In todays email:

• 💬 State of the market: Demand for home improvement on the decline.

• 🙈 Featured Video: Notes versus rentals.

• 💥 Show me the money: 10 factors to consider when buying notes. 

• 🥶 Cool Tools: Ways to get pictures of properties that are far away.

State of the Real Estate

Home Depot (HD) reported 4Q earnings recently and I read through parts of the report to help me get a sense of the housing market conditions. At the same time I saw an article by John Burns Real Estate Consulting that listed a few takeaways that are summarized in the graphs below. One big takeaway from reading this info was that consumer demand for home improvement peaked around the middle of 2022.

• Consumer demand weakening (chart 1): On the earnings call HD said they noticed some deceleration in certain products and categories, which was more pronounced in 4Q22 which saw a slowing of consumer spending at their stores. You can see in the graph below that the kitchen and bath remodeling (niceties) dropped off alot whereas the projects like roofing and siding (necessities) stayed pretty consistent.

• Discretionary project decline (chart 2): The amount of money spent on nice to have projects reduced where the replacement projects are steadily increasing. When the economy slows, homeowners hit pause on big remodeling project.

• Customer traffic in decline (chart 3): DIY customer traffic has been very weak through most of last year, following the 2020 boom. Pro traffic has been noticeably softening since June, which Home Depot noted was the turning point in home improvement demand. Boy what a difference a year makes.

Featured Video 

How notes compared to conventional rental real estate.

In this video, I explain the advantages of investing in mortgage notes as compared to rental real estate. Notes are very passive, steady income, no repairs, no maintenance, no tenant calls, little to no liability, more liquid (can sell faster to get your money back if need be), very scalable and less cost to manage the asset. A list of 13 advantages of notes are below:

• Passive - Servicer collects payment and sends you check.

• Steady and consistent income - get checks for 30 years.

• No repairs or maintenance - Have you ever called your lender to come fix your toilet?

• No tenants - No turnover, evictions or chasing rent.

• No liability - No worries if a homeowner slips and falls.

• Secured - the investment is secured by real estate.

• Insured - unlike a stock, the collateral (property) is insured.

• No taxes and Insurance - Homeowner pays and TI is typically escrowed with the servicing company so no need to track.

• Notes are typically more liquid than rental real estate.

• Consistently higher returns - Typically double digit.

• Scalable - easier to manage several hundred notes versus several hundred rental properties.

• No HOA or COA - homeowners must pay directly.

• No property management costs - instead we pay a fraction to a servicing company to collect payments.

Show Me The Money 

In last weeks newsletter, we listed the 10 main factors to consider when buying performing notes. We then discussed the first 5 in the list and today we will discuss the remaining 5. Again, this is not an all inclusive list but some of the main things to consider when investing in performing notes. This entire list is shown below and we will go over the 5 highlighted in blue today.

10 Main factors to consider when buying performing notes.

• Lien position

• Value of the property

• Unpaid principle balance (UPB), terms and maturity

• Verifying actual note seller

• Payment history

• Property taxes and insurance status

• Owner occupied (O/O) or tenant occupied

• Borrower credit and bankruptcy status

• Who is on the deed

• Liens and judgements

6.  PROPERTY TAXES AND INSURANCE. It is important that the taxes and insurance are up to date and that the borrower is paying. The property taxes can be checked by going to the county treasurer or using Netronline as discussed in this prior newsletter. You will need to get a copy of the current hazard insurance with the proper dates and coverage. The coverage should be higher than the balance on the note so that you will become whole if the house burns down.

    

7. OWNER OR TENANT OCCUPIED. You will ask the note seller if the house is owner or tenant occupied. I prefer owner occupied since they are more emotionally attached to the home and typically will go over and above to keep from losing their home. Owners also take better care of the property versus a tenant. Would I buy a tenant occupied performing mortgage note? Yes but depends on the neighborhood and house condition. Also I want to see that the rent payment is well above the mortgage note PITI payment. If the property is tenant occupied make sure the insurance is a landlord policy.

8. BORROWER CREDIT AND BANKRUPTCY STATUS. Sometimes the mortgage notes you buy already have a credit report from the note seller. Many of the institutional notes do not, but I rarely run credit and instead review the payment history and the servicing notes. It is important to check if borrower is in bankruptcy and this is done as discussed in this prior newsletter. I do buy notes in bankruptcy but want to get a bigger discount since the servicing costs are higher and the risk as well. Notes in chapter 13 bankruptcy can provide a consistent stream of income since monitored by the court.

9. WHO IS ON DEED. You want the person/entity on the deed to match who is on the mortgage and note. The deed is the physical document that proves ownership. The title is the concept of legal ownership that the deed grants you. So many times people interchange the words deed and title. So how do you check who is on the deed? You will run title search and it will show the ownership and who is on the deed. We will have an entire newsletter in the near future to discuss title search and how to read the title search.

10. LEINS AND JUDGEMENTS. You must be search the title to determine what judgements and liens are on the property. There can be IRS liens, mortgage liens, state tax liens, property tax liens, city code violation liens, judgements and various other title defects to be aware of. Never buy a note without getting an updated title search. Now you don’t necessarily have to get title insurance as you do with buying a property but you have to know all the liens and judgements since your note bid will be affected by these liens and many times you will pass since the numbers just don’t make sense.

SUMMARY: You can see there is much to consider and research before you hand over your hard earned money to someone selling a note. But if all looks good there is nothing better that getting a big fat check in the mailbox each month.

Cool Tools

Many times you will buy assets in other states and cannot physically drive to the location to check it out. There are several field servicing companies that have field agents in every state and county that can do inspection services like exterior inspections, occupancy inspections, insurance inspections, etc. These same companies also do property preservations like securing the home, winterization, repair work, etc. They also many times have valuation services if you need to determine what the property is worth. I have listed 3 companies below for reference. I currently use Sand Castle Field Services and have had pretty good results. NVMS requires a large amount of business so this is not a place to start as a newbie. I have not personally tried Financial Asset Services.

Sand Castle Field Servicing (https://www.sandcastlefs.com)

Financial Asset Services (https://www.fasinc.com)

NVMS or National Vendor Management Services (http://nvms.com)

Last weeks POP QUIZ was…Are notes recorded in public record?

ANSWER: NO. Only the mortgage or deed of trust is recorded in public records.

This weeks POP QUIZ: What is a corporate advance?

Check out next weeks newsletter for the complete answer.

We would love to get your feedback and your thoughts! Let us know which topics are of interest or where you need more clarity. You can just respond to this email directly…we like to make it easy 😌 or email [email protected]