When we get a list of non-performing notes we need to weed out the ones that don’t fit our investment criteria. We go thru several steps. The main reasons we discard notes are
If the asset securing the note is located in a city or state in which we don’t have a team in place or at least partial team in place we discard them.
Even though many potential JV partners would like to start very low to get their feet wet, we stay away from very low-value assets, under 25k. If a house is worth 15k and the HVAC system or the plumbing is bust, we need to put in 3-7k into the asset to make it habitable. In a low-value asset worth 15k that is 33% – 46% of the price, this represents a big impact on our returns, therefore, incrementing the risk on that investment.
When we find a picture of an asset that is in bad shape from the last 2-3 years, and the loan is delinquent, it is a given that the owner had no extra funds to make the property look any better and usually outside condition is a reflection of the inside condition.
Some areas have prices that don’t make sense. Some properties recently sold for 9k and some for 40k same specs similar condition. When an area is full of crazy prices it is a sign of price risk. We have tried to mitigate this risk by getting BPOs from different brokers, and if the BPO fluctuate as well, we skip it in favor of a less risky asset.
We go over the foreclosure files of those notes that are already in foreclosure and have accessible foreclosure files. If we see a history of dispute in the process we skip the note.
Some counties in Florida have a database of sinkhole claims and inspections. During the last decade, many borrowers in Florida filed bogus sinkhole claims to get money out of the insurance companies, and many other had legitimate claims. Some collected from the insurance and never fixed the issue. When we find sinkhole issues we skip the note.
7.Numbers numbers numbers
We run the numbers on every possible exit strategy. If the numbers don’t add up in one of the strategies we skip. Sometimes a note looks like a great foreclosure deal but has a very low-interest rate and P&I payment, therefore, a bad reinstate deal.
If our exit strategy is foreclosure we achieve great returns if the borrowers work to reinstate we will achieve discouraging returns. This will put us in a conflict between our joint venture partner and the borrower. In order for us to align the interest of all stakeholders, we only invest in notes that makes sense if the borrower stays and if he leaves.
If the seller has a price expectation that will not allow me to achieve my financial goals, I will not buy. I might be tempted to buy to establish a relationship, but at the end of the day, a relationship with a seller is not worth much if the pricing expectations differ widely.
Many other reasons might exist. These are my top eight.