Understanding Amoritization Schedules When Buying Performing Notes

Foreign.

This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property For Panties on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host CEO of We Close Nodes, Scott Carson.

Hey Real estate investors, this is Scott Carson. I'm known across the country as the.

Note Guy and I've been an active.

Note investor focused primarily on the niche of non performing notes, distressed mortgage notes on residential commercial properties for almost 20 years now. My company is we close notes.com and I know there's a lot of different things when it comes to the note world. Are you buying performing notes? Are you buying owner finance notes? Are you buying institutional debt? Like I would focus on Are you buying first seconds contract for each There's a lot of questions and it can be very confusing about what you can or cannot do. So one of the great things that we've hosted for the last couple of years that we do on just about a regular monthly basis is we host our one day class called Note Weekend. If you go to noteweekend.com you can register for our free three and a half hour class. We'll talk to you and share with you how you find fun and flip non performing notes. And yes, you can buy non performing notes from banks, hedge funds and a variety of different hard money lenders out there for your own portfolio. No, you don't have to have millions of dollars to dive into the non performing note game. We've got students that have bought plenty of deals with 2530 grand getting their ball rolling using their self directed IRA who are tired of dealing with toilets, tennis trash desks, tired of battling contractors and GCs to get properties rehabbed. We all know the market is changing and while it may not be like 2008, 9 and 10 again, it we do see a lot of distressed debt out there on both the residential and the commercial side. So if you're thinking about diving into the note game, becoming a note investor, a lean lord as you'd like to say, versus the landlord. Or you just want to figure out what it is about the sexy side of real estate in the note space. Well, check it out. Noteweekend.com doesn't cost you anything. We host it live usually the first or second Saturday of each month. You can go today. Register at the website noteweeking.com Register for the next live class we host. You'll get sent a replay to the previous class so you can start learning about the note business today. No questions asked, no credit card needed. This is a great way for you to dip your toes in the water and see if it's warm because I guarantee going through Art three one day class. You want to dive into the deep end and become a note investor. So check it out noteweekend.com you can also go to our website. We close notes.com check out our podcast. Check out our YouTube number one YouTube channel. We are here to help support you. Whether you're experienced investor or you're brand new investing Note weekend is a great place for you to get the ball rolling. People often say we cover more in our three hour class than most people cover in their three day class. So check it out. Love to have you be part of our note family but get signed up today@noteweekend.com thanks and have a great day.

Good morning, good afternoon and good evening everybody. Hey, welcome to this episode of the Note Closure Show. Today's episode want to get into a subject matter that I've had the conversation with for with a couple of our coaching students, a couple of our WCN crew monthly members and the conversation is centered around buying performing notes that have some seasoning. They've been around for a while. You know most of the stuff that we see is like 30 year mortgages that have been around for a couple years and it's not really the issue and talk about really doesn't come into play a lot of times when you're buying non performing because on non performing notes you're buying them at a significant discount, usually off of the, you know, the unpaid principal balance or the legal balance. They're either going to foreclose or you're going to get it reinstated, but you're buying it a significant discount that your yield based off of them reinstating is usually going to be a double digit return. Okay. And for getting double digit return, if you're buying a significant discount, your money costs should be covered for a while, right? Because the idea is here to either a buy, keep it performing for a couple of years and then sell the note off to an IRA investor, somebody who wants an 8% return while you're getting a a 12 to 15. You can sell it at a price that makes sense for somebody to take over the entire note or get cashed out by your investor and they're still making an above average return and all as well. The caveat here is you're buying performing notes that are really beyond that 15 year mark. Because here's the thing, when you look at the payment history, the actual amortization table of a 30 year mortgage, the first couple of years we all know 7, 8, the first rate, 10 years, it's mostly interest is being paid, very little principal, the principal is getting, you know, that number is going down slow. It starts to pick up momentum and where you have to be careful of is if you're going to be buying the tail end of that mortgage the last five, 10, 15 years of that mortgage payment. And what happens a lot of times we think, oh, it's got a balance, a up balance. If I buy this at $0.80 on the dollar, it's going to be a good yield to me. Yes, it can be a good yield to you. It can be a good yield to you, definitely. But what you got to be careful of is how, what and how you borrow that money. You know, because here's the thing, we have two kind of interest rates going. You've got your 30 year mortgage, if it's a performing up, that's getting bought down, right. P and I payment every month. But if you're borrowing money from an investor, most of us are buying at an interest only. Like we're borrowing 25k at 10 interest for the year, that's $2500 a year. That's basically $210 a month, roughly 212 that we're paying an interest. But that principal, that 25000 doesn't decrease because we like the cash flow the opposite. You know the op obvious thing is after a period of time we're going to pay back our investor their 25k. Right. So I was explaining this to a couple people and they were just like, they just weren't, just wasn't making sense. Oh, but you know the cash flow that, you know the payments coming in from the borrower, great. They're covering what I'm paying my investor. And yes, they should definitely cover what you're paying your investor. But you have to be careful when that balance gets below or gets closer to that whatever you borrowed from your investor. That's your kind of window. Like hey, I need to get, I need to sell this deal off or sell it, get cash out by the investor and move on or sell to their performance. Somebody who's buying it for their own portfolio, not using other people's money. And the easiest way to explain this is to literally bring up an amortization table and kind of walk you through the process. So if you're listening to this episode, I'm gonna try to explain so you can hear it. I would highly recommend you check out the actual video and that way you can see how we kind of break this thing down for you so that you understand the difference. Because it is, it is numbers and it can be a little taxing on the mind. Oh, that's the wrong tape. Let me. That's a new tape we just got in. I think this is it. Hang on here, Hang on a second. All right, let me pull this up here. That one. All right, so I've got the right tape. I'm looking at new share. All right, so this is what I've done. Okay, so what I did is to make it simple for you. I just ran an amortizational table. I went in. You can do this online, you know, mortgage amortization table and what it is, a thirty year mortgage, A hundred thousand dollar mortgage at a six percent interest rate. Yes, I know rates are at seven and a quarter, seven and a half. But I just wanted to give you a flat 6% interest rate. Kind of give you a bit of idea. You could adjust the numbers as you want. Okay, now what we base this off of, you can see and it started from this year. So it's a 30 year mortgage. So it ends in 2054. Of course you can backtrack the numbers however you want to. Okay, backdate it. But I just wanted to give you a bit of an idea. So what we base this off of, okay. With the performing out at year one. Let's just go here. So year one at, at year one originates in April first payments made in May. Okay. So if you're gonna buy 80% of the unpaid balance in May. So the unpaid balance is 98, 666. The borrower is paying basically 600amonth on this. All right. 599 is the payment. 105 of that is principal. 493 of that interest. So the principal's only going down by roughly $105 a month at the end of year one. So if you paid $0.80 on the dollar for this note, okay. Originated note at one year seasoning, you'd pay 78,933 right. Now where do you get that money from? Now if you are using your own money, great. You're probably making a good, you're making a great return on that. Right? But if you're borrowing money, you're going to borrow that 78,008, 33. Okay, you borrowed at 8% interest only. To 78,000. It's 5, 26, 22amonth. You're only making about $73 a month. Different $73 and 33 cents. Right, because that's what the P and I payment is. Okay. All right, the 9% brought money. At 9%, you're actually only making $7.55. Okay, 10% minus 6. You're losing money monthly. Doesn't make any sense for that. So that's why you got to be careful and understand, obviously this is at a 6%. There's not much difference between the interest rate and what you're paying. So the principal Right. Now, the great thing about this is the balance of the UPB takes a while to drop. So what do you do? We look, we're going to take a look at our amortization table and see when it gets down to race, basically 79,000. So if you scroll down here, we're basically may have May of 2025. That's one year. 78. When does it go? Where does it fall down here? December of 2035. Okay. The balance is at 79,885. Remember, if we go back up here, 79,855. So that's when the balance falls below. So basically we need to be at $79,000. We go back up to here, right? Yeah, sending 9,000 is right. When it's a. From 2035 to. When will we buy this note? May. So basically you'd have 10 years of interest payments if you got, if you had 8% money. So basically 10 years. It's 120. Okay, I'm just gonna do some rough math here. 10 years. So that's May, December. So yeah, that's 10 and a half years. Okay, so that's 120, 126 payments times. Remember? What's our difference? Well, really, the only one that makes sense, this is this 8%. Right? So that would be 73.33 times 73.33. So basically you made 9, 200 bucks. 9, 239 bucks by buying that mortgage and borrow, buying it 80% of UPB and, and paying 8% out to the point where you're okay selling that note off at par to somebody else or selling it back to your investor and letting them get their 78, $79,000. So you made some cash flow. Okay. Ten and a half years. All right, now let's, let's roll it down a little bit. Let's say you're going to look at buying this note that's been around for a little while, let's say. So this is a 10 year mortgage or it's 10 years into the 30 years, May20,34. Now the balance then on this one is 83,504. Okay, 83,504 is the balance. If you're going to buy this performing note at $0.80 on the dollar, that's 66, 803.68. Okay, so it's just under $67,000. If you're going to be borrowing that money at just a flat 8% return interest only, you're paying your investor 445.36amonth. You're making $154 roughly $154 and 38 cent difference between what's coming in. 9%, you're making 98.52. At 10% money, you're only making 40, $43 and some change or $42 and 80 cents. Okay, so here the 445.36 minus the 599, that's where we came up with that 144, $144 and 29 cents or 19 cents. Okay, now let's see how long it takes for your balance to get paid down from 83, 504 to right at 67,000. Okay, so we're here at May. Highlight that red and actually highlight, let's highlight that yellow so it's a little bit easier to read. There we go. All right, so we're looking for $67,000. Keep going down here. There it is. 6775 is May 2040. And we bought this in May of 34. So you'd have six years roughly. Right, exactly right at six years. Yep. Six years of making that difference before you've got to pay your investor back their money or gets below that or turn it back into. So six years of the cash flow. That's not so bad. Okay, now let's say we bought it a different amount. Okay, so you. That was at 10 years. Let's go. Did we do the 20 year? I think we did a 20 year here. Yep, here we go. 20 years. All right, this is. Remember, there's only 10 years left on the mortgage. Okay, so 10 years is only left. I mean, they've been, they've been paying on this thing for 20 years, but they still owe $54,000. Okay, so 80% of the 54,000 is 43,202 bucks. Okay. If you borrow that money at 8% flat interest rate, you're basically paying 288.02amonth to your money partner. You're netting in 3, 1153. 3, 1153, which is not bad, right? 311 bucks. That's a pretty good deal that pays your electrics, whatever. Okay. Even if you borrow that money at 10%, 43,000 at 10%, basically paying $360 in interest only at 10% to your investor on a monthly basis, you're still netting in 239 bucks and 53 cents. Okay, but how, look how fast this drops down. Because remember now it's more principals being paid versus interest. So 43, 202. This is as of April 2024. Highlight that. So where do we go to 43, 202. Boom, right down there. October of 2046. That is only two year difference. Okay? No, it's not even that. It's. It's about two years and five, five months, about two and a half years. So that's why you've got to be careful, ladies and gentlemen. If you start getting into 10 years or less, there's really only. I mean, obviously if it's a lower interest rate and you have a higher interest rate, there's a difference in payments. You got to figure out that calculation. But this is why you should run your numbers and run an amortization table and match this up. Okay, yes, this is in the future, but you can back deck this. Okay, so this actually didn't start in 2024. It started 24 years ago. So 22,000 and running your numbers and backdating it to figure out how long you have. So if you get into where you're basically less than five years. Okay, let's see here. So this last calculation, five years here. All right. And this was almost ideal because one of my investors is looking at, he's looking at a mortgage basically where 31, 000 was the balance. Okay, 31,012 performing note. So remember, remember, it's still making 599amonth payment, but 442, it's going to principal. Okay, so he's an offer just under, I think it was like 25. He's gonna offer 20, just give or take a bit. But Anyway, balance is 31,080 cents a dollar. That is 24, eight guys borrowing 24,809. 8%. You're only gonna pay 165amonth. And that cash flow looks good because the monthly PNI payment's 5.99. That's a nice chunk. That's $334 and 15 cents. $334, that's not bad. But look how fast it gets to where that balance drops down to 24, 8, 09. Boom. From May 2050, you have basically a year of payments before the principal. Yeah, exactly. Actually you have 11 months of payments before. Now the balance falls because the next. Yeah, basically right. At a year 24, 582-you- know, 25,000 five, seven in May. So yeah, you basically have one year of collecting payments before you got to pay your investor back. That makes more, it makes more sense on this one to sell the note to your investor. Maybe you have them pay you a $2,000 finder's fee and let him make a decent return on his money, a 7, 8% or whatever it is for the life of the loan versus you trying to squeeze that. Because that gets pretty tight pretty fast. Okay. This is where it would make sense to find somebody who wants to make it, you know, 8% or 7% return or something like that. In their mind they can buy these at 80, 80, 85 cents on the dollar. It's a good deal for it. So that's why you got to be careful when you start looking at notes. I prefer staying at 15 year, the first 15 years, not the bottom 15 years on the difference. Okay. But this is why you gotta be careful. There was a tape that sold, people paid 80 cents on the dollar, 79 cents of the UPB is what I found out. It paid, it sold that well, that was decent if they're newer term loans, but over half of them were 15 years or older. So hopefully they got cheap money. If they got cheap money, they're using their own funds. That's a different story. Right. But if you're using other people's money, gotta make damn sure that whatever you're paying your investor or what you borrow doesn't fall below the UPB because that's pretty easy to get based on the excited about the cash flow. But now if you owe more than what the actual unpaid balance is, you're going to be in a world you're going to come out of pocket for money and that's not a good place to be. Okay, so hopefully that was helpful. Just run an amortization table, look at where it's at. Obviously, if it's the thing to keep in mind too, ladies and gentlemen, is obviously you're buying non performing. That's now reperforming. There's a period in there 1, 2, 3, 4 years where they didn't make any payments so that UPB didn't go down. So looking at then the legal balance or looking at, you know, adjusting the loan for what the original UPB is and figuring that out, or if you're going to recast the loan and just add the face amount to the loan, then you're going to obviously extend the term of the loan. So they haven't paid for three years, maybe extended by three years and just adjust your amortization table. That's why run the terms as best you can and then look to find as close of a number in your amortization table as far as upb, where it's at, you know, usually go, I usually go a little bit less because there's going to be, if they make, you know, five dollar extra monthly payment, 100 next month payments can adjust the balance to loan. So hopefully that was helpful for you guys. But definitely make sure, if you're buying out instead of performing, make sure you, you preferably buy them in the top half of the 30 because you'll have a longer period of time versus the bottom half where it's going to get start getting crunched. Okay, you don't want to get crunched. Yes, the numbers look great, the castle look great. But when you start thinking like you, you're into it for one year, three years, five years or 10 years and that's about it, or less than that, that's where it can get kind of dicey. We don't want you to be in a dicey area. All right, if you have any questions, feel free to reach out to me. If you ever want me to walk you through one of those, feel free to book a call@talkwithscottcarson.com I'm glad to kind of walk you through that and hopefully that makes sense now that you've had the numbers to take a look at it. So go out, take some action, buddy, and we'll see at the top. Bye, Sam.