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SHOW NOTES FOR EPISODE 303: REAL ESTATE NOTE INVESTING
Many people understand the world of rental properties, fix ‘n flips, wholesaling and other common real estate strategies, but there is a little-known niche that can also provide great returns, backed by real estate, without the effort or headaches: note investing. In today’s podcast episode, Dave Van Horn, real estate investor and author of Real Estate Note Investing, shares how anyone can get started with real estate note investing—even as a newbie investor.
What You Will Learn
- What are real estate notes?
- How do they compare to other types of real estate investments?
- Some of the advantages of creating “multiple streams of income”
- What short and long term notes are
- Where you can buy notes
- The difference between “performing notes” and “non-performing notes”
- Why David prefers “non-performing” notes
- How you can spend pennies on the dollar for notes and generate tremendous returns
- Why real estate notes are great investments for retirees
About Our Guest
Dave Van Horn
Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.
More About Dave
- Grew up a blue collar son of a single mom with six kids
- Working in construction while going to college
- When he graduated college he couldn’t find a job
- Moved back home
- Stayed in construction
Getting Into Real Estate
- His mom said, “Why not try real estate?”
- In 1986, got his real estate license while continuing to work in construction
- In 1989, bought his first investment property, a duplex
- He lived in one of the units and built commercial garages on the property
- He started as more of a realtor and became more of a real estate investor later on
- He knew how to find properties and how to fix them up
- His biggest problem was finding the capital
Becoming a Serious Investor
- He took a real estate investment course to get his broker’s license
- The course instructor told Dave about buying properties using credit cards
- So, he would write himself a “credit card check” and pay cash for an investment property
- He would fix the property up, move a tenant in, refinance the property, pay the credit cards off
- Built a portfolio of about 40 properties doing this
- Real estate property values shot up and he became a millionaire overnight will all his equity
- Started utilizing lines of credit
- Became a hard money lender – would lend other rehabbers money
- He also started a successful painting company with 12 people working for him, trucks, etc.
Injury Changes His Course
- At 42, he got a back injury which prevented him from continuing the painting company
- Although he had enough rental property he didn’t have to work, he wanted to build a stronger financial base
- Focused on real estate full-time
- Bought a title company
- Worked at Re-Max
- Did property management
- Created multiple streams of income
- He would sell primarily to real estate investors, get the title on the property, manage and maintain the property
Another Change in Course
- When 2007 came, he wasn’t selling that many houses
- Financing mostly went away for his investor clients
- He recognized the power networking
- He decided to create his own real estate investor networking group
- The group would meet over lunch/dinner and people would present their deals
- The group started out with 12 people
- In 6 years, the group grew to five states, six locations from Baltimore to New York and over 8,000 people in their database
Getting Into Notes
- He would interview the speakers who spoke at the groups and one guy was raising capital for pools of delinquent mortgages
- The speaker was well received but Dave didn’t respond
- But one of his partners, John, invested in notes and was getting great returns
- Right before the crash, they went to the guy and said, “You show us how to collect on delinquent assets and we’ll buy assets from you.” They said yes and it launched a whole new career path for Dave
- By that time, Dave had become very good at raising capital for commercial real estate deals (mobile home parks, self-storage, and commercial office condos)
- He was used to raising money for syndication
- When the recession came, he was in a perfect place
More on Notes
- David’s wife said notes are musical symbols
- A real estate note is a “promise to pay”
- David says we’re all in the note business. Most people just don’t realize it
- Types of notes
- Student loans
- Medical debt
- Auto loans
- His focus is residential mortgages, 1-4 unit properties
- When he first started, he mainly purchased “junior liens” because there is less capital required and you can diversify more among more the assets
- Junior liens are usually second mortgages or home equity lines of credit (HELOCs), not first mortgages, which are a little higher risk because the first priority pay-off is first mortgages
- Junior liens are higher risk but they have higher upside as well
- Today, he primarily deals with first mortgages
- He tries to help people stay in their loans and keep their properties. He focuses on:
- Community stabilization
- Getting the properties back into the tax rolls
- To become a productive asset again for the community
- No one wants a boarded up house next door to them with overgrown grass
Where You Can Buy Notes
- You can buy notes:
- Online
- Through note brokers
- Loan exchanges
- FCI Exchange
- Note funds
- His company PPR The Note Co has note funds
- Banks
- Service companies
- Through private sellers
- Hard money lenders (short-term notes)
- There are two note worlds:
- The institutional note world
- Private seller-financed note world (someone sells a house to their son or a friend)
Performing vs. Non-Performing Notes
- Performing notes are notes where the borrower is still actively paying the loan
- If someone has “A” credit, they can sell above the mortgage’s original amount
- The seller makes money over the long term through the 30-year amortization – the interest is paid off first
- Typically most people only hold their mortgages for 5-7 years
- Non-Performing notes are notes where the borrower has defaulted on the loan
- Mortgage prices tie directly to real estate values
- Note prices fluctuate with the market:
- in an up market they sell higher
- in down market they sell for less and they tend to be more abundant and it can take longer to sell a note
- Exit strategies differ depending on the type of note:
- In up market, “deed in lieu” is more common
- In a down market, “deed in lieu” is even less common because there is not as much equity backing the property
- First liens trade at different percentages than junior liens
- Junior liens can trade at three pennies to the dollar to $.50 to the dollar or to $.70 to the dollar in up markets
- In an up market, if the property has a $50K first mortgage and a $50K second mortgage but the property is work $300K, the junior lien could trade at a much higher amount because the note is fully covered. You know you’ll get paid, it’s just a matter of when
- But, in a down market, the note may sell for $.03 to the dollar because there is a $50K first and a $50K second, but the house is only worth $80K. Maybe they have moved out of the property and no longer live there, they’re delinquent on the mortgage and you’re buying the junior lien
- For first mortgages
- You’ll see more larger funds buying the more expensive first mortgages over, for example, over $300K in origination
- They get gobbled up by the pension funds, insurance companies, etc.
- The real “low-end” first mortgages, $30-75K, could have back taxes could be higher than the value of the property
- The cheapest first mortgage he ever bought was at $.12 on the dollar
- He is typically at $.50 on the dollar on first mortgages (typically between $100-300K)
- Most are in the $.50-.80 on the dollar
- A lot depends on the foreclosure matrix timeline for each state
- In Texas or Georgia, foreclosure is only a few months
- In states like New York or New Jersey, it can be 2-3 years
- Also, price is affected by the states where the note originates
- Hawaii and New York are known for having high expenses associated with
- Junior liens can trade at three pennies to the dollar to $.50 to the dollar or to $.70 to the dollar in up markets
- David’s company primarily purchases non-performing notes because
- Performing notes are too expensive and have less upside
- He has structured his company to work well with non-performing notes
- Has 30 employees
- Has loss mitigation department
- Good at raising capital
- Good at sourcing product
- Good at foreclosure process
- Manages 25-30 law firms around the country
- Has access to GSEs (Freddie Mac, Fannie Mae type government loans)
- Good network of “boots on the ground” in key states where there’s lots of product (i.e. “rust belt” and northeast)
- Has 30 employees
How Long He Holds on to Notes
- Varies depending on asset class
- Sometime they sell notes..
- right after buy it
- after they take it to foreclosure
- and sometimes they sell the note and finance the property renovation
- Sometimes the asset is “pre-sold” to people they lined up before they even purchased the asset
ROI
- There really isn’t a typical return-on-investment. It varies
- Some home runs
- North Jersey
- Paid $88K for asset
- Got hit by the hurricane and they instantly got $90K from the insurance
- Could flip it and get $200K plus
- Could renovate and sell for $400K
- They decided to just flip
- Brooklyn
- Paid $325K
- Worth $790K fixed up
- North Jersey
- Regarding returns, David’s company is looking for something in the gap between property’s ARV (after repair value) and the “as-is” value. Or what the BPO (broker price opinions) value is looking like when you go to buy the asset – a “drive-by appraisal” has room for error
Due Diligence
- He doesn’t do the due diligence on their notes – he has a partner who has a whole team that does that
- A lot of the analytics are based on the indicative bid
- If they win the indicative bid, then they do the full due diligence which can take a couple of weeks
- His team can screen lists with as many as 10,000 assets
- Sometimes they can cherry pick, other times they have to buy a whole list
Notes Funds
- They’ve managed 5-10 funds over the years
- For the first 5-6 funds, the investors have all been paid back
- Today they have a
- shorter term “liquidity” fund (7% preferred return) requires a 90-day notice to withdrawal
- long term fund (10% return for 3 year term)
- Both for Accredited Investors only
- They also have option for Unaccredited Investors
- They sell notes weekly online
- Notes are handled by a servicing company that does your collections for you
- Notes have a warranty (investment principal minus payments received). For example, if a loan were to to “re-default, David’s company would purchase the note back from you or assist you with a foreclosure attorney so you can obtain the property
- They sell pools of notes through various exchanges
Comparing Note Investing to Other Real Estate Investing Strategies
- He likes many other real estate investing strategies (short and long term).
- He invests in multifamily syndications, rental properties, etc.
- Notes are generally shorter term
- Different yields and different time frames
- Can invest within self-directed plans
- Phantom appreciation notes
- Real estate-backed
- More liquid
Biggest Mistake
- Getting taken advantage of my a note seller
- You need to carefully vet the person or company you are buying from
- Take precautions to limit your exposure to risk
- Know your seller
- Baily letters
- Escrow agents
- Document custodians
- Exception reports
- Get educated
- If you’re in a good fund, there is much less risk
- Performing notes are also less risk
- Network with people who have experience in notes
- Different risk levels based on asset class
- Vacant first mortgages – you will likely end up with the property
- If you’re dealing with borrows, origination and more compliant areas, less risk
Biggest Success
- Establishing direct access to buying government agency loans (Fannie and Freddie)
- More volume
- Cheaper product
Advice for Old Dawgs Interested in Buying Notes
- His father didn’t buy his first real estate investment until he was 70 year’s old
- It’s never too late
- He can do a hard money loan
- His three main real estate investing strategies
- Storage garages
- Self-storage
- Notes
- You can sell a partial note
- If you’re multifamily syndication
- Can invest in note funds and receive regular monthly cash flow
- Note investing is very passive – not a lot of phone calls required
Future of His Company
- They have a 10-year vision for the company
- Goal is to be a multi-billion dollar fund, an enduring enterprise
- His youngest son has worked there for the last 7 years
- They’re helping people and society
Rap it Up
- Favorite real estate book: Making Big Money in Real Estate Without Tenants, Banks or Rehab Projects by Peter Conti and David Finkle
- Favorite business book: Business Brilliant by Louis Schiff
- Most valuable web site for success (other than your own): BiggerPockets.com
- Favorite app: Whova
- Favorite quote: “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.” Warren Buffett
- If you had to start all over, knowing what you know, and you only had $1,000, what would you do to re-launch your real estate investing business? Put an option on a wholesale deal
How to Reach David
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