Note investing can be a great way to invest your money and earn a strong return; however, there are a few pitfalls you need to watch out for. Like any investment, it’s not risk free.
Pitfall #1: Buying Wrong
There are plenty of people peddling wares or services that promise great things, with no underlying substance to back it up. These are joker brokers. They find someone else’s tape of assets and push it off as their own. You want to know your source and ensure they are reputable. The note investing industry is small. If you aren’t sure, then ask around in the note forums and FB pages. The snakes and jokers are quickly revealed in these spaces.
What do I mean by buying wrong? Not knowing your source and not understanding what you are buying.
Be sure to ask if the seller either owns the note or is direct to seller. Never send money until after you have reviewed the collateral file, pulled title and reviewed and signed the purchase sale agreement. In some cases, if the person cannot produce a collateral file or cannot answer your questions, then they are not direct to seller and have no real business attachment to the asset.
Pitfall #2: Not performing thorough due-diligence
It’s important to be thorough with your due-diligence. This means doing your research on the property, calling tax offices to find out if there are any back taxes owed, finding out code violations (sometimes called specials), such as fines for high grass or abandoned cars, confirming property value (order a BPO or contact a realtor), and getting pictures of the property before buying the note. Checking if the borrower is in bankruptcy or if the property is scheduled to be demolished are all part of the due diligence process.
If you don’t do your homework, you could end up losing money on your investment and making costly mistakes.
Pitfall #3: Self servicing your notes
Self-servicing your notes can also be a costly mistake when investing. By self-servicing your notes you can fall victim to poor documentation, getting sucked into a borrower’s story rather than factual evidence, overlooking key deadlines and making emotional decisions.
When a servicer acts on your behalf, you do not have to interact with the borrower or check to see if taxes have been paid or do an annual escrow analysis and make adjustments. The servicer understands all of the laws and regulations regarding proper communication with your borrower. They follow these rules and act on your behalf. They also document every step that is made with your note whether it is a payment or communication with the borrower. All of the information is documented for you.
This removes the burden of you having to investigate laws in every county and state and trying to handle everything associated with the note. A servicer can cost anywhere from $20-$100/month depending on the type of note. If the note is non-performing, the cost is on the higher end. However, the cost is well worth it because if you self-serviced a note and missed documenting a payment or lost a receipt or operated in an unlawful way with the borrower, the borrower could sue you or dispute any claims you have against them due to lack of servicing documentation.
Pitfall #4: Being desperate and overpaying
Don’t be an eager buyer. Be patient with the process. You may want to have your first note or second note within 30 days of learning all about how to invest in notes. But be patient and make sure the note meets your criteria. There are plenty of notes out there, so there is no need to jump into the first one that comes your way. Do your research, run your numbers and ensure that the pricing is right based on the information you found through due diligence.
Conclusion
Taking these few tips into account when investing can save you a massive headache and make note investing an enjoyable investing experience. By avoiding these you’ll be in a great position to make the most out of your note investing journey and earn a healthy return on your money.
