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In recent months it seems that more and more former fix and flip real estate investors have entered the note space. A few years ago when foreclosures were rampant these investors could buy at the courthouse steps, rehab the property and sell it for a handsome profit.
For the last three years, that market has changed and the lack of properties to buy coupled with the reluctance of many lenders to foreclose has driven the purchase prices of these fix and flip properties considerably higher. With cash in hand and a lack of opportunities many of these former fix and flip investors set their sights on the note market. We see a lack of understanding of the business causing these investors to treat notes purchases similar to their former real estate purchases, especially when it comes to pricing. Unfortunately, the two niches are dissimilar in that category.
Purchases made at the foreclosure auction are freed from many of the encumbrances attached to the property prior to the foreclosure with exceptions that can be determined prior to purchase such as property taxes etc. This is not the case with the note purchase. The note buyer must be very thorough in completing due diligence to determine encumbrances attached to the property that may exist after the note purchase. Example, will all delinquent property taxes and fees be paid by the seller? If not how does that affect the note pricing. When are new taxes due? What is the timing of foreclosures in the particular state? Will the borrower declare bankruptcy delaying the foreclosure process?
In most cases the fix and flip investor invests close to home. This is not always possible in a note purchase. This limits the exit strategies available. Every note investor must perform a very complete due diligence process to determine the true cost of the note.