One of the best investments we made as a note buyer happened a bit by accident.
In 2008, we were contacted by a potential seller of a real estate note secured by productive farmland. He wanted to sell payments from his note to pay off his credit card debt.
The details were roughly as follows:
- Sales Price of the Property: $500,000
- Down Payment: $200,000
- Note Balance at the time he called: $286,179.80
- Term: 167 months
- Interest: 6%
- Payment Amount: $2,531.57
All of the characteristics of the note looked great so we looked for an investor who would buy the note. Unfortunately, all of our investors passed on the file. The primary reason was the property type, productive farmland. This was also the same time that the credit crunch had hit the economy and some of the large institutional investors were going out of business. Everyone at this time was very skittish about investments outside of their comfort zone. As such, our plan of brokering the note to an investor went out the window. However, this provided the avenue for one of our best note investments.
Since I did not want to let the note die I decided to see if it made sense for us to buy and hold the note for ourselves. Since it was one of the first notes we purchased for our own portfolio, we went over the details over and over and over to make sure we weren’t missing anything. We then sent the file to a professional processor who had been in the industry for many years just to review our work and take a second look at the collateral. She also gave it a thumbs up so we went ahead and made a purchase of a 24 month partial.
Our Note Investment:
- Number of Payments: 24
- Investment: $49,000
- Investment to value: 10%
The note paid perfectly and sadly the two years went by very quickly. As a note investor, you are always a bit sad when a good paying note pays off. At the end of the two years we proposed buying more of the note payments but the note seller said they just wanted to start receiving the payments again. We assigned the note and deed of trust back to the seller and closed out our investment.
Buying the Note – Take 2
About a year ago, I contacted the note seller again and just reminded him that if he ever wanted to sell additional payments that we would have an interest in purchasing more. Around the end of 2011 he contacted me and needed about $90,000 for a new business he and his wife had started.
Since we had done a thorough job of due diligence the first time and were quite familiar with all of the details involved in the file, due diligence the second time around was a breeze. We focused much of our time evaluating the value of the collateral and reviewing the payment history. The payors had been making their payments on almost exactly the same date each month just as when we held the investment. While the value of the collateral had fallen since we made our first investment, the note payor still had around 25% equity. Our previous experience with the payor, note seller and collateral allowed us to be more aggressive with our second purchase than we would have been had it been the first time we saw the note. We decided to move ahead with a 48 month partial and here are the details of the note at the time and our investment:
- Remaining Balance: $238,912.43
- Remaining Payments: 128
Our second investment:
- Number of payments: 48
- Balance Purchased: $107,795.08
- Investment: $91,000
- Investment to value: 29%
- Yield if pays as agreed: 14.97%
We have now held the investment for about 5 months and are pleased we have had the chance to get involved again. Moral of the story is to proceed cautiously with a property type you are not as familiar with by purchasing a partial, which in turn may leave a door open for more profit in the future.
About the Author: Greg Gehlen is the Principal at Canyon Capital, which specializes in the purchase of real estate notes and deeds of trust. He can be contacted at 702.515.7416 or online at www.canyoncap.com
Ready for the other side of the coin? You may also want to read the article on Greg’s least favorite deal at: