Frequently Asked Questions

Frequently Asked Questions

Below are frequently asked questions about distressed debt and joint ventures. Click any title below to expand the answer.

Why Invest in Distressed Mortgages?

Residential non performing notes are secured by a lien interest in the property perfected by a mortgage or deed of trust. They are purchased at a discounted percentage of the current market value of the property. These deep discounts are the first step in creating our overall profit margins. See our full article by clicking here.

How does the Joint Venture work?

The Joint Venture is essentially a partnership agreement between the Investor and the Manager. A Joint Venture agreement is written and executed which outlines the terms of the relationship between each party, including each party’s duties, profit splits, distributions, accounting, reporting and liquidation. The asset will be acquired in an entity that has the JV partners as the members or beneficiaries, and is usually set up as a personal property trust which provides a low cost structure that allows for anonymity of the actual owners since it is not publicly recorded. Funds are held in a reserve account managed by the Manager and expenses/income are tracked via a simple spreadsheet accessible by all parties via GoogleDocs.

The Investor will provide the funding for the Manager to acquire the note, forward payment for any taxes or fees, and get the loan boarded at our licensed loan servicer. All due diligence and operations expenses are paid at net invoice. Upon acquisition of the note, a due diligence fee of up to 2% of the purchase amount is paid to the Manager for due diligence, contract negotiations and loan boarding/coordination with the servicer and seller.  All cash flow that comes from either working out a repayment plan with the borrower, or from liquidation of the home is split 50/50. After a 12 month period, the loan can be sold to another investor at the current market value at the time of sale, usually at a price that will yield an annualized return of 8% to 10% to the buyer.  Depending upon the final outcome, the Investor will have the opportunity to buy-out the manager based on the current asset value, should the investor want to keep collecting the cash flow on a performing note. See the dedicated page for a workflow diagram at https://note.ventures/how-does-a-joint-venture-work/

What is your strategy for asset acquisitions?

Once we establish an agreement with the borrower and performance has been established, an income stream is realized from the repositioned note, converting it from a distressed note to a performing asset. We then have the flexibility to hold the note for income or we can liquidate the repositioned & performing note to another investor at a discount of face value, realizing a profit from our acquisition and repositioning costs, and generating new capital to reinvest in new distressed notes or value-added properties.

What is your criteria for asset pricing?

The target asset class in which we invest are distressed non performing residential mortgage notes in first position on single family homes in the U.S. We intend to acquire residential mortgages secured by one home. Asset pricing target is less than 50% of the home’s as-is value. Pricing can vary in range from 40% to 70% depending on the location and the amount of equity (if any) difference between the note balance and home value. With the overload of nonperforming residential mortgages weighing heavily on the balance sheets of our banks and federal regulations requiring substantial reserves, financial institutions have been unloading nonperforming mortgage notes in large volumes at steep discounts. We see an opportunity to purchase highly discounted notes on properties in key markets, then reposition them for cashflow income, or in the case of a vacant property, foreclose and sell the property at a substantial profit margin.

How can one partner buy out the other?

Although a note that is performing can remain in the joint venture though its entire term, there may be circumstances where one JV partner may want to sell out his/her interest or buy-out the other partner. Below is a general description of how we would determine the note's value to establish a fair purchase/sellout price. Partner Buyout: As far as a buyout, the JV agreement has various terms in section 8.0.3, but basically either partner can propose to buy out the other for an agreed price. The purchasing party can pay all cash or 4 equal semiannual installments over a 2 year period upon mutual agreement. As far as a guideline for valuation, generally that would depend if the note is performing or non performing, the remaining term of the loan payments due and the value of the home. For an example, lets look at a note with a $50K purchase price, on a home worth $110K and the unpaid principal balance (UPB) of $100K:
  • If non performing it would be the Cost Basis of the note at the time of purchase. So if we bought a note for $50K and had an additional $500 in holding costs/expenses, then the purchase value would be $50,500. In this case the manager would be buying out the partner since the partner funded the deal, or we would be selling it to a third party to liquidate at par.
  • When we get the note performing then the purchase price would be the current value of the note, minus the Cost Basis (purchase cost + expenses - any income to the partner), divided by 2.
  • So in the above example lets say we own the note for 15 months and started collecting $665/month in P&I payments at month #3. Of that payment, $570/mo. is the interest portion, averaged over the first year. Each party is entitled to 50% of the interest portion of the payment and the funding partner gets 100% of the principal portion.
  • So, we've collected $6,840 in interest in the first 12 of 15 months of ownership. The funding partner received half of that amount, $3,420 + the full principal portion of $1,015 = $4,435. The new cost basis for the funding partner is then $50,000 + $500 (initial expenses) - $4,435 = $46,065.
  • Now, what is the value of that now-performing note? In our PE fund, we us a 10% yield as our basis for valuation. On this example, with a remaining UPB of $98,985 and 348 remaining P&I payments of $665/month, the sales price for those future 348 payments at a 10% yield would be $75,346. (less any sales/transaction costs)
  • The equity would be the sale value minus the partner's current Cost Basis: $75,346 - $46,065 = $29,281
  • Based upon that calculated value, then the partner buyout cost would be 50% of the equity or $14,640.
  • At that point the partner purchasing the asset is entitled to all of the remaining 348 term principal payments of $98,985 and interest of $132,541 or a total of $231,526!!
  • If the borrower sells or refinances the loan then the remaining UPB is paid off. The profit would be a capital gain of $52,920 (UPB - Cost Basis). This would be an approx a 87% ROI
Regarding ongoing expenses, they vary depending on the loan, but assuming a performing loan with taxes/insurance escrowed, it would be $30/month for servicing. Also for the JV, we can assume an annual cost of perhaps $200 for tax filing and issuing a 1099 to each JV partner

What markets do you actively seek investments?

Our geographic focus are secondary and tertiary markets in the Pacific Northwest, Mid South and Southeastern regions of the United States, which possess diversified economies, meaningful population growth and strong employment growth. Since real estate markets are cyclical and vary as to their value and potential within their local market, timing is key to location selection. We invest in high growth secondary and tertiary markets with one or more of the following characteristics:
  • Low unemployment
  • Stable economy with major long-term employers
  • Strong emerging markets where equity growth is on the upswing

What are the possible outcomes for a NPL?

Our primary goal for exit on a note acquisition is to work with the borrower to restructure their loan and make it affordable for them to remain in their home. This is a win/win since the borrower can keep their house and the asset then generates long term cash flow. In the circumstance where the borrower cannot resume performance, we will take possession of the home via DIL or foreclosure and sell it on as a “bank owned” property, usually as-is to an investor looking to do a flip or a rental. For loans where a restructure was successful and the loan is then performing, we will liquidate the performing loan at the current market value at the time of sale. Depending upon the final outcome, the Investor will have the opportunity to buy-out the manager based on the current asset value, should the investor want to keep collecting the cash flow on a performing note.

What is involved with due diligence?

Assets purchased will be acquired through various channels developed by us in our course of business. These channels are a result of relationships developed with resellers, brokers, asset managers and online note brokerage businesses. Our due diligence process creates a normalized mortgage file review platform whether the files are fully intact or have eroded in the secondary market over time and trading.

We start by vetting the seller of the note, then check on borrower pay history, fair market value of the home,  location, market value dynamics, unpaid taxes, HOA dues, insurance, and subordinate liens. After an indicative offer is accepted we then review copies of the loan collateral files for key documents like the note, mortgage, chain of assignment integrity, allonges, and bankruptcy status/history of the borrowers.

How can I participate in a Joint Venture with you?

To get started, just complete the Joint Venture Request form on our contact page. We will contact you within 2 business days to discuss your options and interest in partnering on a non performing note.

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