Rare Opportunity for Today’s Note Buyers: Small Mortgage Notes

If you are just starting out in the note industry, and looking for great returns on your money, some cash in the bank certainly helps you get started as a note buyer.

But what if you don’t have a lot of money to invest? What if you are just getting your feet off the ground, maybe saved a few bucks, but are certainly not “loaded” and looking to invest all your money in one big note?

Small Balance Note BuyersSmall Mortgage Notes (with a rare opportunity).

First off, small notes in general can often lead to bigger returns. The institutional investors generally don’t look at real estate notes with balances under $30,000.  That means less competition and greater yields.

Smaller notes may also have greater security (in relation to the value of the home) and can often be re-structured to help both the payer and the investor.

The other advantage of small balance notes is your ability to spread the risk. Maybe you have $80,000 to invest. Would you rather have one note or four? Assuming the yield is the same, four notes can minimize risk vs. going “all-in” on one note.

Real Estate Values Have Gone Down.

Let’s face it. Values in just about every note category have gone down over the years…significantly.

A house that sold for $150,000 six years ago might be on the market now for $75,000.

Here is the “rare opportunity” part…

Your low balance small note has a greater chance of early payoff then it did six years ago.

Do the math.

The houses that are moving now are coming out of bank foreclosures, short sales, and repos. They are priced to move – often way under the value of the market.

If that house that use to be worth $150,000 now sells to someone for $75,000 there is a lot of upside.

I am not saying that the house is going to be worth $150,000 anytime soon. But I am saying that it is more likely that it will be worth $100,000 sometime soon rather than $50,000.

Now, imagine you purchased a $50,000 note for say $40,000.

Are you comfortable investing $40,000 in a $75,000 property (that use to be worth $150,000)? – I know I am.

Hey, $40,000 isn’t a small note.

Ok, maybe $40,000 is not your idea of a small note. Maybe you are looking for something around $20,000, or even $12,000.

Those deals are out there as well; you just need to keep digging.

Now, there are a few things I would avoid.

1. Second position mortgage notes.

2. Poor credit (under 600 credit score)

3. Upside down mortgages

Now, the great thing about this industry is also its greatest risk. You may choose to ignore the above three items. That is OK; there are always reasons to take additional risk.

Maybe there is a lot of equity in the property, so you want to ignore bad credit. That is fair – I probably would as well.

You can be picky.

The note game is just getting warmed back up. Properties are moving. More notes are being created. Investment money is coming in off the sidelines. That said, there are a lot of opportunities out there for the savvy investor…so be patient and look for the right note (for you).

Many big investors have started small. One or two notes here and there. Build a portfolio of small notes and before you know it, you have a lot of notes and the capital to get into even bigger notes.

Disclaimer: I am not an Attorney, CPA, Financial Planner, Doctor, Professional Hockey Player, Lion Tamer, or Wall Street Icon. Nor do I play one on television. The views in this article are my own…and mine alone. They are not meant to give you legal or investment advice – just sharing my own views. If burning or swelling occurs, contact your doctor, not me.

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