How to Invest in Debt by Michael Pellegrino

Author:Michael Pellegrino
Language: eng
Format: epub
Publisher: Skyhorse
Published: 2017-01-16T16:00:00+00:00

IR

Interest Rate

UPV

Underlying Property Value

LTV

Lien To Value ratio

Just like investing in defaulted notes, I always start negotiations with the “as is” property value (“UPV”) because if you can’t agree on a general range for the underlying property valuation, then you probably won’t be able to make a deal. Once a valuation range is agreed upon, the negotiations turn to a final price for assignment of the note and mortgage. Final negotiations turn to likelihood of a default:

• Has the debtor defaulted on any mortgage? If so, how long ago? Prior defaults are seen as increasing the likelihood of another default.

• What is the amount of equity cushion above all liens?

• Is the property more or less likely to be damaged in the future?

• Is the property area generally increasing or decreasing in value?

Servicing

The term servicing refers to collecting, processing, and tracking all of the monthly payments that are made by the debtor under the terms of the note. Large banks hire “servicing” companies to handle this tedious and detailed-oriented work. It is critical to keep accurate records to protect yourself and the debtor. If a note is defaulted and a foreclosure is required, the debtor may demand to see the payment records, and if there are any inaccuracies, it can cause months of costly delays while the attorneys fight it out in court. If you are not the type to keep immaculate records; then use a servicer. In fact, many of the more reputable note sellers will not sell performing notes to you unless you are working with a servicer. Servicers typically charge a small fee of $25 to $40 per month, so it is worth the cost.

Documentation

This is an important aspect that is often overlooked. One would assume that if you are being offered a note to buy, all of the necessary documentation would be in place. Unfortunately, however, it is not always the case. Some unscrupulous sellers will shop notes around “for sale” when they don’t even own the note yet. Once they find a potential buyer, then they will scramble to buy it from another seller and “flip” it to you for a profit. Other sellers will try to sell you a note with incomplete documentation.

I only work with a limited number of well-respected sellers whom I can trust. In order to close a deal, you should receive the entire loan package, including:

1. Original promissory note

2. Original recorded mortgage

3. Complete payment records

4. Signed statement of account due

5. Assignment of note and mortgage

6. Legal file if one exists

Before you get too deep into negotiations, be sure to establish whether you are negotiating with a broker or the true holder of the note and determine whether the seller can provide full documentation of the loan. The required documentation varies from state to state, so check with your local attorney to confirm what documents are needed in your region.

Why It Works

A word on market theory.

So why does this work? Why does this process often result in an investor acquiring an income

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