We recently opened a new fund, literally yesterday as I write this, to purchase re-performing notes. As we worked through the downside of the fund, because that is the most important part, the same question kept coming up between Steve and I. “Why does this seem too good to be true?”
We have all experienced this in investments throughout our careers, and when we did it was actually “too good to be true.” Well this one falls into that category at first glance so you may have the same reaction.
However, it’s not “too good to be true,” it is just darn good and that’s true. Let me tell you what we have put together and then you can decide.
This is all happening because we are part of a special buy coming up here with a hedge fund. These don’t come along every day and there is not as big of a market in re-performing notes as there is in non-performing notes. They are separated by billions in size.
The targeted investor return is 13.6% on what we expect to be the low return for this fund and the upside could go into the twenties. That is big, so it must be risky. With any investment, there is risk but not all investments are created equal with the amount of risk to reward.
I would have to say this is one of those. We will purchase a couple million dollars’ worth of re-performing notes here in the next 30 days. They will have a 15% yield on them and we will net approximately 14.3% return after paying for servicing fees. Or to put it another way, we are buying them at $0.46 on the dollar of the Unpaid Principal Balance (UPB). We will pay $46,000 for a note that has a UPB of $100,000.
We then plan to season them for about 6 months and resell them for a profit. 6 months is an important time frame in the seasoning of a note. Statistically less than 2% go completely bad to the point of foreclosure after 6 months.
The reason is that the borrower, the family in the home that wants to stay in the home, has skin in the game. They have brought the note/mortgage to a current agreed upon balance with the lender. This means they have usually paid thousands of dollars in arrears and also continued to make their payment for 6 months. They are not doing that to just walk away.
Also, don’t forget this “borrower” is not some faceless person making payments because we asked them to. They are real people, real families in real houses. They know the neighbors, the pharmacist, the teachers, the pastors, and I will throw in the baker too. They don’t want to leave!
Here is the kicker. On these re-performing notes, we receive a 2-year warranty if one of the notes were to stop paying. The seller of these notes, who we work with on a daily basis, is the one that provides the warranty. If any one of the notes stops paying, they will work it to become re-performing again, or they will replace the note with a like kind, or they will refund our purchase price less any payments received.
That is worth repeating. They will warranty the notes for two years. How do we lose? The way we see it is only if the seller fails to warranty the small amount that may fail. That wouldn’t be great but it is not a disaster either. Maybe there is some economic disaster that takes almost everything down again, but then what investment is safe in that situation? Other than cash, none is the answer.
Yet you can see why they offer the warranty. Chances are they won’t ever have to honor it since most re-performers continue to perform. When they don’t, it is easy to honor the warranty anyways.
Since we are able to make this buy in bulk, we are able to get a good pricing structure. That allows us to resell the notes at a profit. Along with the monthly cash flow from payments, the investors will make a return when the notes are sold. We anticipate the notes will be sold within a 12-month period.
Who gets to invest in this fund? Right now we are only offering it to our current investors in ROI Strategies, Assuravest, Advanced Commission, and a few select individuals. We may open it up further but we plan on closing the fund for new investments in about 30 days. That will depend on the number of notes that are available to purchase.
It certainly is not a “too good to be true” investment, but it is one of the best risk to reward ones we have seen for a while. If you have interest and are an accredited investor, then send us an email and we will do our best to accommodate your request.