  This was not good news.  

In going back and looking at the documentation, we noticed the BPO did not have a picture of the house just the property.  Other sources had a picture but not the BPO, which was the most recent documentation.  The BPO agent never went on the property to check out the house.  We now try and get "boots on the ground" to at least look at a property prior to buying the note.  Of course this has to be balanced with the competitive nature of notes.

Once you have agreed on a price with the sellers you have approximately 48 hours to wire funds, at which point the seller will send the hard copies of the documentation, and you are now the proud owner of a note.

As with all real estate investing the most important part is being able to sell the asset.  For the note I mentioned above, because we paid only 14 cents on the dollar, selling the note for the value of the lot is the best exit strategy.   Remember, you make your money in real estate investing when you purchase a property, you realize that profit when you sell the property.

As you might guess, it helps to have some real estate investing knowledge when purchasing non-performing notes involving property.

Industry News  

(by Kevin)

Emerging Market

In previous issues of our newsletter we have reported the wisdom of investing in emerging markets.  For new readers, an emerging market for real estate investing is one where there is going to be strong job growth because strong job growth correlates closely to the rise in housing values.

An excellent example of an emerging market is Houston, TX.  In general, Texas is a very pro-growth pro-business environment and Houston is leading the way this year.  Marcus and Millichap report that approximately 117,000 jobs will be added in 2013 but only 8,700 new housing units will come on line in 2013.  As people move into an area or get jobs they tend to look for housing.  Since this increase in jobs is so much higher than the new housing units coming on line, competition for housing will increase, thus driving rental and purchase prices higher.

A multifamily property purchased in an emerging market can rocket the value of the property upwards, a good thing if you get into an emerging market early in the real estate cycle.  

What One Expert Invests In Today

Mr. Faber echoes Porter's thoughts on how central bank money-printing programs will eventually produce a catastrophe.  Faber expects it to end with social upheaval, a stock market collapse, and a war on the rich. Faber says...

Faber is preparing for the "doom" he sees coming by staying diversified with precious metals, cash, stocks, and real estate.  You can read the full interview here. 

In recent issues of the newsletter we have questioned the justification for the rise in the stock market.  In June we saw some correction and a little bit of a roller coaster ride.  I am not a stock expert, but I really like hard assets as investment choices right now.  We especially like housing because everyone needs a place to live.

Laughs and Interesting Stuff 

(Kevin and Mary Jane)  

A distraught senior citizen phoned her doctor's office.  "Is it true," she wanted to know, "that the medication you prescribed has to be taken for the rest of my life?"

  
"Yes, I'm afraid so," the doctor told her.  

There was a moment of silence before the senior lady replied, "I'm wondering just how serious is my condition because this prescription is marked NO REFILLS?"

An older gentleman was on the operating table awaiting surgery and he insisted that his son, a renowned surgeon, perform the operation.  As he was about to get the anesthesia, he asked to speak to his son. 

"Yes, Dad, what is it?"

"Don't be nervous, son; do your best, and just remember, if it doesn't go well, if something happens to me, your mother is going to come and live with you and your wife...."

-------------------------------------------------------------------------------     

A Trip to The Holy Land

A man took his wife and his mother-in-law on a tour of the Holy Land.  Something they had always wanted to do.  Sadly, during the trip his mother-in-law passed away.  In meeting with the officials about making arrangements he was told that it would cost $15,000 for him to fly her body home.  The officials asked in all seriousness "Why not bury your mother-in-law here?  We can arrange a very nice funeral for only $1,000."

The man said, "Are you out of your mind.  We know for a fact that there was a guy buried in the Holy Land once and after three days......"

 
-------------------------------------------------------------------------------  

Jeb Goes to the Dentist

"Doc, how much does it cost to get a molar pulled?"

"Well that would be $800" the dentist replied.

"$800, isn't there something cheaper?"

"I suppose if we didn't use the gas and only the local anesthetic we could do it for $400."

"$400 still seems pretty high to me, any less expensive options."

"If we didn't use any anesthetic at all I could do it for $200."

"I don't know Doc, you must think I'm rich, can we get that price down a little more."

"I could have my intern do the extraction, no anesthetic, for $100 and that is the lowest I can go!"

"Okay doc, you sold me, how soon can my wife get an appointment?"

Keep On Smiling!

(so people will wonder what your up to AND its contagious)