Many brokers in the note business often find spreadsheets or tapes of a portfolio of bank notes that are either non-performing and don’t have a lot of value or the bank notes have very little equity. These type of notes often have very little chance of getting sold, or if they do they are purchased in large quantities by institutions. We have not had a lot of luck with these types of notes. Conversely, if you can establish a relationship with a bank portfolio manager or bank manager then there are notes that can be very good investments. A bank will often sell a note just to get it off their books which is good for the investor looking for a deal. I must caution you to do your due diligence on the note and find the story.
The Texas Note Company recently purchased a bank note that we feel was an awesome deal. Our relationship with one particular bank allowed us the opportunity to purchase a note at considerable discount. We were able to cherry pick it from a group of notes that were being sold. The bank note was one that we referred to as a “Scratch & Dent ” Note. At one point in time the note was non-performing but now it had been turned around and had a recent history of on time payments. Here are the details of the note:
|Orig Note Amount:||$68,000.00|
The original note was created in 2006, the payor made a year worth of payments on time then ran into difficulty when like many people in this economy was laid off from her job. It was a difficult time for her to maintain the payments with no income and looking for a job. After about ten months she was able to land a new job. At that time she worked with the bank to restructure her note at which time a modification was done and a new note was created with a balance of $78,808.00. Since the time of her modification all payment have been made and on time.
For a note like this it was important that we do our homework and understand the status of the note and the risks that go along with it. The credit of the payor was poor even though she had a new job and had not missed a payment since the modification. She had a few credit cards that had been closed and other accounts that were late. It takes time to play catch up but she was working on a plan to get her finances back in order. Just because one has poor credit it is important to note that they are not a bad person.
There were a several important variable for us to buy the note. The appraisal of the property, verify the payment history, payor interview and getting the right price for the note. The appraisal came in a little lower than we wanted at $82,200 which gave us a higher Loan-To-Value, (87%), but if the other variables were good we would let this be a deal breaker. We confirmed the last two years of payments since the modification; the bank , of course, had good records of the payment history just a little difficult to get it out of them surprisingly. The payor interview. Anytime we purchase a note whether from a bank or not The Texas Note company conducts a payor interview, you never know what you may find. In this case though it went great. The payor was a great person and enjoyed the fact that we were real people and would be available to her should she have any questions or concerns in regard to her mortgage.
The final determination was price. The lower than expected appraisal, could have made getting the price we wanted a little tricky. We wanted to be sure that if a default would occur we would get our investment back. We made an offer of $40,000.00, 55 cents on the dollar. The bank tossed and turned on that for a day before they finally cam back with a counter of $43,000.00 which turned out to be 58 cents on the dollar which in turn we accepted.
We in turn are happy with the investment, 42% discounted note with a 7.5% interest rate to give us a final yield of 49.5% return if we hold the note to turn. If the payor decides to pay off early we will receive 7.5% monthly payments and a $30,000.00 principle payment on top of our investment. All in all a good investment for us.