In this edition of my blog on real estate and note investing, I want to center on how to reduce risk in investing in real estate notes. There is certainly no investment that is totally free from some risk; however, there are ways that you can reduce your risk in most anything. Here are a few ways to reduce the risk in real estate note investing:
1. Do your due diligience on the note purchase- Check carefully about the real estate note you are purchasing. Check out the community and neighborhood where the property is located. Is the borrower up to date in their monthly payments or are they behind? Are the property taxes paid up to date? Is their insurance on the property? Is the real estate note serviced by a loan servicer? Are the property taxes and property insurance collected monthly by the loan servicer and paid by the loan servicer? Have you done a title search to see if there are liens on the property? Is there a recent BPO (broker price opinion) available on the property or are you going to get one? There are a few of the things you want to check out. Most people are not competent and/or do not have the time to investigate all these matters on the own. For a nominal fee, there are vendors who can assist you in getting this information. Use them. The cost is certainly worth it.
2. Do your due diligence on the note seller- It is not only important to know what you are buying, but it is also mportant to know who you are buy from. Is the note owned by the note seller or are they a note broker? Have you ever bought from the note seller before? If not, you might want to talk to persons who have done business with them before? If they are a business instead of an individual, have complaints been filed with the BBB or with other agencies? Know your note seller. I want to do business with someone who is honest and of high integrity, and not a “joker broker”.
3. Check the numbers and check them again- Check the numbers the note seller gives to you. What is the loan to value (LTV) and the investment to value (ITV)? It is advantageous and reduces your risk if the investment you are making is low compared to the loan to value and investment to value.
These are a few things that can help reduce your risk in purchasing a real estate note. Again, there is some risk with any investment. However, it is always a good thing when you can reduce your risk. Next time, I will focus on other ways to reduce your risk when you invest in real estate notes. Wishing each of you real estate investing success.- R.L. Wall