Should I Invest in Real Estate Notes?

Question:   Hi Chuck,   I am considering entering the world of real estate commercial note buying, and I want to make sure I have all the information I can find prior to making the move.   I heard of the field from Russ Dalbey, of Colorado.   What is your opinion of the field today?   What in your opinion are the risks of an individual entering the field?     You mention that you used to work for the largest note buyer in WA state, who might that be?     Thank you for your time.

Answer:   Yes, I worked for Metropolitan Mortgage & Securities in Spokane.   When I worked there many years ago, we had purchased over 7,000 private notes (deeds of trust and real estate contracts).

At that time, interest rates were high, so based on a required investment return of 18%, we were getting an average discount off the principle balance of about 30%.   Not bad.   Of course, with interest much much lower today, discounts of that kind are not possible.

It is a great business, or was a great business.   It has gotten to be a very competitive business, so much so that note buyers are offering as much as 97% of the balance.   Wow.   A 3% discount hardly makes it worth considering.   Of course one’s rate of return is based in part on the interest rate on the existing note, so a small discount might still work out to a decent ROI, provided the underlying interest rate is high.   Problem is, most people refied and all those private high interest notes pretty much are history.   Note buying is still a great opportunity, but it is hard to find secured notes on good real estate that is not overvalued right now and that can give you a good ROI.

There are some serious risks for the inexperienced note buyer.   Of course, you want to be in first place, so you have to be able to analyze title information like an expert, to recognize potential problems, and to know when to hold ’em and when to fold ’em.   There are unrecorded dangers, too, like a labor or a mechanic’s lien.   There is the danger of unrecorded encumbrances, like adverse possession or an easement by prescription.   There are other legal risks, like an IRS tax lien, private judgments, and spousal claims.   You could loose money real fast in this business if you are not an expert from the start, or if you don’t get an expert partner from the beginning.

If I had to compare the best opportunities right now in the real estate market, I would say that single family homes can be purchased at massive discounts, and many of these in the right areas will double in value in 5 years.   There’s a lot more to what I’m saying in this paragraph, and it would take a lot more space to type a full explanation, but I just wanted to share this info for your consideration.   Here’s a bonus for you.   I really think that a small group of 3 to 6 partners with a total of 5 or 6 million could make a fortune in a real estate partnership over the next 5 to 7 years.   Of course, it definitely would take some serious knowledge and experience in the areas of partnerships (avoiding the common pitfalls), real estate buying, investing, selling, and so on.

If you consider doing this, I would strongly recommend some serious professional help, and not just anyone.   It takes a special expertise to be able to do this without losing your funds.   That’s kind of important.   I would suggest someone with both a real estate law and a real estate brokerage background, like my background.   This is not a solicitation.

Best Regards,
Chuck Marunde, J.D.
Broker/Owner/Realtor
Sequim & Port Angeles Real Estate, LLC
618 South Peabody St., Suite I
Port Angeles, WA  98362
(360) 775-5424
(866) 733-7135 fax
chuckmarunde@gmail.com
http://SequimPortAngeles.com

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