How To Invest In Notes – We covered note investment due diligence in Part 2 of The Basics series. This is the ultimate guide to listing due diligence and we aim to satisfy. Not only is this post packed with content, but we go further and provide advanced due diligence tips that can make the difference between making or losing money as a bond investor.
Through The Basics series, offered exclusively on , we cover the basics of real estate bond investing to help new bond investors get started. Just in case you missed part 1 of The Basics series,
How To Invest In Notes
As we continue to mature, we will continue to work on updating our content while continuing to invest in real estate notes. Until that point, a quick update here with something we experienced with a realtor in Ohio (OH) who originally had no clear title to the property!
What Is A Convertible Note?
We had executed a Deed in Lieu (DIL) on a property and wanted to sell the property to a local investor so that we could withdraw our original investment in the deed we had originally purchased. We encountered a snag and potential cloud in the title to the property when we learned that Ohio (OH) has a dowry clause for real estate. So what does that mean?
When I hear dowry or dowry, I think of the traditional custom that dates back to colonial times, where a bride would bring goods and/or money for her future husband to marry. The opposite of this was turning, where a future husband would do the opposite, giving property and/or money to a future bride’s family.
What we found is that Ohio (OH), Arkansas (AR) and Kentucky (KY) still retain dowry rights under a dowry clause, which I had never heard any other note investor talk about before. Let’s illustrate dowry rights in an example:
John, who is married to Susan, sells his property, located in Columbus, OH, to Adam for $250,000. Along with the signed deed, Susan must sign a release of dowry rights for ownership to be transferred free of charge (pure title). If she doesn’t sign a release when the property sells and no one picks it up before it closes, the property will now have a clouded title. Five (5) years later, Adam decides to sell the property, but his title company discovers that the title is unclear because these dowry rights have not been released by Susan. Susan must sign the release to remove title from the property. If Susan cannot be found, a silent title action must be taken to remove title from the property.
Investment Decision Rules
Death and divorce are the only ways to terminate dowry rights, which turned out to be the good side of our situation. The previous owner was divorced, so we were able to sell the property with clear title.
Recommendation: For notes you purchase in OH, AR or KY, take extra time to review the chain of title to ensure that all assignments have corresponding releases of all spouses’ dowry rights (signed, notarized and ideally registered). If a borrower was divorced prior to selling property, be sure to review divorce papers to verify that the divorce occurred prior to any property sales.
The common real estate adage applies just as much to self-storage investing as it does to investing in real estate securities. you earn your money
When performing note investment due diligence, you want to set yourself up for the highest possible profit on exit. For this reason, a large part of due diligence comes down to eliminating potential risks and reducing those risks that cannot be completely eliminated in an investment.
Transition To Notes Is Complete
The due diligence for investing in notes varies depending on the underlying security or the type of property the note is linked to. Due diligence will change, for example, if the underlying title is vacant land, commercial property or detached houses. This may seem like an obvious observation, but it’s an important data point to address when it comes to investment due diligence.
Unlike commercial or vacant land notes, residential notes are the most traded real estate notes. For that reason, for the purposes of this post, we are going to focus on note due diligence on notes backed by residential properties.
Due diligence for note investments is divided into 2 main phases, initial and secondary due diligence. The first initial phase of due diligence is carried out before initial offers are sent to note sellers. Once an initial offer is accepted, you enter the secondary due diligence phase. Before we talk about each phase of due diligence below, let’s cover basic note buying terminology.
The due diligence on the initial note varies from one real estate investor to another. For example, a note investor will find a few critical elements to do their due diligence before submitting their first offer. On the other hand, a newer investor can cover a wide range of due diligence pieces at this early stage before making an initial offering. It comes down to your level of experience and comfort in submitting bids without knowing every bit of due diligence in the interface. As you become more familiar with analyzing real estate securities contracts, you will begin to increase the efficiency of your due diligence. Don’t get frustrated if you feel the initial due diligence is taking too long once you get started, things will get easier. Also, your purchase criteria will be limited as you continue to buy notes.
Why Structured Notes Might Not Be Right For You
In the secondary phase of note investment due diligence, you will perform all detailed and in-depth analysis of the notes. Your secondary due diligence should either confirm the starting bid price you entered or give you pause to consider a fade from your starting bid. More often than not, you’ll discover aspects of the potential note you want to buy that will justify fading your starting bid.
This is due to the fact that many important elements of due diligence, such as security assessments or property and warranty reports, are not performed during the initial due diligence investigation. This is why the secondary due diligence phase is so important when buying real estate securities. Let’s talk about your note investment due diligence strategy now.
An important point to remember with promissory notes is that after your initial offer is accepted, you have a period of time to conduct due diligence on the secondary note investment. When this secondary due diligence phase is complete, the transaction is financed. For single note purchases, note sellers typically offer about 7 days to perform secondary due diligence. For larger purchases of notes, secondary due diligence may extend beyond 30 days.
An effective strategy is to quickly perform initial due diligence and be one of the first to bid on multiple assets. There are several advantages to this strategy, including:
Real Estate Note Investing: Using Mortgage Notes To Passively And Massively Increase Your Income
To summarize, there are many advantages to quickly submitting a first offer on multiple properties. That said, it’s easier said than done to bid big on multiple assets at once. Don’t go overboard when starting out, but remember that most of your bids will not be accepted by note sellers. Better to bid on 10 assets and get 3 accepted bids than to lose on all assets.
Due diligence when investing in notes is incredibly important, but it can also seem like one of the most daunting tasks of investing in notes. There are many different parts of due diligence, all of which must be considered to ensure that you are in the best position when acquiring sheet music. For this reason, I strongly recommend that you engage the services of professionals such as attorneys and title appraisal companies such as ProTitle USA who can help you invest in your due diligence.
A key differentiating factor when investing in proprietary notes is that you cannot perform any type of internal inspection of the note’s underlying title. You cannot simply knock on the borrower’s front door and ask to inspect your property. Think about it, would you let a stranger into your home to inspect your property for some unknown reason? In fact, you cannot legally contact a borrower who pays with a note you want to buy.
This differentiator is often completely overlooked by new note investors who were previously fix-n-flip investors. This results in fixes and fins paying too much for the bills and quickly burning up in the bill investment space. To account for this differentiation, note investors must include a higher discount in their note offerings. The larger discount will help offset interior repairs if the property is eventually taken over by the net investor. Remember to include this in your due diligence and return calculator.
Structured Notes And The Benefits Of Fixed Income Investments
While some real estate investors only invest in their local backyards, most invest throughout the United States. This ability to invest throughout the United States is an attractive aspect
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