Have you ever heard of people talking about note investing? Probably not! It is not a topic that you are discussing over coffee or at a social event. Would you be surprised to know that note investing has been around since the 1950’s. When I first heard about note investing 4 years ago I had no clue what it was and I was skeptical just like you are. Since note investing is not part of the mainstream investing conversation, people do not believe or understand how they can invest in notes passively. What is a note? Instead of giving you some crazy definition from Investopedia I wanted to share my definition with you: Notes are financial instruments that are used to secure loans against real property. These instruments can be used on just about any type of real estate. Additionally, notes play a critical role in the housing market in the form of land contracts, owner financing, trust deeds. These forms of mortgages “notes”, are utilized for homeowners that do not qualify for financing from traditional brick and mortar banks.
Now we got the boring stuff out of the way let’s start talking turkey! We all remember the last recession and how bad the housing market was hit. Housing prices in some markets dropped 30% in value, and foreclosure rates were in the double-digits. The American Economy was a disaster and there was no relief in sight. Just like you, I do not want to go through another time like that again without being prepared. This is where note investing comes into play for all of us. In 2016, banks/lenders sold $116B worth of non-performing notes (1st trust of deeds on Single Family Residences). This number does not include purchases by hedge funds like Black Stone, Fortress, and GCM Grosvenor to name a few. These hedge funds are buying directly from Freddie and Fannie, and are paying between 20%-40% of the Current Market Value of each property. When I first learned about all this I could not believe it! I did my homework on the offerings, and I wanted to find out how I could buy directly from banks/lenders. This is where I will leave you on this posting and on my next posting we will talk more about the journey and how banks/lenders operate in this space. Let’s work together to bring Wall Street to Main Street!