When evaluating notes for purchase, a number of factors are taken into account. Those most applicable to a partial note buyer are Pay History, Which State, and Investment to Value Ratio.
Pay History
Some examples to illustrate this factor:
- A 30-year note at a 7% interest rate nearing the end of its first 5 years. Over those 5 years, all 60 payments were received; however, 2 were late in the 15-30 day range. Further research shows the borrower had a judgment against him/her 3 years ago (during the time of the late mortgage payments) for an unpaid medical bill. The case was resolved, after which the mortgage payments resumed. Since then, all payments have been on time. We would probably purchase that mortgage. Bad things happen to good people.
- A 30-year note for $57,000 at 8% interest with sporadic payments over the course of the first 15 years. The pattern appears to be a payment every 3-4 months; most payments cover several months of mortgage. Over all, the remaining balance is exactly where it should be after 15 years. The borrower is self-employed. We would probably purchase that mortgage. However, the shorter length of the note would not make this a candidate for a 10-year partial. Perhaps 5-7 years. This partial might be a candidate for someone with a low-value, self-directed Roth, as the purchase price of the partial would likely not be very high.
- A fairly new 20-year note at 8% interest. It has paid on time for 5 months. partialNotes.com might purchase this note; but would likely not offer it as a partial for several more months, until the borrower has an established pay history. Factors that might override this are if the borrower is a very high income earner in a stable job, and has made a substantial down payment on the property (i.e. skin in the game.)
- A note that has been created by us will have been properly vetted and underwritten, with all paperwork compliant with state and federal law. All notes created by us will have a substantial down payment associated with them and will be serviced by a third-party servicer (this is an industry best practice). Our notes will all have used the service of an RMLO (Registered Mortgage Loan Officer), which is also an industry best practice.
State
The state in which a property is located drives an initial decision by partialNotes.com about whether we would even consider purchasing the note in the first place. Some states dictate that the foreclosure proceedings must flow through a judge. You might get a pro-tenant judge, you might get a pro-lender judge. For the most part, partialNotes.com avoids states in which judicial foreclosure is mandated.
In addition to judicial/non-judicial states, partialNotes.com looks at the average length of time to conduct a foreclosure. Although we do not ever want to foreclose, we will if we must. As more states enact anti-lender legislation, partialNotes.com will be more selective in choosing states in which to conduct business. The map below highlights states in which partialNotes.com likes doing business. Three factors are considered: non-judicial foreclosure, short timeframe required to foreclose if needed, and affordability. Any correspondence with political parties is coincidence.
The map above addresses foreclosure rules. The map below provides a heat map of affordability, by county. At partialNotes.com, we focus on states that are either non-judicial states and/or states with short-to-medium lengths of days required for foreclosure (should that become necessary). Further, partialNotes.com focuses on counties that have low to medium priced housing (dark blue below).
Investment to Value Ratio
When we purchase or originate notes, we like to see properties where the current outstanding loan value is significantly less than current property values. We also tend to look at notes where the property owner (aka borrower) has devoted significant resources to that property. These two filters help avoid potential losses driven by deflating home prices, such as happened in 2008-2010. They also decrease the likelihood that the borrower will simply quit paying and walk away.
Other Factors
We look at area crime, zoning, schools, local economy, and up to 50 other factors when deciding which notes to purchase. These are beyond the scope of what passive investors would ever want to know.