Note Investor Mistakes
Avoiding the biggest Note Investor Mistakes will help you gain the best chance of success when it comes to Note Investing. Here is our top 10 most common mistakes made by Note Investors
Avoiding Note Investing Mistakes
- Note Investor Mistakes #1: Lack of education and research
A common mistake is not taking the time to learn and understand the note investing process, including the legal and financial aspects involved. It is important to thoroughly research and educate oneself with note investing education before making any investment decisions. Lack the understanding of the “5 Note Math Numbers” (Number 5) and how they affect the profit returns of buying and selling notes.
- Note Investor Mistakes #2: Not conducting proper Note Investing Due Diligence: Due diligence is crucial in note investing, and new investors should not overlook this step. Proper due diligence includes analyzing the value of the underlying property, running the asset through a proper Bid Calculator (Check # 7 Lacking a Full Note Bidding Calculator), confirming the collateral file is complete and contacting an attorney to review any legal or regulatory issues.
- Note Investor Mistakes #3 Overestimating returns: New investors may be tempted to overestimate the potential returns of their note investments. It is important to be realistic about the expected returns and to consider all potential risks and expenses associated with foreclosing. Often new investors calculate strictly expecting certain outcomes of a note, such as the note continuing to perform or foreclosure to obtain the property.
- Note Investor Mistakes #4: Focusing only UPB (Unpaid Principal Balance) OR LTV (Loan to Value):
UPB – Bidding based on UPB is easy math however is misleading as it only takes 1 of 5 numbers in the “note math”. We have a video showing how bidding or selling on percentage of UPB can result in not hitting the expected returns. In this method of bidding you are removing the term and interest rate which are 2 of the key items to determine your return. UPB is often calculated after you come up with your bid price, to determine if the seller would possibly entertain your offer.
LTV – Similar to bidding on UPB, LTV is only 1 factor of the math. For example you have a note that is 60% LTV but results in a 5% return versus a Note that is 80% LTV but has a 12% return. LTV is a secondary equation after you come up with your bid price.
Focusing on Yield is a better calculation however you need to calculate the possibility of it defaulting and having to foreclose.
“Start with end in Mind”
We bid on assets with the desired return we want for each scenario and then back into our bid price.
- Note Investor Mistakes #5 Not understanding Note Math / Financial Calculator
Unlike typical Real Estate, Note Buyers make most of their money from interest on a note. So calculating via ROI does not equate to note investing. Similar to a Mortgage calculator, Note Investors work on the 5 Note Math Numbers. Some investors use a manual calculator while others automate by calculating right within the tape (list of Notes) spreadsheet. We have a workshop on what each of the following mean, how they interact with each other and how to run calculations in a spreadsheet.
- PV – Present Value
- I – Interest Rate
- N – (NPER) Number of Periods
- PMT – Principal and Interest (P&I)
- FV – Future Value (Balloon)
- Note Investor Mistakes #6 Brokering or Buying from “Joker Brokers”:
Too often real estate wholesalers turn Note brokers into this note space and talk about deals they have available and indicate to you their fee, however they don’t own them. They may not even know who the true seller is nor if the notes are still available. If they attempt to broker notes in this fashion, they could face legal issues as they are passing along confidential borrower information without permission. These are known as “Joker Brokers”.
If you have low capital available we recommend you add Value to an asset or look to purchase a partial. Take a tape of assets from a principal seller and review them. You can then run diligence on all the assets and identify the best assets on the tape. Informing a buyer of the best assets and why they are the better assets along with showing your due diligence.
- Note Investor Mistakes #7 Lacking a Full Note Bidding Calculator: (Part of our Advanced Note Investing Training)
Note Investors need a calculator that can review all aspects of the note investment. The calculator should calculate a bid price no matter if the note is performing and Non-Performing (Defaulted). The calculator should evaluate to ensure all exits (ex: reinstatement, Default with equity, Default underwater) are protected, such as Statute of Limitations or Requirements of State Debt Licenses. In addition to including all the expenses and Timeframes of a note are accounted for. *Big tip: For foreclosure expenses make sure you include both the Fannie Mae Attorney Fee + Court Costs for each state, annual property taxes plus the length of time it takes to foreclose.
Default is always a possibility in note investing no matter how long a note is performing.
Reinstatement is always a possibility so plan for a situation where you are not able to modify or foreclose.
- Note Investor Mistakes #8 Failing to seek professional advice: Note investing can be complex, and new investors may benefit from seeking advice from a financial professional and Attorney or experienced note investor. They can provide guidance on investment strategies, due diligence, and risk management. You can find a local attorney through our Due Diligence Resources section.
You can always reach out to JKP for Note Consulting
- Note Investor Mistakes #9 Not having a clear investment strategy and desired return: Investing without a clear strategy or plan can lead to confusion and poor decision making. It is important to have a well-defined investment strategy that aligns with one’s financial goals and risk tolerance. Be sure you invest wisely and mix both higher expected returns along with some stable investments.
- Note Investor Mistakes #10 Note Inventory: Finding note sources is one of the most difficult things to do in the note space. We recommend checking out our Top 10 where to buy notes blog.