RG 043 – Note Investing 101 with Jay Tenenbaum

About Jay

  • Jay used to be an attorney
  • He has 20 years experience in the debt collecting world
  • He runs a meet-up in Orange county called Notes and Boats
  • Jay cash flows through mortgage notes

Unrelated to Real Estate

  • Married for over 25 years and 6 children
  • His eldest son works in the same company

Jay worked for 20 years as an attorney in debt collection, this has set him up with the skills to be a successful and efficient note investor. Jay works for the Anema Capital Group in their investing wing and works with his son purchasing and flipping notes. Despite being based in California he has invested in 24 other states across the country mainly sticking to the Midwest and “rust belt”. His “why” when he is working is ensuring people are able to stay in their own home and he does this by modifying each note to suit his interests and those of the borrower.

What is note investing and how can I get into it?

When you buy a property you create a mortgage – also called a deed of trust or a “note”. This is a promise to pay x by time x. These notes can be bought from the bank after the borrower has gone delinquent and are generally sold to hedge funds or private investors. Once you buy a note you become the bank and the borrower owes you the monthly mortgage repayments. After 2008 the banks tried to foreclose on people who owed on their mortgages but the quantity of foreclosures was too cumbersome so they began selling the notes as a commodity. Jay makes an effort to purchase a note after foreclosure but when the borrower is still occupying the home.

When you’re getting started in note investing Jay recommends that you either find an education course from a reputable source – he recommends weclosenotes.com or alternatively partner up with someone who knows what they’re doing. This partner doesn’t need to be local to the investment market, so this option could be ideal for a foreign investor.

How to purchase notes

To start purchasing notes it’s good to work on developing your relationships with hedge funds as these will be your sellers. Jay’s son is his acquisition manager and stays connected with a selection of banks and hedge funds in the industry space. This quality of relationship means that over the 185 assets Jay has bought since January 2014 they came from only 10 sellers. The bank or hedgefund seller will show you a “tape of assets” and you can purchase as many as you want and this group is called a “pool”. After Jay has done his research into each property he spends $250,000 each month on his pools. For the average note investor a pool will result in; one third loan modifications, one third the borrowers will give the deed in lieu of foreclosure and the final third will be foreclosed upon. However, Jay’s figures are different because he goes directly to the borrower after the note has been bought and asks “how can I help you”. This means that the borrower is given the opportunity to say how much they are able to pay each month and Jay can modify the note.

What is the value of a note?

Cash flow can be generated from this business by buying the property at a much lower cost than it was originally worth. For example if you purchase a $50,000 house for $10,000 and modify the note so that the borrower is paying $400/month, this will generate a cashflow for you. Jay recommends that if it’s your first time buying a note then purchase under $50,000 but go for a higher value property within your market. This is because with a lower value property the mortgage note can often by higher than the value of the property. Whereas with a high value property your returns might be lower but at least you have a high value acquisition on your hands and you can always re-sell the note for more than you paid initially.

There are several ways Jay modifies a note; he can change the monthly payment amount, the interest rate, the term or the overall balance. Modifying the overall balance is a great way to incentivize regular payments. The interest rate that the borrower pays is the interest on the original purchase cost; not the amount you paid for the note. Modifying a note is in your interest because the default rate on a modified loan is only 5%.

Top investing tips:

  • Most successful habit – creating a foundation and processes so that everything is same regardless of how many notes you buy.
  • Most influential tool in your RE business – His phone, everything is still done over a phone call.
  • Most exciting project right now – His seller finance programm
  • Who is your most influential person – Scott Carson who was the first person to get him into note flipping
  • Best US deal to date – A home in Oklahoma where he helped the borrower move back in by modifying the loan.



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