Closed my first performing note at 80, and a delinquent tax bill nearly killed it

A few mechanics behind what happened here, since the tax item is the most repeatable lesson.

A performing note bought at a discount produces two separate numbers. The borrower's obligation stays exactly where the note says it is, 7.5% on the unpaid balance in this case. Your yield is that same payment stream measured against your lower basis, which is why 80 of UPB on a 7.5% loan with 262 months left lands near 11%. Nothing about the purchase changes what the borrower owes.

Unescrowed taxes and insurance sit ahead of your lien in most states, and an unpaid tax installment can grow into a lien with priority over the mortgage. Property tax lien priority and the redemption timeline differ by state, so check the statute for the county the collateral sits in before you price. The practical step is what beacon did, which is get current status from the taxing authority and the insurance carrier directly rather than trusting the seller's summary.

On servicing transfer, federal servicing rules generally require notices to the borrower when servicing changes hands, and your servicer will normally handle that. Confirm the current requirements and timing with the servicer in writing rather than assuming.

Assignment recording practice, recording fees, and whether an assignment must be recorded to be effective against third parties all vary by state, so ask a local attorney what the county expects.

Discount accretion has income tax consequences on the way in and out. That's a question for a CPA, not a forum.

How many notes did you look at to buy this one? That's the number I never see in these posts and it's the one that tells me whether the strategy is actually available to a person with a day job.

Collateral file. Did you get the original wet ink note in hand, or a copy with a promise to deliver? And is the endorsement chain complete from the originator through to your seller, with an allonge if it ran out of room on the note itself? A performing loan with a broken endorsement chain is a fine investment right up to the month it isn't.

Your 11.2% is a to-maturity number and nobody holds these to maturity. Rerun it assuming she refinances at month 24. You get 24 payments of $503 plus a payoff of roughly $59,400, against $49,120 in. That's still fine, call it high single digits to low teens depending on how you treat the $1,045, but it's a different asset than the one your headline describes.

I get 10.6% after the $27, not 10.5%, and if you amortize the $1,045 of diligence into basis you're at about 10.3%. Small stuff. The number I'd actually argue with is the $920 you paid on the taxes. That's basis too. Once it's in there you're at $50,040 and 10.1%.

Still a real return on a first lien at 51% of a drive-by value. I just want the number stated with everything in it.

Where did the note come from? Broker, a fund selling off odd lots, a private lender cleaning up their book? I'm trying to work out whether one-off notes at this size actually trade or whether everyone's buying tapes.

Slow down for me. UPB is the balance still owed, yes? And ITV, is that the loan compared to the house value? I've read three articles about this and each one used different letters.

$49k in one borrower is the part that stops me. If she loses her job you've got one asset, one story, and a foreclosure timeline that depends on which state the dirt's in. How do you think about that versus putting the same money into something with 40 borrowers in it?

beacon, thanks. 60 something to get to one closed is roughly what I'd guessed, which means the real cost of this strategy is the hours, not the $1,045.

$1,045 all in on closing costs is lower than I expected. Was there a fee to the seller or a broker cut baked into the 80, or was 80 actually the price?

Who held the money while the assignment was being prepared? I've seen these done directly seller to buyer with a wire and a FedEx envelope, and I've seen them done through a closing agent with escrow instructions and a funding condition on delivery of the collateral file. The second one costs a few hundred dollars and I'd pay it every time.

Also, did you get an assignment of the mortgage recorded in the county, and did anyone check whether that county wants the note endorsement to match the assignee name exactly? Some do.

Okay so if I've got this right, she pays 7.5% and then beacon gets the extra 3.7% because of the discount, so the total return is the rate plus the discount stacked on top.

vellum, no. Nothing stacks. She pays 7.5% on her balance and that's the only money moving. The $503 a month is fixed. Beacon paid less than the balance to buy the right to that $503, so the same dollars measured against his smaller basis work out to about 11%. If he'd paid full UPB he'd earn 7.5% and she'd pay exactly the same amount either way.

The discount also isn't free money on the tax side, as I understand it, some of it gets picked up as income over the life of the loan. Worth an hour with a CPA before your first one rather than after.

What actually happens on month one of no payment? Do you call her, does the servicer, and how long before you're spending real money? This is the part that decides whether I ever do this.

quill, the servicer calls, not you, and in a lot of states you'd trigger licensing questions by collecting yourself. On the money: say she stops and you end up foreclosing. Cost varies wildly by state, judicial states can run five figures and take a year or more. Against beacon's numbers there's $96k of collateral behind a $61.4k balance, so there's room for legal fees and still a recovery above his $50k basis. That cushion is the whole reason ITV matters more than the pay history to me.

One note is one borrower and one roof. I learned that owning four small buildings and I'd guess it reads the same on paper.

I've been looking at originating instead and this comparison is useful. Originating gets me a rate I set and a borrower I underwrote from scratch. Buying seasoned paper gets me 38 months of somebody actually paying, which is evidence I can't manufacture on a new loan. The trade is that I inherit whatever the originator did badly, including no escrow account apparently.

One more on servicing transfers. Get the goodbye letter and the hello letter dated and in your file, and watch for the borrower paying the old servicer for a month or two out of habit. It sorts itself out, but the payment history will show a gap that isn't real, and if you ever sell the note the next buyer will price that gap as a late.

Is this actually passive though? You priced it, pulled tax status, argued with a seller about $920, and set up an escrow account with a servicer. That's a project. It might be passive from month seven onward, which is not the same claim.

How long from first seeing the note to funding? I move slowly and I want to know if a seller will wait for me.

$49k and you make $476 a month. I put $49k into a cosmetic rehab last year and cleared $31k in five months. Different risk, I know, and I also spent every weekend on it and had a contractor walk mid-job. Not arguing with your deal, just saying the passive version costs a lot of yield for the quiet.

What actually hits your account each month, after the servicer and after whatever goes to escrow now? That's the only number I care about and I never see it stated plainly.