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A Simple Method To Assess The Risk Of Note Investments

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A Simple Method To Assess The Risk Of Note Investments

I must admit, I have an entrepreneurial spirit and although I don’t often shoot from the hip, I have certainly tried things simply for the thrill of it. 

I think there is a bit of gambler in every entrepreneur.  It’s not that we are overzealous or on the other extreme risk adverse, but often we take chances based on the thrill of the hunt. Our attitude, or at least mine, may be the more we risk the the bigger the reward or the more money we pour into the deal the higher the potential return.  

This is an especially dangerous attitude in the note business.  It is certainly an attitude I have had to overcome.  Sometimes when I assumed too high a risk I’ve been successful through sheer will: doing absolutely everything that had to be done to escape unscathed.  

Sheer will doesn’t work that well in the note business. So, I’ve had to set some rigid parameters and limits on our investment strategies and I suggest you do the same. My experience in the business has taught me that the risk of notes is variable and difficult to assess, but an attempt must be made if you want staying power.  

One of the best ways to assess risk is through beta.  Beta is simply a standard.  You would set a standard from which you will measure everything else.  

Let’s use a beta ONE to start.  I am going to rate non performing notes as that is our core business.  One is our standard, i.e. one beta is represented by a non performing first loan with equity in California.   

All the other loans we rate will be based on this standard.  For example, because of the time and cost of foreclosure the same exact note in New Jersey may be assigned a beta of 1.5, it’s 50% more risky.   An underwater loan my be assigned a 2 beta and a non performing 2nd with equity may be a 3.  No one can really tell you what your rating should be and it is not the number that is important.  What is important is that you are thinking about the risk involved and have set some limits on your investing.  

I can tell you that if you don’t I can almost guarantee many sleepless nights.

Ron Happe
Ron has a 40 year history of entrepreneurship having started or bought, grown and sold ten companies; two publicly traded. He brings an extensive management background and business sense to trust deed investing. Mr. Happe holds a BA in Business with graduate studies in economics and management. He is a licensed real estate broker with NMLS endorsement, a licensed general contractor and holds numerous professional designations including Senior Business Analyst with SBA.