Evaluating Performing Notes: What You Need To Know
Richard Allen
Co-Founder at Paperstac - The Technology Powering Tomorrow's Mortgage Debt Trades
If you’re considering investing in performing notes, it’s essential to conduct a thorough evaluation of the note’s performance. In this blog post, we will explore the key factors you need to consider when evaluating performing mortgage notes.
This blog post is based on an episode from the Mortgage Note Investing Weekly Paperstac podcast titled, “Methods to Evaluate Performing Mortgage Notes".
For those interested, the full episode is available for viewing here:
Keep reading to discover the critical aspects of evaluating performing mortgage notes that you need to be aware of before making your next investment.
What You Need To Know When Evaluating Performing Notes
Here are the different methods you can use to evaluate performing mortgage notes before making your next note purchase.
Asset Value
When evaluating a performing mortgage note, the first thing you need to consider is the asset value. You want to know what the value of this asset is. Why? Because, ultimately this could come back to a foreclosure.
Understanding the asset’s value is crucial because it could impact the foreclosure process in the future.
They say plan for the worst, hope for the best.?If they have a great payment history you’re probably going to wind up with a performing asset that continues to pay.
If there’s an unforeseen and rare event like COVID or the mortgage crisis, it’s important to have done your?due diligence?and taken precautions to protect yourself.
You want to make sure that you’ve at least done your due diligence and you’re protected.
Always Look At Value
You never want to buy a $150, 000 note and pay par for it when the house is worth 70 grand. Because you’re upside down. Therefore,?always consider the asset value?before making a purchase.
You can learn more about mortgage note due diligence in our ultimate guide here:?Mortgage Note Due Diligence: The Ultimate Guide
Terms of The Note
The second thing to look at when evaluating performing notes is the terms of the note, such as the interest rate, principal balance, length of the loan, and term of the loan. For example, for what’s the term of the loan, is it a 300 month loan and we’re on month 240 or is it a 300 month loan and we’re 36 months into it. Is there a lot of interest left on the front end of it? Those things you really want to dig into.
These details are considered the meat of the performing loan, providing insight into what you may expect to pay. Suppose the payment history is excellent. In that case, you can use this information to estimate the amount you may have to pay.
Assuming payment history is tip top with all that information about the interest rate, the length of the loan, and the principal balance; you’re going to be able to get into a ballpark of what you’re going to pay.
Payment History
Then it comes down to the payment history. The payment history of a borrower is critical when evaluating a performing note. Analyzing the payment history can help create a narrative for the note, providing insight into the borrower’s payment habits.
Examine the payment history to create a narrative for the note. Your goal for this part is to learn as much as you can about the borrower and their payment habits.
Look At Whether The Real Estate Note Is Performing?
You want to look at whether the real estate note is really a performing loan.
Look at whether the borrower is paying on time, paying early, making two payments a month, or rolling 15, which means they are consistently 15 days late. Although the credit bureau reports late payments after 30 days, late fees are incurred after 15 days.
Therefore, it is essential to look at the payment history and identify any payment inconsistencies or patterns. A payment history of 24 months or more provides a good picture of the borrower’s payment cadence.
Key Takeaway: You can get a good picture of the borrower’s payment cadence if you have 24 months or more of payment history.
Servicing Notes When Evaluating Performing Mortgage Notes
Consider the servicing notes when evaluating performing mortgage notes. Servicing notes provide information on why the borrower is making payments slowly or not making payments at all. Dive further into any payment inconsistencies by looking for patterns, like past dues or missed payments and try relying on the servicing notes to explain why the borrower is making payments slowly.
If you see something that’s kind of spotty, the payments are not always there, they’re just kind of fluctuating all over the place, you should factor that risk into your bidding. That’s why it is so important to look at the payment history and servicing notes.
Type of Security Instrument
The type of security instrument is a crucial factor to consider when evaluating a performing mortgage note.
Why is knowing the type of security instrument important?
It determines the foreclosure process, which varies depending on whether it is a mortgage or a deed of trust.
Deed of Trust vs. Mortgage Foreclosure
In the case of a deed of trust, foreclosure is quicker and cheaper compared to a mortgage foreclosure. When a borrower defaults, the lender can foreclose without a judge’s approval by presenting proof of default to the trustee.
On the other hand, a mortgage requires a judicial state foreclosure, which can take a considerable amount of time, causing complications for investors.
Deed of trust states have a much quicker timeline to get the house back and it costs a lot less money. With a deed of trust, if the borrower defaults, the lender can foreclose without a judge’s approval by showing proof of default to the trustee.
For those of you who aren’t sure exactly what a deed of trust is, and how it works let’s break it down further for you.
What Is a Deed of Trust?
For those unfamiliar with a deed of trust, it is a legal document used in place of a mortgage in many states. It protects the lender in case the borrower defaults on the loan, allowing them to foreclose on the property.
Three parties involved with a deed of trust:
1.) The Buyer (Borrower)
2.) The Seller (Lender)
3.) The Trustee (holds the title until debt is paid off)
How Does a Deed of Trust Work?
The borrower transfers legal title to a trustee who holds the property in trust as security for the debt’s repayment. The deed of trust becomes void when the debt is repaid, but if the borrower defaults, the trustee may sell the property to pay the debt.
A deed of trust is typically paired with a promissory note, with both documents working together to provide security for the lender until the loan is paid off. By understanding the type of security instrument, investors can make informed decisions when investing in performing mortgage notes.
Evaluating Performing Notes with Asset Type
When evaluating performing mortgage notes, one crucial factor to consider is the asset type. It’s essential to examine whether the property is a double-wide, a single-family home, a duplex, or a multi-family unit.
These factors hold significant importance, as they can impact the property’s value over time.
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For instance, double-wide properties are usually considered depreciating assets, whereas single-family homes are often seen as appreciating assets.
Additionally, multi-family units are generally considered appreciating assets due to the potential to earn more rental income. It’s not just about replacement costs or comparables, but also about the cap rate, which is the amount of money you’re earning from the property.
Therefore, it’s vital to consider the asset type when evaluating the performance of mortgage notes.
Summing Up Things To Consider When Evaluating Performing Notes
- Asset Value
- Terms of the Note
- Payment History
- Security Instrument Type
- Asset Type
In conclusion, evaluating performing mortgage notes requires a thorough understanding of several key factors.
Firstly, knowing the value of the asset and conducting due diligence is crucial.
Secondly, analyzing the terms of the loan, including interest rate, term length, and principal balance, is essential.
Thirdly, payment history is an important consideration to evaluate risk.
Fourthly, understanding the type of security instrument impacts the foreclosure process.
Finally, it’s essential to know the property type to determine whether it’s an appreciating or depreciating asset. By comprehensively analyzing these five key areas, you can make an informed decision when investing in performing notes.
Therefore, it’s crucial to take a strategic approach to evaluate performing mortgage notes and make sound investment decisions.
Performing Mortgage Notes on Paperstac
If you feel ready now to evaluate performing notes for your next note purchase you can take a look at our?performing notes for sale?on Paperstac. If you haven’t yet had a chance to sign up for your free Paperstac account you can do so here:?https://paperstac.com
Sign Up For Your Free Paperstac Account:
It’s free to bid and list. You’ll pay a small 1% fee ($250 minimum) during closing. The fee covers all FedEx shipments, audit reports, online notary and more! Paperstac makes it simple to buy and sell mortgage notes online in a fraction of the time it typically takes.
Paperstac Note Investing Platform Features
Our platform offers various features that not only enhance the efficiency, communication, and transparency in mortgage note closings but also mitigate risks for note investors. To make the note closing process more streamlined and error-free, we provide a proprietary to-do list that guides investors through each step.
If you want to learn more about our platform and how it can benefit you, visit our website.
You can learn more about us here:?https://paperstac.com/about.
Thanks For Reading
Thanks for reading this blog post on evaluating performing notes. We hope you enjoyed learning about evaluating performing mortgage notes. Stay tuned for more helpful content on real estate investing and mortgage note investing on the?Paperstac Blog!
For any blog content requests related to mortgage note investing or collaboration inquiries contact?jessica@paperstac.com.
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Additional Note Investing Resources
- Paperstac — Sign Up For Your Free Paperstac Account Today:
- Paperstac Academy?— The Ultimate Note Investing Course
- Paperstac Blog
- Paperstac Podcast — Mortgage Note Investing Weekly
- Paperstac Guides
- Paperstac YouTube Channel
- Intro to Note Investing?YouTube Series
- Paperstac Support Knowledge Base
- Paperstac Social Media Channels — Linktr.ee
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