Investing in Non Performing Loans (NPNs)

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Submitted by 34f3f3f on December 29, 2009 - 1:33pm

NPN's, notes or paper as they being referred to seems to be a popular way to invest in REO's, and is cheaper. It's look like it is largely confined to big deals, but eventually I guess the smaller investor will be able to get a piece of the pie. Does anyone know anything about them, the risks, returns, etc?

Submitted by Jumby on December 29, 2009 - 2:08pm.

My company just brokered a $1.5 million dollar NPN. New home builder went under in Mississippi, 35 homes. 85% of them completely done, with appraised value at $95k a piece being conservative. They also were GO Zone qualified. The investor made out....and so did I for brokering the deal.

I learned the biz thanks to this guy Dean who I personally vouch for...

http://tinyurl.com/y8jysc5

P.S. Don't be turned off by his direct response marketing, his program is legit and right now is a perfect time to be on top of this.

Submitted by patb on December 29, 2009 - 3:27pm.

Jumby wrote:
My company just brokered a $1.5 million dollar NPN. New home builder went under in Mississippi, 35 homes. 85% of them completely done, with appraised value at $95k a piece being conservative. They also were GO Zone qualified. The investor made out....and so did I for brokering the deal.

I learned the biz thanks to this guy Dean who I personally vouch for...

http://tinyurl.com/y8jysc5

P.S. Don't be turned off by his direct response marketing, his program is legit and right now is a perfect time to be on top of this.

risk is proportionate to reward.

You want returns, take on risks.

Submitted by Jumby on December 29, 2009 - 3:51pm.

agreed

Submitted by CA renter on December 29, 2009 - 5:14pm.

I know of one group that will take investments of $100,00 and pool them with other, larger investments.

You never really know what the returns will be because every package is different, and the fees and costs vary greatly. From what I'm hearing, you could probably net anywhere from 20-70%+, IF everything goes right.

Submitted by NeetaT on December 29, 2009 - 6:40pm.

"I know of one group that will take investments of $100,00 and pool them with other, larger investments."

I may be interested. Do they have a website?

Submitted by 34f3f3f on December 29, 2009 - 7:14pm.

patb wrote:
Jumby wrote:
My company just brokered a $1.5 million dollar NPN. New home builder went under in Mississippi, 35 homes. 85% of them completely done, with appraised value at $95k a piece being conservative. They also were GO Zone qualified. The investor made out....and so did I for brokering the deal.

I learned the biz thanks to this guy Dean who I personally vouch for...

http://tinyurl.com/y8jysc5

P.S. Don't be turned off by his direct response marketing, his program is legit and right now is a perfect time to be on top of this.

risk is proportionate to reward.

You want returns, take on risks.

So given the potential returns I've heard bandied about, these must be very high risk investments.

Submitted by pabloesqobar on December 29, 2009 - 8:54pm.

CA renter wrote:
I know of one group that will take investments of $100,00 and pool them with other, larger investments.

You never really know what the returns will be because every package is different, and the fees and costs vary greatly. From what I'm hearing, you could probably net anywhere from 20-70%+, IF everything goes right.

Wow, those are huge numbers. I'm guessing the risk is higher as well. Probably not secured by first TD's on property that have plenty of equity to cover you after fees/costs.

I was fortunate enough to get in on a deal at 11% for 1 year. Even that made me nervous. (I think you know him).

Submitted by NeetaT on December 29, 2009 - 9:39pm.

I made 15% per year for two years recently on corporate debt, but that ended and I can't find any more deals like it. This sounds right up my alley. Please list more contacts if you have them.

Submitted by CA renter on December 29, 2009 - 11:44pm.

NeetaT wrote:
"I know of one group that will take investments of $100,00 and pool them with other, larger investments."

I may be interested. Do they have a website?

I will see if they (and Rich!) will allow me to put up their info on this site. If not, then anyone who is interested can PM me, and I will get back to you with the info.

Submitted by CA renter on December 30, 2009 - 12:04am.

pabloesqobar wrote:
CA renter wrote:
I know of one group that will take investments of $100,00 and pool them with other, larger investments.

You never really know what the returns will be because every package is different, and the fees and costs vary greatly. From what I'm hearing, you could probably net anywhere from 20-70%+, IF everything goes right.

Wow, those are huge numbers. I'm guessing the risk is higher as well. Probably not secured by first TD's on property that have plenty of equity to cover you after fees/costs.

I was fortunate enough to get in on a deal at 11% for 1 year. Even that made me nervous. (I think you know him).


--------------

Yes, from what I understand, they are buying notes on properties all across the country, so there is more risk because they are dealing with different laws and regulations WRT foreclosures, etc.

I was told that they were first lien notes, but cannot find that specifically stated in the documents I've reviewed. Their exit strategy is to have capital returned within 2-3 years, though five years is possible.

Yes, there is definitely a fair amount of risk. I am still researching this myself, and have not yet invested anything. Will not and cannot make any recommendations either way, as everyone has to do their own risk assessment.

Submitted by clearfund on December 30, 2009 - 1:02pm.

Not sure who this group is, however, If you know what you are doing you can achieve very high returns averaging in excess of 20%/year based on a reasonable workout. Given the size of the loan purchases, and the need to diversify, the best approach is to invest via a fund or pooled investment with an experienced management team.

With our funds/clients we have been buying non performing loans (mainly commercial property) in CA/AZ/NV and performing loans at steep discounts to the unpaid balance (these get us high current yield). Examples: Office building in Phoenix $8mm NON PERFORMING loan for $2mm; $4mm PERFORMING loan for $2.5mm

It is the best way to access the property market at a good discount to value and avoid the games/competition at the 'retail' level. We only buy 'off market' loans from local/regional lenders as the values are best.

2010 will be the sweet spot for buying loans at a sizable discount to the underlying property's current value...

Submitted by socrattt on December 30, 2009 - 3:15pm.

It seems as though everyone has a squeeze page or landing page these days and something to sell. The only problem is who to believe. This guys idea definitely sounds high risk as the market is poised for a interest rate rebound which could change things overnight.

At this point in the market I think just about everything has a ton of risk involved as the government is playing puppet master of the stock market and RE markets. Choose wisely when investing and remember that just because one person has mastered a system the chances are it's already too late to capitalize!

Submitted by CA renter on December 30, 2009 - 3:34pm.

I agree with you about the risk, socratt. That being said, 2009 was my worst year for returns (~3.5% total) because I largely exited out of everything in October 2008 (mostly as a short seller), because it was obvious markets were not going to behave rationally due to all the manipulation.

The problem with the Fed's ZIRP program, is that it causes normally conservative investors to go much further out on the risk curve. I've always been a control freak when it comes to managing our money, and have stayed away from wealth managers, hedge funds, etc. because I like to control everything on a day-to-day basis. Now, I'm finding myself re-evaluating everything because conservative investors are getting creamed in this current environment.

This is exactly what the Fed wants, and this is exactly why we're in the mess we're in. Any conservative fixed-income investors (seniors, pension funds, etc.) have been slaughtered this past decade. BTW, this is one of the biggest reasons Cal-PERS is in trouble, IMHO. It's only partially due to "overly-generous" pensions. They've not been able to attain their forecasted returns due to the low interest rate environment, because low interest rates cause the mispricing of risk and force investors to take on more risky investments. They've made some risky choices because they were left with no options, and now many of those investments have blown up.

Submitted by 34f3f3f on December 30, 2009 - 6:28pm.

clearfund wrote:
Not sure who this group is, however, If you know what you are doing you can achieve very high returns averaging in excess of 20%/year based on a reasonable workout. Given the size of the loan purchases, and the need to diversify, the best approach is to invest via a fund or pooled investment with an experienced management team.

With our funds/clients we have been buying non performing loans (mainly commercial property) in CA/AZ/NV and performing loans at steep discounts to the unpaid balance (these get us high current yield). Examples: Office building in Phoenix $8mm NON PERFORMING loan for $2mm; $4mm PERFORMING loan for $2.5mm

It is the best way to access the property market at a good discount to value and avoid the games/competition at the 'retail' level. We only buy 'off market' loans from local/regional lenders as the values are best.

2010 will be the sweet spot for buying loans at a sizable discount to the underlying property's current value...

When you say access the property, do you mean take title, and is that your goal?

Submitted by Jumby on December 31, 2009 - 1:08pm.

What are you talking about? What do interest rates have to do with this? Could they raise and further press down values? Sure....but you are missing the point...investing in non performing notes allows you to buy non performing loans from the bank, you then own the real estate for a fraction of what was owed on it...and with nothing but foreclosures in the pipe, it is a very wise time to be on top of this...like I said earlier, I brokered a $1.5 million NPN, the investor is going to see a huge return on his money, the key is finding the banks that have NPNs (ALOT) and making sure you aren't overpaying...

Submitted by socrattt on January 1, 2010 - 12:53pm.

Jumby wrote:
What are you talking about? What do interest rates have to do with this? Could they raise and further press down values? Sure....but you are missing the point...investing in non performing notes allows you to buy non performing loans from the bank, you then own the real estate for a fraction of what was owed on it...and with nothing but foreclosures in the pipe, it is a very wise time to be on top of this...like I said earlier, I brokered a $1.5 million NPN, the investor is going to see a huge return on his money, the key is finding the banks that have NPNs (ALOT) and making sure you aren't overpaying...

Jumby, it's simple mathematics. If rates go up your "fraction on the dollar" purchase becomes a higher fraction. Prices will depreciate as rates rise, foreclosures increase and unemployment increases. You have to look at the big picture! A common sense investment approach is not so common sense anymore. I will guarantee you one thing, if you continue to think the way you do, you will lose in tomorrow's market. Tomorrow's market to me is defined as anything but today. The real estate market could essentially change overnight and now that we are officially in 2010 I can say the market will change dramatically this year!!

Submitted by Jumby on January 2, 2010 - 11:26am.

Socratt, what you are saying is common sense...this isn't 2005 though, it's 2010, when you are buying homes (through non performing notes) for HALF OF REPLACEMENT COSTS you are getting a great deal. These are the kind of deals that are out there right now for diligent investors. Times like these is when big money is made....

You can sit back and philosophize all you want or you can get in the game and see if there is anything worth your time and money....

Submitted by barnaby33 on January 2, 2010 - 12:23pm.

when you are buying homes (through non performing notes) for HALF OF REPLACEMENT COSTS you are getting a great deal. These are the kind of deals that are out there right now for diligent investors. Times like these is when big money is made....

Get in the game? Buy now or be priced out forever? Where have I heard these before. Buying a note for half the face value in this environment means you now own a note that in most cases, is just face value. Lots of stuff that was loaned against in the last ten years are zero's. Far flung exurbs, big box retailers in those exurbs etc. Maybe if you are getting those deals in places where people will want/need to go in the next few years, you'll make out like a king. First you gotta tell me where those people are going to want/need to go.

Forget the inflation/deflation debate, thats just one peice of the puzzle. The savvy investor is not the one buying distressed debt, but distressed debt with a FUTURE and that sir is where the money will be made. Personally I wouldn't be betting on anything in Arizona or Nevada, but that is just me.

Josh

Submitted by Jumby on January 2, 2010 - 1:18pm.

I'm surely not saying 'buy now or be priced out forever', don't stretch it.

I think you summed it up nicely by saying.."Maybe if you are getting those deals in places where people will want/need to go in the next few years, you'll make out like a king. First you gotta tell me where those people are going to want/need to go."

If you can get stuff for half of replacement costs in areas like that then you should do it....that's all I'm saying...end of story.

Submitted by EconProf on January 2, 2010 - 5:16pm.

In weighing the merits of buying distressed commercial and residential properties, or the loans thereon, keep in mind the ease of renting them at vastly lower rents. You can steal tenants from the competition which is in denial not only about the value of their own property, but the sinking rental value as well.
When you buy a property at half its peak price, you can slash the rents to fill it up and still make cash flow.
I recall the early and mid-1990s apartment market in San Diego. When gloom and doom prevailed as apartment vacancies were in the teens, a few brave souls bought buildings for $30k per door, slashed rents, and filled up, much to the distress of mom and pop owners who refused to face market realities. Many of them suffered 30 to 40% vacancy rates rather than cut rents. Most went under, adding to the inventory for the bottom-fishers to scoop up.

Submitted by patientrenter on January 2, 2010 - 5:24pm.

EconProf wrote:
..
I recall the early and mid-1990s apartment market in San Diego. When gloom and doom prevailed as apartment vacancies were in the teens, a few brave souls bought buildings for $30k per door, slashed rents, and filled up, much to the distress of mom and pop owners who refused to face market realities. Many of them suffered 30 to 40% vacancy rates rather than cut rents. Most went under, adding to the inventory for the bottom-fishers to scoop up.

And some people insist on calling this the end-of-the-world RE-driven recession. It's still way less severe than even the last RE downturn.

Submitted by clearfund on January 2, 2010 - 7:30pm.

We look at buying our NPN notes at a max of 70% of TODAY'S value. Thus, our basis is well below today's value when/if we end of owning the property.

We also ensure that our cost of the project (foreclosure, renovation, leasing, ti, etc) is well below replacemtn value.

Lastly, we require that when we stablize the property with conservative assumptions (high rental factor, below today's market rents, etc) we will earn a minimum 12% all cash yield.

Therefore, using the above we are buying at values that will provide us with high all cash yields for a possible long term hold...no flipping expected!!!

Alternatively, if we buy a note at 50% of face (70% ltv on today's value) and we can get an owner to pay us cash flow and then 'cut him a break' at a 75%-80% payoff down the road we make out with a 50%+ profit plus cash flow....

When the market returns at some point, we simply refinance all our our cash out of the deal at the new crazy valuations, cash flow, or sell.

Just use fundamentals of commercial to make sound real esatate purchases and all will work out. But one must pay all cash (or a very high %) and have a 5+ year horizon (preferrably 10 years) and you will look back very happy.

This is not a game for high LTV players, be conservative with underwriting/acquisition strategy until things turn around.

Lastly, re: AZ/NV the fear is exactly why you should buy quality commercial property there now (phoenix over vegas is I had to pick). Its a boom/bust town and you can get incredible deals if you use the above type of transaction structure.

FLIPPING IS NOT INVESTING: BE AN INVESTOR, NOT A FLIPPER!!!

Submitted by Jumby on January 2, 2010 - 11:01pm.

clearfund, how did you find this thread? i see you are new here....google alerts?

Submitted by clearfund on January 3, 2010 - 10:44am.

I have been actively reading it for over a year + but have never registered/commented till now.

Submitted by Allan from Fallbrook on January 3, 2010 - 11:33am.

clearfund wrote:

FLIPPING IS NOT INVESTING: BE AN INVESTOR, NOT A FLIPPER!!!

Clearfund: However, what you're advocating isn't investing, either. Its speculating, pure and simple.

Regardless of your "transaction structure", you're still making bets on someone else's valuation (either the market's or prevailing wisdom at the time) and that is both volatile and dangerous.

You can tinker with the numbers on either a DCF or FV basis to support your valuation, but isn't that how we got into this mess in the first place?

Using Vegas as an example, you have no way of actually predicting (with any degree of accuracy) where values will be over your timeline, which is directly opposed to being able to predict (with a fair degree of accuracy) where a company's fortunes will take them over the same period using simple valuation tools. Hence, the difference between speculation and investment.

Submitted by Jumby on January 3, 2010 - 1:08pm.

Allan, can't a person purchase a NPN based upon what the unit will rent for? How is that not investing?

Submitted by peterb on January 3, 2010 - 2:56pm.

Econ prof has a point about rents. Since they are far more reliable than valuations, it's a decent plan B should the valuations take a hit. But you may end-up being an out of state landlord. special kind of hell. But in a market that's this heavily manipulated, risk is very high.

Submitted by clearfund on January 3, 2010 - 3:41pm.

Allan - How is buying a high quality building with conservative underwriting and an all cash yield (read: zero debt) north of 12% (based on rents well below today's depressed rental rates) speculating? I'd call it investing. Sure, the investment could go south, but so could any other investment/company.

I seem to recall the bulk of wall st. firms and their "simple valuation tools" being way off the mark so I wouldn't hang your hat on that analogy.

To me, investing is based on conservative/historical fundamentals, speculating is based the need for a rising market to make the deal work.

I would say that buying a newly constructed class "A" bldg on a great location at 50% of replacement value that needs 40% occupancy to break even is investing, not speculating.

Submitted by Allan from Fallbrook on January 3, 2010 - 4:41pm.

clearfund wrote:
Allan - How is buying a high quality building with conservative underwriting and an all cash yield (read: zero debt) north of 12% (based on rents well below today's depressed rental rates) speculating? I'd call it investing. Sure, the investment could go south, but so could any other investment/company.

I seem to recall the bulk of wall st. firms and their "simple valuation tools" being way off the mark so I wouldn't hang your hat on that analogy.

To me, investing is based on conservative/historical fundamentals, speculating is based the need for a rising market to make the deal work.

I would say that buying a newly constructed class "A" bldg on a great location at 50% of replacement value that needs 40% occupancy to break even is investing, not speculating.

Clearfund: If you cite Wall St. and their "simple valuation tools", you missed my point entirely and actually wind up making it for me. Digressing slightly, Wall Street's valuation and risk modeling tools were actually anything but simple (unless you consider a sixteen page interlinked MS Excel spreadsheet simple). I did point out in my post that Wall Street and those valuations landed us in the mess we're in.

Nope, when I refer to simple, I'm discussing a Balance Sheet driven investment model. You make a point of referencing historical values. What possible use are historical values in assessing a market like Las Vegas? Which period of time would you use? Last five years? Last ten? Twenty plus, with a COLA/inflation adjustment?

Any "investment" with a strong reliance on cash flow is, by its very nature, speculative. Do you feel strongly enough about your investment to guarantee occupancy and rents? I can point out no less than a dozen buildings in downtown San Francisco (FiDi) where the buyers sold the deal based on occupancy and rents. A quick glance at the news will show how this is working out. And, trust me, Las Vegas and Phoenix aren't downtown San Francisco, especially when it comes to attracting Class A clientele.

Are you at all familiar with Heller Ehrman or Thelen in San Francisco? These were long-time law firms (Heller was 118 years old and Thelen was 84) domiciled in downtown SF. Both were anchor tenants in their respective buildings and both imploded in late 2008. They wound up taking the building owners down with them. My point is this: Using your investment model, clients like this would be considered "blue chip", correct? In a CRE market like this, anything is possible, and a continuing, possibly accelerating downward trend is not only likely, but probable. No "transaction model" in the world can prepare for a Heller Ehrman or Thelen implosion, which tends to debunk your conservative underwriting approach entirely. Which is why I use speculation instead of investment.

Submitted by Jumby on January 3, 2010 - 6:17pm.

So Allan, let me get this right...this is no such thing as real estate investing? It's only speculating? That's what I get from reading you...

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