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NPN Story: My First Time

We all remember the first time, don’t we? It was 2015 and I had some experience with rentals, but I had never gone all the way. I had never taken a non-performing note from start to finish before. I never had firsthand experience of the buying process, how to do due diligence, close the note buying deal, initiate foreclosure, be the lender at the trustee sale instead of the buyer, any of that.

For my first time, I actually had two at once (lucky me!) but the Phoenix loan was the one that finished first and remains closest to my heart. The climax of the note purchase occurred when we foreclosed on the note at the trustee sale and it was so, so good.

First Deal

I met my business partner, Sean, at the end of 2014. We had a couple of conversations, decided to work together, and bought our first two notes during the summer of 2015. I had a day job then, so I had limited time to go to the office and learn.

I had about $70,000 to work with so we decided to buy two smaller balance loans. This spreads the risk between two deals instead of one. Sean explained that it was even riskier to go for smaller assets because you have certain fixed costs that are independent of the loan size and really cut into your returns the smaller you go.

For example, you might budget $5000 in foreclosure costs and that number is the same for a $5,000 loan as well as a $500,000 loan. For the amount we had to work with, buying two loans represented the best balance of all of the options.

Joint Venture

I provided the capital and Sean provided the access, experience, and management skills. We picked two notes with purchase prices totaling under $70,000.

I was fascinated by the whole note business, by all of the concepts and theory, and by the mystery. When you learn about notes for the first time, it’s exciting in a way. You don’t even have to go out to a property and manage a rehab. You can sit in an office, send a bunch of e-mails, make a bunch of phone calls, and boom! You make money!

Now I was getting a chance to learn all of the nitty, gritty details; all of the books I read and the real estate forums I frequented talked about the big picture but didn’t give the details on how notes really worked on a granular level. I was going to get that chance.

What You Really Need

I got to read every single document in the collateral file, which actually wasn’t very much. This was a bare bones file with only the essentials. You really want to have as much of the original loan documents that you can but, if you’ve got a non-performing note that’s severely delinquent, the bare essentials are an original note, complete allonge or endorsement chain, complete assignment chain, and a copy of the title policy. If someone challenges your note in court, you’ll want to have more than this; the more you have the better. But for what we were doing, less was an acceptable risk.

My first one was not love at first sight. With a purchase price of $22,929, I wasn’t getting the best collateral that Phoenix had to offer. That’s another risk of a smaller priced note: a less desirable property in a less desirable neighborhood. This house was in a working-class neighborhood that we definitely didn’t want as an REO. Our strategy was to foreclose and have a low enough bid so that an investor would buy it at the trustee sale.

Take Care of the Problems to Add Value

The odd purchase price number was due to the delinquent taxes against the property and a city lien because they had to cut the overgrown and unmaintained lawn. It’s customary to agree on a purchase price with the seller of the note and then deduct any outstanding taxes and municipal liens.

Shortly after we purchased the loan, I contacted the attorney whose client paid for the tax liens and made sure we paid him in full. This added value to our note and would ensure that we got a higher bid at our auction.

Trustee sale buyers will discount their maximum bid when there are delinquent taxes and usually by more than what those actually amount to (at least I did when I bought condos at foreclosure auctions). Anything you can do to make the property appear “cleaner” by paying outstanding liens will make it more attractive to buyers.

Borrowers Gone; Squatters in Property

Our best information was that the borrowers (6 years behind in their payments) had left the country and were living in Mexico. The current occupants were either squatters or renters who still paid the borrowers rent, although we didn’t know which was actually the case.

As bad as that may sound, it was actually good news to us. It was a sign that the borrowers had given up on the property and wouldn’t fight the foreclosure.

Like I said before, we weren’t interested in taking this property back at foreclosure because we didn’t want to manage a rehab of a rundown property in a sketchy neighborhood in another state. The property was far underwater; the borrowers owed $150,000 and our BPO (broker price opinion or appraisal lite as I describe it) came in at $75,000. The total of our purchase price plus payments for the delinquent taxes, city lien, and other fees came out to $30,846.

We set the opening bid at $36,000, which would guarantee us a little bit of profit if it sold at that price. As a trustee sale buyer of 25 condos in California from 2011 to 2013, I understood things from the buyer’s perspective. It was a much different feeling as a lender on the other side of the transaction. I liked being the lender much, much better.


We waited in anticipation and were pleased when it sold to a third-party bidder for $48,000. What a nice little investment it turned out to be! For your first time, you want something gentle with no surprises (and no pain) and this one turned out just great for everyone involved. We made some money and the winning bidder bought a $70,000 house for $48,000. I wish they were all this easy….

Things I learned:

Split your available capital so that you can buy multiple assets to spread risk but, be aware that if you go too small, your margins have to be bigger to make up for fixed costs.

You don’t need a super thick collateral file but it’s nice to have one. If you accept less documents, there’s a higher risk if you have to go to court.

Everything you do to fix problems (such as paying delinquent taxes or liens) adds value to the note whether you want to re-sell the loan or liquidate to a third party bidder at the foreclosure sale.

You can only learn so much about this business by reading books; at a certain point, you have to do it yourself and get your hands dirty.

I really, really liked doing everything from an office and not having to deal with tenants, toilets, or otherwise going to a property in person

Final Numbers:

Purchase Price: $22,929

Total Cost Basis: $30,846

Net Sales Price: $45,242

Net Profit: $14,396

Days Held: 153

Return on Investment (ROI): 46.7%

Annualized ROI: 111.3%

Originally posted on on August 27, 2019

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