Secured Income For Life with Note Investing

Ellis San Jose Ellis@thenoteguys.com

Gerald Lemoine GL@thenoteguys.com

Office: (310) 414-9757

www.TheNoteGuys.com

Agenda

Who we are & What to expect tonightWhy notes? Goals & StrategiesWhat are notes? How we buy & evaluate notes Typical yieldsManaging notesPitfallsExit strategies & Case Studies

Ellis San Jose – Investing & Work Experience

Influences: Father & Mother: Retired Navy and Housekeeper to Real Estate Investors

Courthouse Steps: Managing rental propertyMy First Solo Investment“Bud Fox vs. My Dad” Wall St. is callingBruce Norris wake up callFull-time leap of faithNotes: The Beginning

Gerald Lemoine Influences - my father - entrepreneurWork Experience

• Project Manager – General Contractor• Steamboat Springs, CO - land development • California Foreclosures

How I got started in Notes • Ward Hanigan reunion• Buying REO’s from lenders

What We Specialize In….

1st Position and JuniorsDeeply Discounted Notes

• Non- Performing• Re-performing• BK 13

We Fix Damaged Goods and Improve ValueThink of Us as “Note Rehabbers”

How We Do Business?

Happy Happy Notes- Happy if they pay - Happy if they don’t

Happy Happy Borrowers & InvestorsWe have flexibility to modify payments, loan balancesWe are the lending committee

What Are Notes?

Note: •a contract for a payment or series of payments.

Categories: •Unsecured- no collateral attached•Secured (cars, land, equipment, house)

What is a Trust Deed/Mortgage?

Backed by collateral (Real Property) Secured InvestmentRecorded document on the public recordWhen you buy a Trust Deed:

“YOU ARE THE BANK”The security for the note (contract)

Amortization: Portion of the principal paid with each payment

Term: How many payments Face value: Original loan amount Rate: Contracted interest rate BPO: Brokers price opinion of value ITV%: Investment to value UPB: Unpaid balance

Terminology

Terminology Discount: Percentage under face amount Yield %: Annual rate of return of investment expressed in % Performing: Paying as agreed Non-performing: Not paying at all Re-performing: Re-establishing payments Priority: Determines order of payment in

liquidation (1st, 2nd, 3rd…)

Two Common QuestionsWhy would banks sell?

• Clear portfolio of poor or non-performing notes• Raise capital

Why would Note Funds sell?• Buy pools of $100 million or more• Primary model is to liquidate property• Not interested in long term hold• Sell to investor is last choice

How to evaluate notes?

Purpose for buying• Buy and Hold for Yield• Rehab and Flip• Broker to other investors

How to evaluate notes? Types of notes

• Price range - inexpensive to expensive• Penny Stocks to Blue Chip - quality• Nationwide vs. Local - location• Borrowers ability to pay?• Performing or Non-performing• Vacant or occupied• Chapter 13 BK

Lafayette, LA

Redding, CA

How to evaluate notes?

Primary model• Owner occupied, source of income, desire to stay• This results in a lower risk investment• Buy multiple notes in low to medium price range• BK 13 – payment deducted from paycheck• Performing or non-performing• Loan modification to help borrower make payments

How to purchase notes?

Due Diligence• Value – Zillow, Dataquick, Epraisal, Google• Best indication of value – Local Realtor• Title search• Taxes – could be $10,000 plus• Building Dept – Code violations• Assessor web site – additions, remodels

How to purchase notes? Calculating offer price

Low Equity High EquityProperty value 45000 105000Monthly payment 850 850

% Fair Market Value 62% 46%

Yearly payment 10200 10200Note offer 28000 48000Yield - cash on cash 36% 21%

Limiting factor Investment to value (ITV)

Yield

Provide Cash Flow & Increase Net Worth

Note Portfolio Case Study Long term Investment Risk Investing in IRA/HSA

Managing Re-performing Notes: An Example Portfolio

Provide Cash Flow & Increase Net Worth

Case Studies• Fix & Flip - Ontario, CA• Seller Financing - West Newton, PA • Cash Flow – Crutcher /Dayton, OH

Ontario, CA Sold July 2009

Note Purchase $155,000

Repairs $ 25,000

Sold $218,000

Net profit $ 24,000

Total time 77 days

West Newton, PASold Aug. 2010

Purchased in August 2009 $19,000Cost of rehab, etc. $ 8,000Total invested $27,000Received Payments ($ 4,000)Net Investment $23,000 Sold with Seller financing $43,000Down payment $5,000Total financed $38,000 Payments are $450/mo for 125 months @ 8% interest rateResulting Yield 24.93%

Dayton, OH

Note Purchase $ 16,500

UPB $ 50,043

Monthly pmnt $ 516

Maturity date 10/2036

Yield 37%

Performing by Nov. ‘10

How to provide CF & increase NW? Long-term Investment

• As underlying asset appreciates value of note increases.

• Note balance is decreasing due to amortization.• Investor capital returned in 50 months with payment

at $1,500/mo.• See following chart showing appreciation, reduction

of note balance (UPB) and return of capital.

$0

$50

$100

$150

$200

$250

$300

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101 106 111 116

Number of Months

10 Year Investment (in Thousands)AppreciationPurchase PriceUPB

Provide Cash Flow and Increase Net Worth

Manage Risk• Basket of notes – like mutual fund• Individual notes – one goes bad, may take

months/years to recover investment• Investor risk tolerance - buying singles or partials?• Investor skill level – manage notes?

Pitfalls

Owner may use BK as a delaying tacticUnder estimate repairsOver estimate valueForensic loan audit

What’s the Market Opportunity? Why Now?

• Volume of institutional re-performing paper is ENORMOUS• Choice of notes – Hi Equity vs Low Equity, Low price vs Higher• Expected Yield, Various ways to generate yield• Not just yield – BIG payday down the road• Advantages of investing in IRA’s• Supercharge your portfolio with Partial Note Sales (Leverage)

Long Term Investing in Institutional Re-

Performing Paper = Positive Cash Flow!