If you’re a craps player, you will totally understand the analogy.  If you’re not a craps player, or are too risk averse then you may not want to enter into non-performing notes as an investment strategy.

You Won’t Win on Every Deal

Just like in craps, don’t approach the table thinking you will win on the first roll.  Don’t buy one note and give up because you didn’t make money.  They recommend you buy a pool of notes, definitely more than 6, or more like 10 in order to assess the investment as a package.

I know when I play craps, I may win some and I may lose some.  The total results are how I ended the day.  With notes, the total results are on the pool you bought.  You win some, you lose some.  You have to be OK with that.  If you’re not, consider paying the higher price for performing notes, or go to your local bank and put your money in CD’s (aka Certificates of Destruction).

You CAN Win BIG in Non-Performing Notes

I heard several stories on some of the big wins.  Just like in Craps, you can roll the dice and triple your money in a heartbeat.

One story I heard was from someone bought a non-performing note, and in the file was a “deed in lieu of foreclosure” already signed by the borrower.  Somehow in the paperwork mess at the bank, they sold the note without even realizing this document was include in the property.  So this person bought this heavily discounted mortgage note and all he had to do was file the paperwork and the property was his.  That’s a big win.

The financial crisis of the last few years caused the government to come in and help homeowners modify their first mortgage that is underwater.  Government assistance intervened and helped the homeowners stay in their home and now pay a much more reasonable first mortgage at a lower rate and lower payments.  For some reason that escapes me is the 2nd mortgage is still in arrears and people don’t pay it.  Sometimes it takes a little communication with the borrower to identify that since they modified their first loan, the second mortgage will be much easier for them to resume the payments.  This is also another opportunity to modify that mortgage and to get the note re-performing thus creating a reasonable cash flow both for the investor and at a rate the borrower can afford.

You Can Get into BIG Trouble if you DON’T Follow the Rules

Don’t even try to cheat at Craps.  Casinos don’t find any amusement in you not following the rules and neither does the Federal Government when it comes to trying to communicating with the borrower.  Just like the craps table, there is no tolerance for inappropriate behavior.

There are very strict rules for communicating with the borrower – for example, NEVER communicate with the borrower until after you’ve purchased the Note.  Then there are certain rules and procedures you have to go through to notify the borrower that the mortgage note has changed hands.  FDCPA, RESPA, TILA are all laws that outline the correct procedure for communicating with the borrower.  Thank goodness there are servicing companies that will ensure you are protected during this critical period of turning a non-performing note into a performing note.

You Can’t “UNROLL” a Dice

Yes, there are some non-performing notes that are just not collectable.  One story I heard was a man just purchased a 2nd position non-performing note based on a property in Texas (Texas has one of the fastest foreclosure timelines in the country).  He went on vacation and when he returned, the first mortgage lender had foreclosed on the property, which totally wiped out any claim this man had to collecting on the note.  This was a total loss to him.

In Conclusion

I’ve attended Scott Carson‘s 3 day seminar, Bill Mencarow’s Paper Source Non-Performing Note Seminar (twice now) and I can say I feel empowered to move forward in trying my hand at some non-performing note purchases.  I’ve also had the good fortune to learn about performing notes with my local associate, note-broker Robert Young from the Texas Note Company and been honored to have Dawn Rickenbaugh, the Note Queen, as a guest on one of my featured podcasts.  I feel comfortable now moving forward.

Some will question if I need a mentor?  At this point, I won’t pay for one.  I know that the best experience is to learn by doing.  Just like my foray into rehabbing a property after my initial training with Armando Montelongo, I had no mentor (he fired my named mentor and the replacement he chose was ineffective, based on my experience), I aligned myself with others that were more advanced or had more experience in the industry, I listened to podcasts on the subject, read books and networked with others both virtually and locally.  But that’s just me.  I’m a little stubborn and hard headed, but it’s true that the best way to move forward is to learn as much as you can, and when you’re ready to pull the trigger, just do it.