When you get to the bottom, buying a non-yielding real estate note is like buying a boat; The two happiest days are the day you buy it and the day you sell it! Investing in a non-performing note (NPN-NPL) and cashing in at a profit are my two happiest days as a note investor.
You’ve heard the old saying in real estate, you make a profit when you buy. How true that is, especially in the world of notes! We’ve found that you need to factor in all the costs you’ll incur from the day you buy it to the day you sell it, and use those to make sure you’re not overpaying. If not, you can lose money; sometimes a lot, sometimes everything.
While there are some warm and fuzzy feelings when you own the boat, like taking it out on the water for the first time, you will have a lot of ongoing costs. If you keep it in the water, there are dock fees, maintenance fees, insurance, and if you finance it, monthly fees. If you keep it at home or in a parking lot, you’ll need to protect it from the elements, possibly pay rent, and could destroy it in a towing accident or put it in water.
With NPN, finally getting in touch with an owner who wants to stay, despite doing their best to be invisible, is just as exciting. This usually leads to trying to work out a payment plan to get them to pay, or settling for a lump sum to pay it off is a great feeling.
Otherwise, it’s pretty much death by a thousand cuts.
Sometimes I feel like we are being cheated and cheated to death by a plethora of service providers; attorneys, note managers, record custodians, rehabbers, lawn mowers, property preservationists, appraisers, photographers, house cleaners, municipal agencies, code enforcement, county tax collectors, real estate agents, health inspectors, ordinances zoning, homeowners associations, utilities, forestry divisions, garbage haulers, flooded areas, etc., who want to extract as much money as possible from you every time they move or write something.
So the most important thing I do now is figure out as many costs as possible before I make an offer to buy a note, so we can factor that into our purchase price. One of the biggest ones we have found when calculating more than fifty notes is that the expenses are usually higher and it takes longer to get out in judicial foreclosure states. And now that we know something about real estate rehab, we’ve been equating potential home repair costs in our note purchase offers now, to see if we can still make a profit or take a potential loss.
Now is the time to take into account the sentence of the old carpenter; “Measure twice, cut once.” With tickets, you’ll want to make sure you run the numbers inside and out before you commit to buying a ticket with “Calculate Twice, Buy Right.”