Ways to Make Passive Income.

In todays email:

• 💬 State of the market: Housing units, days on market, and rates.

• 🙈 Featured Video: Passive Income Case Studies

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

• 🥶 Cool Tools: Best electronic signature software for 2023.

State of the Real Estate

• Total Housing Units in US: Housing unit is a house, an apartment, a group of rooms, or a single room occupied or intended for occupancy as separate living quarters.

  • Currently at nearly 144,000,000 units ending 4th Qrt 2022 which is up from 142,600,000 ending 4th quarter 2021. This is an increase of 1,400,000 units in 1 year. You can see from the graph the number of units increased at a faster rate in the years prior to 2008 than now.

• Median Days on Market: The median number of days property listings spend on the market in a given geography during the specified month (calculated from list date to closing, pending, or off-market date depending on data availability).

  • Jan was 75 DOM which is up substantially from Dec of 67.

• 30-year Fixed Rate Mortgage Average: The graph below for the weekly mortgage rate is based on applications submitted to Freddie Mac from lenders across the country. 

  • Interest rates are bouncing around and in Feb they went from 6.09% on Feb 2 to 6.50% on Feb 23. We will see many starts and stops in housing market due to the rate changes. Total Housing Units in US. Up 1,400,000 in one year.

Featured Video 

Passive Income Case Studies. In this video, I discuss some detailed examples and case studies to help you better understand how the process works. All these examples clearly demonstrate building passive income in this manner will allow you to sleep well at night since all your money is collateralized on hard assets.

I will illustrate by going through 5 case studies. Two mortgage note case studies where we did loan modifications, two small balance private loan case studies, and finally a rental income case study which resulted from a foreclosing on a note and ended up as an REO (real estate owned…sometimes referred to as bank owned).

BONUS - I will show you an experiment I did with 2 small retirement accounts and how I built them from a few hundred thousand dollars to multi-million accounts in 7 years (2013 through year end 2020)! Now these accounts have continue to grow and I will update in future videos.

Show Me The Money 

This week I want to talk about ways to narrow down which types of notes to buy. I want to first discuss the definition of performing notes, sub-performing and non-performing notes and then discuss things to consider when buying performing notes. In subsequent newsletters we will focus more on non-performing notes and the big picture and try to determine which non-performing notes are right for you to pursue depending on whether your end game is getting the cash flow or the house itself.

DEFINITIONS:

• Performing Note - these are mortgage loans where the borrower is current, meaning they are making their monthly payments on time. In other words, a performing note is a loan being repaid according to the terms spelled out on the note.

• Sub-Performing Note - these are mortgage loans where the borrower is paying but inconsistently and not according to the terms of the note. They may send in payment one month and skip the next and the following month pay 2 months worth of payments to catch up. Or someone who gets behind a few months then they get back on track and paying every 30 days but are rolling 60 or 90 days late. There are many variations but these are a few examples.

• Non-Performing Note - these are mortgage loans where the borrower is in default and hasn't made any scheduled payments of principal or interest for a certain period of time. In traditional banking, loans are considered nonperforming if the borrower is 90 days past due. There is no standard or definition of NPLs. My definition for non-performing is when payments become overdue by more than 120 days, although actual terms vary from one note to another.

Now that you understand the definitions lets focus on performing notes first. Why? Performing notes are a good place to cut your teeth in the note market. There is a steep learning curve for buying non-performing notes and we will cover it at a deeper level in subsequent newsletters.

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

Today we will talk about the first 5 and leave the remaining 5 for the next newsletter.

1. LIEN POSITION: It is super important to determine if you are buying a 1st, 2nd or 3rd lien position and how many mortgages are on the property in total. I have purchased 2nd liens and later found out they were 3rd liens (a great story with a happy ending which I will share in another newsletter). How do you determine lien position? Order a title search.

2. VALUE OF PROPERTY: You need to research and determine the value of the property that secures the note and mortgage. How do you determine value? Get a BPO (brokers price opinion) or an AVM (automation valuation model).  A BPO is the estimated value of a property as determined by a real estate broker or agent. An AVM is a software-based tool that's used in residential and commercial real estate to determine property value. The service uses mathematical or statistical modeling with a combination of existing databases to determine the value of a particular property. You could also simply ask a good agent familiar with the area to run COMPS for you. Below is an example of the comparable sales page in a multi-page BPO.

3. PRINCIPLE BALANCE, TERMS AND MATURITY: Many times the seller of the note will tell you these items but you must verify the outstanding balance due and the note terms and maturity dates for yourself. How do you determine UPB, terms, maturity? Read the original note (example below) and make sure you understand the terms of the note. There are many little things that can trip you up so read the note carefully.

4. VERIFY THE ACTUAL NOTE SELLER: There are many people brokering notes but do not have direct ownership of the note. You need to confirm the actual note owner and watch out for daisy chains (one person selling a note to another and that person selling to the next and so on). How do you determine the actual note seller? You need to look at the chain of assignments and this can be found in the title search report that I mentioned above. An assignment is the transfer of ownership from one entity to another which is recorded in public record.

5. PAYMENT HISTORY: You need to verify that the note is actually performing and determine the next payment date and whether there are any outstanding property taxes or insurance past due. How determine if performing note? You need to get the payment history (see example below) and any servicing notes and review the details. Did they have any gaps in payments, are they contractually current, etc. You can check the county treasurer to see if the property taxes have been paid. See this prior newsletter for details concerning property tax lookup.

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 (well I guess that was the old days…now direct deposit) but you get my point!

Cool Tools

DOCUSIGN is the cool tool of the week. What is DOCUSIGN?

DOCUSIGN (https://www.docusign.com) is an electronic signature software that helps you get documents signed digitally. You can use it to occasionally sign a PDF yourself or you may need a solution that allows your customers or clients to sign electronically.

There are many solutions out there but I like Docusign since it provides a logical and easy way to upload docs, populate the docs where you like with initials, dates, and signatures. The best electronic signature platforms automate and simplify your signature processes, all while providing better customer experience and document management. Over the years I have received docs from agents, attorneys, etc…and I found that Docusign was easier to use than many others. Docusign also has the ability to make templates (so you don’t have to reinvent the wheel each time), you can set the order of who signs 1st, 2nd, 3rd… and it is secure and reasonably priced which varies based on your needs (as low as $10/month). It is good for contract management and saves me time. I am sure there are others but it has been around a long time and a proven track record of innovation.

Basically there are 4 steps (see below) to send documents and it is pretty simple. 1) add docs 2) add recipients 3) add signature fields and 4) review and send when ready or save for later date.

Last weeks POP QUIZ was…When you buy a house and get a loan from the bank are you the mortgagor or mortgagee?

ANSWER: Mortgagor. The lender is the mortgagee. You as the borrower are giving a mortgage and the lender is getting the mortgage as collateral if you do not pay according to the terms of the note.

This weeks POP QUIZ: Are notes recorded in public record?

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]