Tired of losing money on mortgage note investments? Join Chris Seveney as he reveals the top 10 mistakes investors often make and how to avoid them. From the importance of due diligence to understanding foreclosure laws and the hidden costs of non-performing notes, Chris provides actionable insights to help you navigate this complex market. Discover why having a solid exit strategy and understanding loan servicing are crucial for success. Learn how to avoid overpaying for notes and the dangers of neglecting diversification. This episode is packed with practical tips to help you protect your investments and maximize your returns.

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Top 10 Mortgage Note Investor Mistakes

Mistake #1: Skipping Proper Due Diligence

Welcome back, everybody. I want to do an episode where I’m going to talk about the top ten mistakes I see people who get involved in note investing make. These are very common and they’re easily avoidable as well. It’s going to be an interesting topic where I’m going to be educating you, if you’re a new note investor or interested in investing in a mortgage note fund, on understanding some of the things that people make that are easily avoidable. I’m going to tell you how we mitigate some of these issues.

Let me start with number one on this list, which is skipping proper due diligence. Many investors fail to thoroughly investigate the due diligence, which could be a borrower’s history, their financial situation, a property condition, or the legal status of the loan. A perfect example is when I saw on a website that I’m a member of a forum post where an investor went out and bought a loan but did not really understand the lien position and the status of other loans on the property. He was excited. He was like, “I’m making my first purchase and it only cost me $10,000. The seller of the loan is even going to finance a portion of it.” All red flags. This is a situation where you see an investor rush into a deal and not fully understand that background.

It’s very simple to avoid. You have an acquisition process. We are a SOP-driven company where we have Standard Operating Procedures. We have a comprehensive due diligence checklist that we follow and go through. This includes ordering property inspection, reviewing title reports, and ensuring the loan documentation is validated. We have an attorney review that file, especially if the loan is in default. We want to mitigate the risks.

If people want a copy of that due diligence checklist, we provide it to investors and provide it to people out there so they understand what we do and how we go through this process. To me, this is something that could be easily avoided, but people get this FOMO and want to rush into some of these assets or they believe what the seller is telling them, which is something that you never want to do.

Mistake #2: Overpaying For Mortgage Notes

A lot of times, when you skip that due diligence, that leads to what is second on this list, which is people overpaying for mortgage notes, especially non-performing loans. A lot of times, they may not account for potential foreclosure costs, the legal fees, and the property condition. In many instances when this happens, people have clear criteria to ensure they’re purchasing the note that fits their model of what they want to make on these loans.

Many times, it’s A) investors not knowing. They don’t understand what it costs to foreclose on a specific state. They don’t understand how long it’s going to take. They may go online and say, “It’s going to take six months to foreclose.” It might take six months to foreclose, but also, that’s a foreclose. If it’s occupied, you might spend another 3 to 6 months getting that borrower out of that property if you do end up foreclosing. In this instance, they ended up filing for bankruptcy, and that wasn’t an exit strategy that the person considered, so they overpaid based on a certain exit strategy that didn’t come to fruition.

This is why it’s important to understand how to model and understand all the costs when acquiring a note. Many people listen to a guru that says, “Pay 70% or 50%.” Pick a number. That’s not the right way. That’s like going in and buying a property at foreclosure and saying, “I’m going to buy everything at $0.70 on the dollar,” without knowing how much it’s going to rehab.” That was a good example. That is something we see often.

Mistake #3: Not Understanding Foreclosure Laws

There was somebody on LinkedIn talking about what they’re paying for a note. They’re paying $150,000 for a $170,000 loan. I’m sitting there scratching my head. I was like, “There is no money in this deal at all. What is this person doing?” Sometimes, when somebody gets money, especially if it’s not their own money, they’re like, “I’m going to get out the door to show this person that we bought a note.” That is the worst thing that can happen. Understand that you shouldn’t overpay. Unfortunately, a lot of these investors don’t even realize that they’re overpaying for the note. These all tie together as we roll into number three, which is a reason why many people overpay.

Mistake number three is they don’t understand foreclosure laws in the state where the property is located. Some states may have a lengthy and costly judicial process, which can erode returns. For example, we’ll use Philadelphia. I have attorneys tell me, “Don’t even bother investing in Philadelphia because even if you foreclose, the sheriff to ratify that sale is taking up to twelve months.”

Understand the laws and talk to attorneys. You have to do research. That’s an easy way to avoid this. Understand the timeline and the costs and speak to attorneys. Don’t go off of what you read on the internet. I can tell you that there are people out there who are providing all this information to investors and not even buying loans. How do they know? They owe attorneys money. They’re not even paying attorneys for money they owe them from five years ago, but they’re out there telling you, “Here’s what it’s taking.” They have no idea because they’re not doing it.

Understand that when you’re getting your information, get it from somebody who’s going through that process. A lot of people miss this step. They go off of what they read on a Facebook forum. It’s so critical to consult with attorneys on a state-by-state basis. If it is a judicial state, it can take much longer and cost significantly more. If you don’t know this or account for this, it goes back to number two, which is you overpaid for the note.

Mistake #4: Underestimating Costs Of Non-Performing Notes

Let’s roll into number four. All of these tie together in some way, shape, or form because at the end of the day, the mistake people make is they lose money on a deal because of not understanding these things that we’re talking about. What we mentioned is the foreclosure timelines and costs, which ties into four, which is underestimating the cost of non-performing notes. They underestimate the cost of the legal fees, the foreclosure fees, filing fees, and also property repairs.

What is it going to take to get this property into a sellable condition? Property taxes. Did you account for property taxes? Did you account for holding costs if you have to take this back? You need to be conservative in your modeling. You can’t be too conservative that you’re never going to win a bid, but you need to understand that there’s default servicing from your servicer that is going to be approximately $100 a month.  If they file bankruptcy, there might be double fees from the servicer.

 

You have property taxes. What about insurance? Did you account for insurance and the skyrocketing cost of insurance? All of this can be found back in number one, which is the due diligence process. It’s so important that people understand the costs involved. If somebody understands, “The property’s worth $300,000,” and you take it back at foreclosure, guess what? You have to sell it.

Are we going to have to pay a realtor? Do we have to pay closing costs? You’re not netting the full $300,000. Did you account for $5,000 to $10,000 in trashing that place up and getting it cleaned to at least even get it presented? There are lots of costs that you need to know about. A lot of new investors don’t even know these costs exist. It’s important to understand the cost of every cost that could be incurred and estimate it properly.

Mistake #5: Lack Of Diversification

The next is a lack of diversification. This is very common as people get started because people will put all their capital in 1 or 2 notes. Another term is called concentration risk. If one of those is a performing note and it defaults, chances are you’re not going to probably do very well. If it underperforms, it could have a serious impact on your portfolio.

This is a tough one to avoid because it depends on how much money you have to invest. If you have $100,000, maybe you pick up 3 or 4 loans at $20,000 to $25,000 apiece. You can make it work. I know people who have $10,000 or $20,000 want to get into the game, but it’s going to be very challenging. I got into the game with under $50,000, but this was also several years ago. There was a significant inventory of loans under $25,000 to $50,000. I could easily buy 100 loans at $10,000 to $20,000 back then. Now, it’s challenging to find those. If you do, you’re typically on land.

Mistake #6: Failing To Understand Loan Servicing

The other area of diversification is geographic. Don’t put all your eggs in one city because there could be an impact there. Understand whether it’s judicial or non-judicial, and then also your type of loan. Are you buying all performing or non-performing loans? Diversify. For me, I would tell people, “Invest in a performing loan for your first loan.” The reason why, which leads us to number six, is failing to understand loan servicing, what a loan servicer is, and the importance of that servicer.

This was a mistake I made early on because I didn’t realize how painful that process can be when you board a loan. Unfortunately, I was also using a company that was probably the worst in the industry at boarding loans. We were several months in and they still didn’t board the loan. To this day, I won’t use this servicing company even though they’re pretty large.

You need to understand what the servicer does. How do they handle our communication? How do they board a loan? How do they process the payments? Also, they don’t manage your notes. That is the clearest thing people need to understand. They are there for you to manage them. Their job is to collect the payments, and if the borrower is not performing, to call them to get them to make the payment.

There was a post on Facebook in which somebody asked the question, “Loan servicers, what are you doing about the flooding in Asheville to get in touch with borrowers? There is no power or phones.” I pushed back on this person and asked, “What do you expect them to do? You hire them for a nominal fee to call people and mail statements. They keep you compliant.

If you want to send somebody by the property to see if it still exists, that’s on you. You need to tell them what you need or want. If you’re the puppet master, you’re the puppet master pulling all the strings. They will do what you tell them to do, but they’re not going to do something on their own. They’re not going to say, “There was a flood. Let’s send people out there to go take a look at these properties,” because you might have already sent somebody or used somebody else and then tell them, “I’m not going to pay you for it.”

If you're the puppet master, you're pulling all the strings. People will do what you tell them to do, but they're not going to do something on their own. Share on X

People need to understand that servicers ensure compliance with regulations. They manage the payments, communicate with the borrowers, and reduce the burden on you, but you still have the burden of managing them. It’s important to understand that in loan servicing. Some people think, “I buy a note and the servicer does anything. I can be passive.” That’s not the case.

Mistake #7: Expecting Immediate Returns

Next, lucky number seven is expecting immediate returns. There are gurus out there that will tell you you can make $250,000 in your 1st year. They’ll tell you, “If you buy a $50,000 note for $25,000, you get that borrower to give you 6 months of payments at $5,000. You then turn around, resell that note for $40,000, and get your $25,000 back. Plus, you made an extra $20,000 or $25,000 on that loan. You doubled your money. If you do that 10 times in the 1st year, you are going to make $250,000.” That is the dumbest thing I’ve ever heard.

Running a business is going to take a period of time to make money. Can you get lucky and hit a home run early on? You can, but if you expect to make quick profits, especially on non-performing notes, it’s not the game’s name. It’s patience, especially when dealing with these distressed assets. Let’s say I bought a loan. I’m recording this in mid-October 2024. That loan is not going to be boarded, most likely with the servicer, until Thanksgiving, hopefully, because you got hello and goodbye letters and everything else. Let’s say December 1, and then it’s boarded. You have to give them 30 days to allow for that transfer.

You’re at January 1 and let’s say the borrower is behind. I can send a demand letter on January 1, which realistically is going to take 2 weeks to get organized and have your attorney send it. It arrives on January 15th and expires on February 15th. You start the foreclosure process then. Maybe you file by March 1st. Let’s say it’s a non-judicial state. That gets you in May. You were in October, November, December, January, February, March, April, and May. It has been seven months already. That’s the fastest.

When people are thinking that they’re going to get immediate returns, it’s not going to happen. Understand the average lifecycle of a loan 12 to 18 months. Typically, it can be longer. I’ve had some loans going on for four-plus years and am still disputing things with the borrower. For those that are expecting that immediate home run and every deal is a home run because that’s what people show you, sorry. That is not the case for us. We’ve said this many times. We like to target the singles, the doubles, and the triples. It’s not that we don’t like to hit home runs, but we don’t swing for the fences. When you swing for the fences, you can strike out.

Mistake #8: Overlooking The Importance Of Title Reports & Lien Position

Number eight is overlooking the importance of title reports in the lien position. This one’s really interesting because it is probably the one I see the most, and people don’t understand it. I’m in 1st, but there are also 2 other liens behind you. I’m looking at a loan. This one’s a crazy situation. It’s in the first position. It has three loans behind it.

The borrower’s trying to sell the property. Somebody looks at it and says, “The borrower’s selling it. It’s got its sale pending. That’s great. I’m going to get paid off.” You’re not because the sale of the property is not going to satisfy those other lien holders. They can’t sell a property. You’re going to have to foreclose. You’re going to have to wipe out those other liens. The borrower could file bankruptcy as well, but it’s a mess. When it’s a mess, mess means time.

 

Here’s a true story. We bought a portfolio in 2018 of 80 assets. The seller said, “I already got ten of these under agreement with other people. Can you manage it and sell them so the seller doesn’t have to do all these other assignments and stuff?” If your bid was lower, you can make you know a few bucks on them, which was pretty close. We didn’t make anything on these, but we were like, “We’re going to transfer the day of the sale.”

I told these people, “I’m doing no due diligence on these. You have to put the funds in escrow. We’ll do a double closing. I’ll close with the seller and then turn around and close with you.” Everything is issued on the same day and so forth. This buyer who is buying a performing loan didn’t look at the title. He didn’t even order a title. It was a property that had two parcels attached to it. The servicer was screwed up and did not pay the taxes on the second parcel, which housed a garage.

A week after this person bought the loan, that second parcel gets sold at tax sale. They came back to me and said this was my fault and that I needed to make it right. I said, “What do you want me to do? You didn’t do your due diligence. You should have paid the taxes.” He was like, “You should have paid him.” I was like, “Why? I owned the loan for about seven minutes. I’m sorry, but it’s on you.” This person does not like me because of it. It goes back to if he had ordered a title report, he would’ve seen that there were past due taxes that were going to sale because it showed up on the title report. The person ordered a title report after the fact and then had the uh-oh moment. Understand the importance of the title in the lien position.

Also, in regards to this, I see a lot of people doing lending. Here’s a true story. We have a first-position loan on a property in bankruptcy. A woman gave this borrower who was in bankruptcy a $50,000 loan and didn’t do any title or investigation. She didn’t even know this person was in bankruptcy. She gave him the loan and it’s unsecured.

The person may have used it to buy new cars. The person didn’t use it to pay us. I know that much. This person realized that they were out of money. They were like, “What did I do?” They gave this person money that, unfortunately, is probably going to be completely wiped out because, unfortunately, they didn’t understand what they were doing.

Mistake #9: Not Having An Exit Strategy

As we round out the final two, they tie together. Number nine is not having an exit strategy where people go into an investment without a clear plan. How are you going to exit, especially if it doesn’t perform as expected? I mentioned that person who overpaid. Their whole theory was, “I’m going to get this borrower to do a reverse mortgage and pay me off.” Do you know how hard it is to get a reverse mortgage underwritten and done and then explain to somebody who’s in their 70s? It’s hard. It’s not easy at all. If they have family members, it even makes it harder. That was their only exit strategy. If that strategy didn’t work, you’re toast.

Many investors enter deals without a clear plan for how they'll exit, especially if things go sideways. Share on X

I see this a lot in private lending. They’ll give somebody a loan for a property. The person has all this equity but they forget to ask the question, “If I do a twelve-month loan, how am I getting paid back in a year? What are you going to do to pay me back?” Understand there isn’t an exit strategy. As part of any loan, you need to plan for these various scenarios. If I have to sell this to another investor, what would it look like if I had to modify the loan?

Mistake #10: Lack Of Understanding Of Evaluations

I read on a Facebook post that somebody can’t sell their house. They were like, “I’m going to do seller financing because I can get more money. I’ll do a loan to this borrower at 6% and sell it back on the market.” This is what rolls into the last one, which is a lack of understanding note evaluations. This person doesn’t analyze the exit strategies or they come up with one, but then they don’t understand the valuation, which is number ten on this list. If you’re going to sell a note at 6% on the secondary market, that’s going to sell for $0.50 to $0.60 on the dollar. I’d rather sell my house for $10,000 or $20,000 less and write a $200,000 loan at 6%. That’s probably going to sell for $120,000. Do the math. Which one would you rather do? A $20,000 or $80,000 deduction?

People will go into these situations because gurus are telling them creative finance and seller finance is the way to go, but they don’t understand how to value a note. They’re giving people loans at 130% loan-to-value on the property. They’re thinking, “I’m going to be able to sell this for $0.90 on the dollar.” You’re not. You’re writing a loan for $130,000 and the property is worth $100,000. Most investors don’t want above a 75% LTV, or you’re going to pay for that risk. That means you’re going to discount it more. A lot of times, people focus too much on the face value, or they’ve got this one exit strategy tied in their minds and don’t understand what it is.

Another example is from Facebook. I tell people, “Whoever looks on Facebook to buy loans, you’re never going to buy one on Facebook.” Someone offered a $280,000 loan at 4% and they wanted more than the unpaid principal balance. They wanted $300,000 for it. Other people picked up on this, too. The people were like, “Send me more information.” I was like, “Send me more information on what? You have no clue how to evaluate that loan.”

What this investor was thinking was, “The loan has $500,000 in total payments. That’s how we calculate it.” That’s like buying a CD that’s going to pay you for five years. Let’s say it starts at $50,000 and ends up at $80,000. That’s like saying, “I’m going to give the bank $70,000 for a $50,000 CD.” The risk-free rate is higher than what this note was written at. This note is pretty much at $280,000 and worth $140,000. They’re trying to get $300,000 for it. If that person who did sell their financing is thinking, “I’m going to do great on this,” they’re toast. It’s so important to understand how to value these notes.

Those are ten. I could probably go on and list another 100. I wanted to give you the top ten that we are seeing in the space. If you call us up and want to understand notes or how we evaluate ours, we can tell you all the dirty little details. You don’t, as an investor passively, may not understand everything we say, but you should at least listen because there are a lot of debt funds out there that don’t know how to buy debt. When you ask them, “What’s your exit strategy? What are you going to do with this?” You’d be curious to see what they say. As always, thank you for tuning in. Make sure to leave us a review on your favorite station. Take care and enjoy.

 

Important Links

• https://7EInvestments.com/Invest
• LinkedIn – Christopher Seveney