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Choice Group Homes, Inc. 1
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
Choice Group Homes, Inc.
Business Plan
Choice Group Homes, Inc. 2
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
Contact: Lloyd Bowman
Phone: (708) 206-6180
E-mail: Lloyd@choicegrouphomes.com
1.0 Executive Summary
Business Name, Choice Group Homes, Inc. (also referred to as “the Company”) is a start-up
business located in Country Club Hills, IL and acquiring 1st
and 2nd
lien performing and non-
performing single-family residential mortgage notes. The company will also use buy and hold,
fix and flip, and fix and rehab strategies for acquiring notes. Choice Group Homes will operate
as a management company for the proposed company, Choice Investments LLC, which will
purchase and acquire the Notes. Choice Group Homes will distinguish itself from other
businesses by keeping a close eye on trends in the industry, and by maintaining an excellent
customer service record.
The Company will operate within the performing and non-performing note industry. Housing
trends within the Midwest suffered dramatically during the collapse that began in 2006. As of
2013, those prices are starting to recover. Our company has been able to take advantage of the
recovery by selling properties in the Chicagoland area to investors. Currently, there are 591,000
single-family homes for sale in Chicago, indicating a strong ability to continue purchasing real
estate.
To increase awareness of its business, Choice Group Homes intends to launch a creative
promotional campaign. Marketing channels will include use of a website, print media
advertisements, word of mouth referrals, Internet advertising, and a Yellow Pages ad. Through
these efforts, the Company will establish its reputation as a primary purchaser of performing and
non-performing 1st
and 2nd
lien real estate mortgages.
Lloyd Bowman owns and manage the Company. Mr. Bowman has worked for Chicago Transit
Authority for 18 years as a bus operator, line instructor, and supervisor. While working as an
employee of the transit agency, Mr. Bowman also wholesales properties. He will leave his
current place of employment to work full time as an asset manager for the Company.
Lloyd Bowman received a BA in Communication Studies and a MBA in Business Economics
from Ashford University.
Mr. Bowman seeks to continue his education in real estate by training as an underwriter and
mortgage broker for the Company.
Saundra Bowman is the co-owner and business partner of the Company. Mrs. Bowman has
worked for Pendum LLC and Syncada LLC as an Account Manager. Her duties included
managing corporate customer accounts and resolving discrepancies as a part of business
relations.
Saundra Bowman received a BA in Social Science and a MBA in Public Administration from
Ashford University.
Choice Group Homes, Inc. 3
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
The proposed company, Choice Investments, LLC, will be formed with the purpose of
investing in promissory notes (Notes) secured by residential mortgages or deed of trusts. The
primary investment strategy of Choice Investments is to purchase defaulted Notes secured by
second position mortgages. Choice Investments may also purchase defaulted Notes secured by
first position mortgages. Choice Investments will contact homeowners and negotiate a
“resolution.” There are multiple “resolutions” that will generate cash flow and profits for Choice
Investments.
• Workout Agreement – Choice Investments modifies the terms of the Note and the
homeowner begins making monthly payments. Expected yearly cash flow is 40% to 50%
of purchase price of the Note.
• Past Due Payments – Choice Investments collects a percentage of the past due balance.
After the payments is made, the homeowner pays down the unpaid principal balance on
the Note. Past due payments can be more than the purchase price of the Note, thus
reducing the cost basis for an individual Note to zero. In this example, all payments to
pay down the unpaid principal balance are profits to Choice Investments.
• Discounted Payoff – Choice Investments collects a one-time payment from the
homeowner to payoff the Note and to satisfy the lien. Discounted payoffs can range
between 150% to 200% of the Note purchase price.
• Foreclosure – Choice Investments forecloses on the property and keeps the property as a
rental or sells the property. Foreclosure from the second position requires that the first be
paid or Choice Investments receives the deed “subject to” the first lien, in which case
Choice Investments pays the first mortgage from rents collected.
• Sale of Re-performing Notes – After Choice Investments negotiates a Workout
agreement with the homeowner, the Note is now classified as a re-performing Note. It
now can be sold on the secondary market. Expected sale price is 200% to 250% of
purchase price of the Note.
• Cash-Outs – After a Workout Agreement is in place and the homeowner has been
making monthly payments, Choice Investments can receive a cash-out when the
homeowner decides to refinance or sell the property. Choice Investments is paid the
balance on the Note. Choice Investments can discount the balance due, which can be
several multiples of the purchase price.
Choice Group Homes, Inc. 4
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
1.1 The Opportunity (Why Focus on 2nd
Lien Mortgage Notes)
The market opportunity for this business model was developed during the last several years as a
number of defaulted mortgages increased. Banks of all sizes have been actively selling off large
pools of defaulted notes at substantial discounts. As a private investment company, Choice
Investments can provide creative solutions not offered by banks. Choice Investments will
purchase the notes at significant discounts and pass some of the discount to the homeowners. A
win-win solution is created where the homeowner can stay in their home with reduced payments,
and Choice Investments makes an above average return.
There is a high level of perceived risk in purchasing second position mortgages. Choice
Investments can reduce that risk to make the reward and profit above average. Homeowners who
are paying their first mortgage have “emotional equity” and are highly motivated to negotiate a
workout on their second mortgage so they can stay in their home. Choice Investments will
purchase Notes that can be up to three to four years delinquent. The homeowners are past their
“difficulty,’ which was usually one of four events: job loss, divorce, death of spouse, or illness.
The homeowners are now able and willing to start paying again.
When Choice Investments purchase non-performing Notes, it makes direct contact with the
homeowner to modify their existing loan via a Workout Agreement. The Notes are now a
performing asset and can be held for monthly income or sold through the secondary market to
other Note Investors.
A pool of Notes can generate exceptional cash flow within twelve months of the purchase. In
addition to the monthly cash flow and profits from the sale of re-performing Notes, there is a
great opportunity to generate profits over the next three to ten years from cash-outs.
Traditional cash flow investments, such as bonds or newly originated mortgages, do not have the
opportunity to create equity, and ultimately large profits.
Because Choice Investments will buy notes at such a large discount to face value (typically an
85% discount), there is huge potential to generate profits when a homeowner sells their property
or refinances.
Most homeowners will have the required equity and/or credit score to refinance or sell within
three to ten years. The profit potential is the difference between the unpaid principal balance on
the loan and Choice Investment’s purchase price. Choice Investment’s opportunity for cash-outs
during the next three to ten years should increase as home values increase and the principal on
the first mortgage is paid down.
This business is similar to investing in traditional residential real estate. However, instead of
buying a house, rehabbing it, and then keeping the house as a rental for cash flow or flipping it
Choice Group Homes, Inc. 5
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
for a one-time profit, Choice Investments buys a Note, or the “paper,” rehabs the Note, keeps it
for cash flow, or flips it for a one-time profit. The primary exit strategy is through the
homeowner via a loan modification or Workout Agreement. The secondary exit strategy is
through the house via foreclosure.
It’s a wonderful business. We never need to worry about a contractor showing up or a call in the
middle of the night because of a leaky toilet or roof.
Choice Group Homes, Inc. 6
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
1.2 Mortgage Note Definitions
1) Promissory Note (Note) – the legal instrument signed by the homeowner detailing the terms of
the loan, such as loan amount, interest rate, maturity date, and monthly payment.
2) Mortgage or Deed of Trust – provides the security interest of the lender (Choice Investments)
in the property. Mortgage instruments are typically used in judicial foreclosure states, and Deed
of Trust instruments are typically used in non-judicial foreclosure states.
3) Judicial Foreclosure – foreclosure is processed through the courts.
4) Non-Judicial Foreclosure – foreclosure is processed through a trustee sale, and used when a
power of sale clause exists in a mortgage or deed of trust. A “power of sale” clause is the clause
in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay
off the balance on a loan in the event of their default.
5) Non-Performing Note/Defaulted Note/Defaulted Mortgage – homeowner is not current on
their mortgage payments.
6) Workout Agreement – document created by Choice Investments that details the loan
modification. If a homeowner defaults on the Workout Agreement, then the original terms of the
Note and Mortgage/Deed of Trust are enforced.
7) Re-Performing Note – a Note is considered re-performing when the homeowner is making
payments per the terms of the Workout Agreement.
8) Collateral Documents – include the promissory note, mortgage/deed of trust, assignments, and
allonges.
9) Assignment – legal document showing transfer of the mortgage from the seller to Choice
Investments. Assignments are recorded by the local counties.
10) Allonge – legal document that provides the endorsement of the Note from the seller to
Choice Investments.
Choice Group Homes, Inc. 7
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
1.3 Business Operations
1) Note Acquisitions
a) Purchase Process
Choice Investments will purchase defaulted Notes from hedge funds and private
investment companies. There are two types of purchases:
i) Type 1:
Seller sends out a list of Notes to multiple buyers. Choice Investments performs its due
diligence and places a bid for the Notes. Seller contacts Choice Investments if they are
the winning bidder. The buy/sell agreement is executed. Choice Investments wires the
money to the seller. Seller sends original collateral documents.
ii) Type 2:
Choice Investments contacts seller and requests a pool of Notes for a specified purchase
price. Choice Investments can specify criteria such as location of property (by state),
amount of equity, and status of first mortgage. Choice Investments performs its due
diligence. Choice Investments can negotiate pricing, but pricing is usually firm. Choice
Investments can request to remove specific Notes that do not pass its due diligence and
have the seller replace it with new Notes. The buy/sell agreement is executed. Choice
Investments wires money to seller. Seller sends original collateral documents.
b) Collateral Documents
Electronic copies of the collateral documents are received from the seller as part of the
due diligence process. The original collateral documents are mailed by the seller after
payment is received. Choice Investments will store the original collateral documents at a
third party document storage company that specializes in legal documents.
c) Due Diligence
i) Credit Report – review for status of first mortgage, other debt analysis, and bankruptcy
history.
ii) Equity – establishes the fair market value (FMV) of property through analysis of
comparable sales and then calculates equity. Formula is FMV less first mortgage equals
equity to cover second.
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Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
iii) Bankruptcy – review Pacer, which is the federal government’s online system for
court records.
iv) Skip tracing – review personal information through private access databases.
d) Equity Criteria
Choice Investments will purchase Notes with full equity, partial equity, and no equity.
The majority of the purchases will have partial or no equity.
i) Full Equity Notes – there will be enough equity in the value of the house after the first
mortgage to cover the full unpaid principal balance on the second mortgage.
FMV = $200,000
First Mortgage = $150,000
Equity After First = $50,000
Second Mortgage Unpaid Principal Balance = $48,000
ii) Partial Equity Notes – there will be enough equity in the house after the first mortgage
to cover the purchase price of the second mortgage.
FMV = $160,000
First Mortgage = $150,000
Equity After First = $10,000
Second Mortgage Unpaid Principal Balance = $33,000
Purchase Price of Second Mortgage = $5,000
iii) No Equity Notes – there will be no equity in the value of the house after the first
mortgage to cover the costs of the second mortgage.
FMV = $160,000
First Mortgage = $170,000
Equity After First = ($10,000)
Second Mortgage Unpaid Principal Balance = $33,000
Purchase Price of Second Mortgage = $5,000
Choice Group Homes, Inc. 9
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
2) Workout Operations
The following procedures are followed to take a Note from non-performing to
performing.
a) RESPA Letter – Real Estate Settlement Procedures Act (RESPA) letter is sent to notify the
homeowner that the servicing of their mortgage has been transferred to Choice Investments.
b) TILA Letter – Truth in Lending Act (TILA) letter is sent to notify the homeowner of the
transfer of ownership of the note and mortgage/deed of trust.
c) NOP Letter – Notice of Purchase (NOP) letter is sent to homeowner with copies of the Note
and mortgage/deed of trust. The NOP letter details the current status of the mortgage, including
past due amount and payoff amount.
d) Skip Tracing – the process of trying to get contract information such as place of employment,
unlisted phone numbers, relatives, etc.
e) Phone Campaign – call every three days for first 10 days. If a message is left, it is very non-
confrontational. “We are here to help resolve the accounting issues with your mortgage. Please
call so we can review your options.”
f) Hand Written Letter Campaign – send up to three hand written letters asking the homeowner
to contact us so we can help.
g) Legal/Foreclosure – if, after 16 days the homeowner does not contact Choice Investments,
then we will initiate foreclosure. The first step is to send a Demand Letter from a local attorney
in the property’s state. The foreclosure laws and timeline vary by state, but the next step is
usually a Notice of Default, which is recorded at the local county office and posted on the
property. The main purpose of the foreclosure on less than 15% of Notes purchased.
h) Workout Agreement – after Choice Investments has contacted the homeowner and negotiated
a workout, a Workout Agreement is prepared and sent to the homeowner for signature and must
be notarized.
i) Servicing for Re-performing Notes – after the Workout Agreement is finalized, Choice
Investments transfers the servicing of the mortgage to a third party servicing company that
specializes in servicing for private mortgage investors. The new servicer sends out the monthly
statements, collects the payments from the homeowner (preferably through ACH), wires the
payment to Choice Investments, and sends the year-end Form 1098 to homeowners for mortgage
interest paid. The cost for third party servicing of re-performing Notes is $15 per month per
Note.
Choice Group Homes, Inc. 10
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
j) Defaulted Re-Performing Notes – if a homeowner stops making payments per terms of their
Workout Agreement, Choice Investments follows the same procedures listed above, including
foreclosure.
3) Sale of Re-Performing Notes
After a non-performing Note is converted to re-performing, it can be sold on the secondary
market.
a) Sale to a Related Party
If the sale of a re-performing Note is to a related party of Choice Group Homes, Inc., or Choice
Investments, then the sale price will be determined using a Present Value (PV) calculation. The
PV calculation is based on the monthly homeowner payments, the number of remaining
payments on the loan, and a discount rate of 25%. Balloon payments due from homeowners are
not used in the PV calculation.
Present Value Examples:
i) Sales Price = PV = $11,905
Monthly homeowner payment = $250
Term = 235 months
Discount Rate = 25%
Yearly Cash on Cash Yield = 25.2%
ii) Sales Price = PV $14,390
Monthly homeowner payment = $300
Term = 355 months
Discount Rate = 25%
Year Cash on Cash Yield = 25.0%
b) Sale to Non-Related Party
The sale price of a re-performing note to a non-related party will be determined by the current
pricing in the secondary market. The pricing is expected to be 200% to 400% of the purchase
price of the non-performing note.
c) Re-Performing Note Warranty
i) Warranties are not required, but higher prices can be achieved with a warranty. It is also easier
to sell lower quality performing notes with a warranty. The quality is determined by the amount
of equity to cover the sale price of the re-performing note.
ii) The Choice Investments warranty will provide the purchaser with a replacement re-
performing note, if the original Note goes into default for more than six months. Choice
investments will attempt to get the defaulted note re-performing again during the six-month
Choice Group Homes, Inc. 11
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
period. The value of the replacement note is equal to the original sale price less all homeowner
payments received by the purchaser.
4) Note Tracking
a) Choice Investments will utilize a software program developed by ZOHO (www.zoho.com).
This is a cloud-based software system. The cost is $20 per month per user.
5) Accounting and Recordkeeping 
a) Choice investments will utilize QuickBooks or an equivalent accounting package.
Choice Group Homes, Inc. 12
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
1.4 Responsibilities of Members
1) The members of Choice Investments, LLC will be Choice Group Homes, Inc., and the Private
Investor.
2) Choice Group Homes, Inc. will be the Managing Member.
Item Choice Group Homes, Inc. Private Investor
1) Note Acquisitions Primary Review
2) Workout Operations Primary Review
3) Sale of Re-Performing Notes Primary Review
4) Note Tracking Primary Review
5) Record Keeping Primary Review
6) Cash Management Primary Review
1.5 Cash Management
1) Choice Group Homes, Inc., as managing member, will be responsible for cash management
and payments to trade vendors. Prior to any distributions to members, trade vendors will be paid.
Choice Group Homes, Inc. will provide cash flow analysis to ensure there is adequate cash
available to pay its vendors. The order and priority of cash payments will be as follows (from
first priority to last priority):
a) Trade vendors.
b) Preferred Return (interest payments) to Private Investor and Management Fee to Choice
Group Homes, Inc.
i) The preferred return and management fee will have equal priority.
c) Distributions to Members (see section 1.6).
1.6 Distributions to Members
1) Choice Investments will make cash distributions to its members in the following order and
priority (from first priority to last priority):
a) Tax distributions
Choice Group Homes, Inc. 13
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
A pro rata tax distribution to holders of Class A and Class B Units, in an amount to pay their
anticipated federal, state and local tax obligations attributable to Choice Investments net income
passed through to such holders.
i) Any Tax Distributions will be deemed an advance towards “Distribution of Excess
Cash” listed in item “d” below.
b) Distribution of Cash from Previous Pools
After the Private Investor’s contribution for a specific pool of Notes is re-paid 100%, then the
excess cash generated from the re-performing Notes from that specific pool will be distributed
even if additional contributions are made to purchase additional Note pools. Distributions will be
made to holders of Class A Units; XX% to Private Investor and XX% to Choice Group Homes,
Inc.
c) Return of Contributions to Private Investor, as holder of Class B Units, until the Private
Investor’s contributions for purchase of a Note pool are returned in full and accrued interest
thereupon paid; and
d) Distribution of Excess Cash to holders of Class A Units; XX% to Private Investor and XX%
to Choice Group Homes, Inc.
1.7 Expenses
1) Corporate Expenses Paid By Choice Investments, LLC
a) Management Fee
$XXX per note purchased is to be paid to Choice Group Homes, Inc. by Choice Investments.
Payments to be distributed equally over twelve months, starting from the purchase date of the
pool of Notes.
b) Variable Note Expenses/Working Capital
Expenses listed below are the estimated average expenses per note. The loan from the Private
Investor for each pool of Notes will include working capital equal to $/gile) per Note purchased.
Description Cost Per Note
Office Supplies $25
Note Service Setup $45
Postage $50
Door Knock $60
Legal $1,800
Private Investigator $30
Notary Fees $10
Choice Group Homes, Inc. 14
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
Other $100
TOTAL $2120
c) Note Servicing Fees
After a Note is converted from non-performing to performing, Choice Investments will transfer
the servicing to a third party mortgage servicing company. The current fee is $15 per month per
Note.
d) Overhead Expenses
General Overhead Expenses
Description Cost Per Month
Software Access for ZOHO $30
Toll Free Number $50
TOTAL $80
Corporate Legal and Accounting Expenses
Description Cost Per Year
Legal $1,500
Accounting $1,500
TOTAL $3,000
Expenses Not paid by Choice Investments
a) The following expenses are to be paid by Choice Investments as part of its management fee.
Choice Group Homes, Inc. will not be reimbursed for these expenses.
i) Computer hardware, meals, travel, office rent, copier, internet access, and fax line.
Choice Group Homes, Inc. 15
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
1.8 Growth Plans
The following chart illustrates the expected quantity of Notes to be purchased and required
funding. After twelve months, Choice Investments LLC expects to purchase twenty-five Notes
per month.
After the first twelve months, Choice Investments will be in a position to create a fund to raise
capital. The underlying assets in the fund will be re-performing Notes. The fund will pay its
investors a fixed annual interest payment in the 12% to 15% range, and return principal in three
years. The capital raised from the fund will be used to purchase non-performing Notes.
Total
Notes Working Funding
Month Purchased Note Cost Capital Required
1 11 88,000 12,100 100,100
2 0
3 0
4 11 88,000 12,100 100,100
5 0
6 20 160,000 22,000 182,000
7 0
8 20 160,000 22,000 182,000
9 0
10 25 200,000 27,500 227,500
11 0
12 87 200,000 27,500 227,500
TOTAL 1,019,200
Choice Group Homes, Inc. 16
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
1.9 Frequently Asked Questions
Where do you buy notes?
• The banks are selling pools to private investment companies and hedge funds. Some of
these companies break up their pools into smaller pools that can be purchased by smaller
investors.
What collateral do you receive?
• Promissory note, deed of trust or mortgage, assignment, allonges, and accounting records.
• The Assignments is what transfers ownership and is recorded at the local county.
What is a Second Position Mortgage Note?
• Second position mortgage notes are typically originated when a homeowner finances the
full purchase price of their home and needs two loans, typically with an 80/20 split. They
also originate from home equity loans.
Why Second Position Mortgages vs. First Position Mortgage Notes?
• Diversification – The purchase price per asset is much lower than the first position
mortgage notes. This results in the ability to purchase a larger number of assets with the
same amount of capital.
• Leading Indicator – As part of the purchase due diligence, the credit report for the
homeowner is reviewed. If the homeowner has a solid payment history with the first
position mortgage, then there is a great leading indicator that the homeowner wants to
stay in their home and make payments.
• Scalability – When investing in “seconds,” the main exit strategy is through the
homeowner via a workout agreement. Because of this, assets can be acquired throughout
the United States with very little “boots on the ground” operations.
• Pricing – There are greater discounts for second mortgages, which lead to greater
monthly cash flow and profits.
• Competition – The capital that can be invested in distressed second mortgages is too
small for large Wall Street investment companies. This market dynamic keeps the
distressed second mortgage investment business a niche business without competition
Choice Group Homes, Inc. 17
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
from the big players. This results in better pricing economics for distressed second
mortgage investors.
Why can a private investor get the homeowner to start paying again and the banks can’t do this?
• In some cases, the banks will perform a modification with the homeowner. However, the
big banks are so overwhelmed with defaulted loans that their main focus is on the larger
first position mortgage notes, and they are selling off pools of second mortgages.
• Typically, the big banks do not have the creativity or resources to work one-on-one with
homeowners to work out a mutually beneficial solution.
• Banks need to clean up their balance sheets so they are selling the distressed debt to
investors.
• As a result of purchasing notes at a substantial discount, there is a lot more flexibility to
reduce the monthly payment and/or unpaid balance. This reduction creates a win-win
solution, where the homeowner can start re-paying their second mortgage, avoid
foreclosure, stay in their home, and the private investor earns an above market rate of
return.
Can you foreclose from the second position?
• Yes, you can foreclose from the second position.
• When a note is purchased, the buyer receives the original promissory note signed by the
homeowner, as well as the signed mortgage. This collateral provides the buyer with the
legal right to foreclose.
• The mortgage is assigned to the buyer and recorded at the local county.
• As part of the purchase due diligence, the buyer confirms there is an accurate chain of
title.
Who provides the servicing of the mortgage?
• Servicing is provided by a third party mortgage servicing company that provides all of
the required accounting and billing activities. The monthly mortgage payment from the
homeowner is paid to the servicing company and the servicing company then wires the
money to the owner of the note. The typical servicing fee is $15 per month per loan.
What is a Self-Directed IRA (SDIRA)?
Choice Group Homes, Inc. 18
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
• A SDIRA allows individuals to control the investments within their IRA accounts.
Typical investments include notes, real estate, gold, tax liens, and private lending.
SDIRA accounts are administered through third-party companies.
• Any individual with an IRA, Roth IRA, or rollover 401K can invest in notes through his
or her SDIRA. The money in a SDIRA grows tax deferred, just like an IRA with a
traditional investment company. A SDIRA account can be set up for both Traditional and
Roth accounts. With the Roth IRA, your money grows tax-deferred and withdrawals are
tax-free.
Choice Group Homes, Inc. 19
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
2.0 Non-Performing Notes Case Studies
Workout Agreement with Past Due Payment (completed in 3 months from purchase)
Raleigh, NC
Purchase Price $ 5,192
Face Value $ 35,523
Discount 85%
Arrears payment $ 6,000
New Monthly Payment: $ 207
New Loan Terms: $22,200 Balance, 20 yrs, 9.5%
First Year ROI ((9x207) + 6,000) / 5,192 151%
Workout Agreement (completed in 3 months from purchase)
Millmont, PA
Purchase Price $ 5,178
Face Value $ 39,161
Discount 86%
New Monthly Mortgage Payment $ 260
Yearly Mortgage Payment $ 3,120
New Loan Terms: $32,365 Balance, 30 Years, 9%
Balloon: $6,442
First Year ROI (9x260)/5,178 45%
12 Month ROI (12x260)/5,178 60%
Foreclose and Sell House (completed in 7 months from purchase)
Memphis, TN
Purchase Price $5,400
Face Value $78,211
Revenue from Sale of House $23,000
Gross Profit $ 17,600
Expenses $ 3,627
Net Profit $ 13,973
7 Month ROI (13,973/5,400) 258%
12 Month ROI 443%
Choice Group Homes, Inc. 20
Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181
2.1 Re-Performing Notes Portfolio Example
The portfolio listed below is a note investor’s portfolio of re-performing notes that was
purchased through a self-directed IRA. The portfolio was purchased from two private investment
companies who purchased non-performing Notes, performed the workouts, and re-sold the
Notes. It is shown here as an example of the types of returns that a passive investor can realize if
they purchase Choice Investment’s re-performing Notes.
Choice Investments will have a very marketable product because of the opportunity for a passive
investor to purchase our re-performing Notes and realize yearly cash yields above 20%. Re-
performing Notes are typically purchased by investors seeking passive monthly income, similar
to rental properties. Investors can purchase Notes in their own name, but the Notes are typically
purchased through an entity such as an LLC, or through a self-directed IRA account. If the re-
performing Notes are purchased through a self-directed IRA, then the account grows tax
deferred. If the Notes are purchased through a self-directed ROTH IRA, then the account grows
tax deferred and withdrawals are tax free – this a huge opportunity for a passive investor.
City, State Position Pur. Date Price Monthly Payment
Forney, TX 1st
2/2012 $23,500 $356
Fort Wayne, IN 2nd
7/2012 $7,200 $99
Carolina Beach, SC 2nd
9/2012 $5,600 $242
Pico Rivera, CA 2nd
12/2012 $27,900 $469
TOTAL $64,200
TOTAL MONTHLY INCOME $1,166
TOTAL YEARLY INCOME $13,922
YEARLY CASH YIELD 21.79%

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Choice Business Plan 2

  • 1. Choice Group Homes, Inc. 1 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 Choice Group Homes, Inc. Business Plan
  • 2. Choice Group Homes, Inc. 2 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 Contact: Lloyd Bowman Phone: (708) 206-6180 E-mail: Lloyd@choicegrouphomes.com 1.0 Executive Summary Business Name, Choice Group Homes, Inc. (also referred to as “the Company”) is a start-up business located in Country Club Hills, IL and acquiring 1st and 2nd lien performing and non- performing single-family residential mortgage notes. The company will also use buy and hold, fix and flip, and fix and rehab strategies for acquiring notes. Choice Group Homes will operate as a management company for the proposed company, Choice Investments LLC, which will purchase and acquire the Notes. Choice Group Homes will distinguish itself from other businesses by keeping a close eye on trends in the industry, and by maintaining an excellent customer service record. The Company will operate within the performing and non-performing note industry. Housing trends within the Midwest suffered dramatically during the collapse that began in 2006. As of 2013, those prices are starting to recover. Our company has been able to take advantage of the recovery by selling properties in the Chicagoland area to investors. Currently, there are 591,000 single-family homes for sale in Chicago, indicating a strong ability to continue purchasing real estate. To increase awareness of its business, Choice Group Homes intends to launch a creative promotional campaign. Marketing channels will include use of a website, print media advertisements, word of mouth referrals, Internet advertising, and a Yellow Pages ad. Through these efforts, the Company will establish its reputation as a primary purchaser of performing and non-performing 1st and 2nd lien real estate mortgages. Lloyd Bowman owns and manage the Company. Mr. Bowman has worked for Chicago Transit Authority for 18 years as a bus operator, line instructor, and supervisor. While working as an employee of the transit agency, Mr. Bowman also wholesales properties. He will leave his current place of employment to work full time as an asset manager for the Company. Lloyd Bowman received a BA in Communication Studies and a MBA in Business Economics from Ashford University. Mr. Bowman seeks to continue his education in real estate by training as an underwriter and mortgage broker for the Company. Saundra Bowman is the co-owner and business partner of the Company. Mrs. Bowman has worked for Pendum LLC and Syncada LLC as an Account Manager. Her duties included managing corporate customer accounts and resolving discrepancies as a part of business relations. Saundra Bowman received a BA in Social Science and a MBA in Public Administration from Ashford University.
  • 3. Choice Group Homes, Inc. 3 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 The proposed company, Choice Investments, LLC, will be formed with the purpose of investing in promissory notes (Notes) secured by residential mortgages or deed of trusts. The primary investment strategy of Choice Investments is to purchase defaulted Notes secured by second position mortgages. Choice Investments may also purchase defaulted Notes secured by first position mortgages. Choice Investments will contact homeowners and negotiate a “resolution.” There are multiple “resolutions” that will generate cash flow and profits for Choice Investments. • Workout Agreement – Choice Investments modifies the terms of the Note and the homeowner begins making monthly payments. Expected yearly cash flow is 40% to 50% of purchase price of the Note. • Past Due Payments – Choice Investments collects a percentage of the past due balance. After the payments is made, the homeowner pays down the unpaid principal balance on the Note. Past due payments can be more than the purchase price of the Note, thus reducing the cost basis for an individual Note to zero. In this example, all payments to pay down the unpaid principal balance are profits to Choice Investments. • Discounted Payoff – Choice Investments collects a one-time payment from the homeowner to payoff the Note and to satisfy the lien. Discounted payoffs can range between 150% to 200% of the Note purchase price. • Foreclosure – Choice Investments forecloses on the property and keeps the property as a rental or sells the property. Foreclosure from the second position requires that the first be paid or Choice Investments receives the deed “subject to” the first lien, in which case Choice Investments pays the first mortgage from rents collected. • Sale of Re-performing Notes – After Choice Investments negotiates a Workout agreement with the homeowner, the Note is now classified as a re-performing Note. It now can be sold on the secondary market. Expected sale price is 200% to 250% of purchase price of the Note. • Cash-Outs – After a Workout Agreement is in place and the homeowner has been making monthly payments, Choice Investments can receive a cash-out when the homeowner decides to refinance or sell the property. Choice Investments is paid the balance on the Note. Choice Investments can discount the balance due, which can be several multiples of the purchase price.
  • 4. Choice Group Homes, Inc. 4 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 1.1 The Opportunity (Why Focus on 2nd Lien Mortgage Notes) The market opportunity for this business model was developed during the last several years as a number of defaulted mortgages increased. Banks of all sizes have been actively selling off large pools of defaulted notes at substantial discounts. As a private investment company, Choice Investments can provide creative solutions not offered by banks. Choice Investments will purchase the notes at significant discounts and pass some of the discount to the homeowners. A win-win solution is created where the homeowner can stay in their home with reduced payments, and Choice Investments makes an above average return. There is a high level of perceived risk in purchasing second position mortgages. Choice Investments can reduce that risk to make the reward and profit above average. Homeowners who are paying their first mortgage have “emotional equity” and are highly motivated to negotiate a workout on their second mortgage so they can stay in their home. Choice Investments will purchase Notes that can be up to three to four years delinquent. The homeowners are past their “difficulty,’ which was usually one of four events: job loss, divorce, death of spouse, or illness. The homeowners are now able and willing to start paying again. When Choice Investments purchase non-performing Notes, it makes direct contact with the homeowner to modify their existing loan via a Workout Agreement. The Notes are now a performing asset and can be held for monthly income or sold through the secondary market to other Note Investors. A pool of Notes can generate exceptional cash flow within twelve months of the purchase. In addition to the monthly cash flow and profits from the sale of re-performing Notes, there is a great opportunity to generate profits over the next three to ten years from cash-outs. Traditional cash flow investments, such as bonds or newly originated mortgages, do not have the opportunity to create equity, and ultimately large profits. Because Choice Investments will buy notes at such a large discount to face value (typically an 85% discount), there is huge potential to generate profits when a homeowner sells their property or refinances. Most homeowners will have the required equity and/or credit score to refinance or sell within three to ten years. The profit potential is the difference between the unpaid principal balance on the loan and Choice Investment’s purchase price. Choice Investment’s opportunity for cash-outs during the next three to ten years should increase as home values increase and the principal on the first mortgage is paid down. This business is similar to investing in traditional residential real estate. However, instead of buying a house, rehabbing it, and then keeping the house as a rental for cash flow or flipping it
  • 5. Choice Group Homes, Inc. 5 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 for a one-time profit, Choice Investments buys a Note, or the “paper,” rehabs the Note, keeps it for cash flow, or flips it for a one-time profit. The primary exit strategy is through the homeowner via a loan modification or Workout Agreement. The secondary exit strategy is through the house via foreclosure. It’s a wonderful business. We never need to worry about a contractor showing up or a call in the middle of the night because of a leaky toilet or roof.
  • 6. Choice Group Homes, Inc. 6 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 1.2 Mortgage Note Definitions 1) Promissory Note (Note) – the legal instrument signed by the homeowner detailing the terms of the loan, such as loan amount, interest rate, maturity date, and monthly payment. 2) Mortgage or Deed of Trust – provides the security interest of the lender (Choice Investments) in the property. Mortgage instruments are typically used in judicial foreclosure states, and Deed of Trust instruments are typically used in non-judicial foreclosure states. 3) Judicial Foreclosure – foreclosure is processed through the courts. 4) Non-Judicial Foreclosure – foreclosure is processed through a trustee sale, and used when a power of sale clause exists in a mortgage or deed of trust. A “power of sale” clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of their default. 5) Non-Performing Note/Defaulted Note/Defaulted Mortgage – homeowner is not current on their mortgage payments. 6) Workout Agreement – document created by Choice Investments that details the loan modification. If a homeowner defaults on the Workout Agreement, then the original terms of the Note and Mortgage/Deed of Trust are enforced. 7) Re-Performing Note – a Note is considered re-performing when the homeowner is making payments per the terms of the Workout Agreement. 8) Collateral Documents – include the promissory note, mortgage/deed of trust, assignments, and allonges. 9) Assignment – legal document showing transfer of the mortgage from the seller to Choice Investments. Assignments are recorded by the local counties. 10) Allonge – legal document that provides the endorsement of the Note from the seller to Choice Investments.
  • 7. Choice Group Homes, Inc. 7 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 1.3 Business Operations 1) Note Acquisitions a) Purchase Process Choice Investments will purchase defaulted Notes from hedge funds and private investment companies. There are two types of purchases: i) Type 1: Seller sends out a list of Notes to multiple buyers. Choice Investments performs its due diligence and places a bid for the Notes. Seller contacts Choice Investments if they are the winning bidder. The buy/sell agreement is executed. Choice Investments wires the money to the seller. Seller sends original collateral documents. ii) Type 2: Choice Investments contacts seller and requests a pool of Notes for a specified purchase price. Choice Investments can specify criteria such as location of property (by state), amount of equity, and status of first mortgage. Choice Investments performs its due diligence. Choice Investments can negotiate pricing, but pricing is usually firm. Choice Investments can request to remove specific Notes that do not pass its due diligence and have the seller replace it with new Notes. The buy/sell agreement is executed. Choice Investments wires money to seller. Seller sends original collateral documents. b) Collateral Documents Electronic copies of the collateral documents are received from the seller as part of the due diligence process. The original collateral documents are mailed by the seller after payment is received. Choice Investments will store the original collateral documents at a third party document storage company that specializes in legal documents. c) Due Diligence i) Credit Report – review for status of first mortgage, other debt analysis, and bankruptcy history. ii) Equity – establishes the fair market value (FMV) of property through analysis of comparable sales and then calculates equity. Formula is FMV less first mortgage equals equity to cover second.
  • 8. Choice Group Homes, Inc. 8 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 iii) Bankruptcy – review Pacer, which is the federal government’s online system for court records. iv) Skip tracing – review personal information through private access databases. d) Equity Criteria Choice Investments will purchase Notes with full equity, partial equity, and no equity. The majority of the purchases will have partial or no equity. i) Full Equity Notes – there will be enough equity in the value of the house after the first mortgage to cover the full unpaid principal balance on the second mortgage. FMV = $200,000 First Mortgage = $150,000 Equity After First = $50,000 Second Mortgage Unpaid Principal Balance = $48,000 ii) Partial Equity Notes – there will be enough equity in the house after the first mortgage to cover the purchase price of the second mortgage. FMV = $160,000 First Mortgage = $150,000 Equity After First = $10,000 Second Mortgage Unpaid Principal Balance = $33,000 Purchase Price of Second Mortgage = $5,000 iii) No Equity Notes – there will be no equity in the value of the house after the first mortgage to cover the costs of the second mortgage. FMV = $160,000 First Mortgage = $170,000 Equity After First = ($10,000) Second Mortgage Unpaid Principal Balance = $33,000 Purchase Price of Second Mortgage = $5,000
  • 9. Choice Group Homes, Inc. 9 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 2) Workout Operations The following procedures are followed to take a Note from non-performing to performing. a) RESPA Letter – Real Estate Settlement Procedures Act (RESPA) letter is sent to notify the homeowner that the servicing of their mortgage has been transferred to Choice Investments. b) TILA Letter – Truth in Lending Act (TILA) letter is sent to notify the homeowner of the transfer of ownership of the note and mortgage/deed of trust. c) NOP Letter – Notice of Purchase (NOP) letter is sent to homeowner with copies of the Note and mortgage/deed of trust. The NOP letter details the current status of the mortgage, including past due amount and payoff amount. d) Skip Tracing – the process of trying to get contract information such as place of employment, unlisted phone numbers, relatives, etc. e) Phone Campaign – call every three days for first 10 days. If a message is left, it is very non- confrontational. “We are here to help resolve the accounting issues with your mortgage. Please call so we can review your options.” f) Hand Written Letter Campaign – send up to three hand written letters asking the homeowner to contact us so we can help. g) Legal/Foreclosure – if, after 16 days the homeowner does not contact Choice Investments, then we will initiate foreclosure. The first step is to send a Demand Letter from a local attorney in the property’s state. The foreclosure laws and timeline vary by state, but the next step is usually a Notice of Default, which is recorded at the local county office and posted on the property. The main purpose of the foreclosure on less than 15% of Notes purchased. h) Workout Agreement – after Choice Investments has contacted the homeowner and negotiated a workout, a Workout Agreement is prepared and sent to the homeowner for signature and must be notarized. i) Servicing for Re-performing Notes – after the Workout Agreement is finalized, Choice Investments transfers the servicing of the mortgage to a third party servicing company that specializes in servicing for private mortgage investors. The new servicer sends out the monthly statements, collects the payments from the homeowner (preferably through ACH), wires the payment to Choice Investments, and sends the year-end Form 1098 to homeowners for mortgage interest paid. The cost for third party servicing of re-performing Notes is $15 per month per Note.
  • 10. Choice Group Homes, Inc. 10 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 j) Defaulted Re-Performing Notes – if a homeowner stops making payments per terms of their Workout Agreement, Choice Investments follows the same procedures listed above, including foreclosure. 3) Sale of Re-Performing Notes After a non-performing Note is converted to re-performing, it can be sold on the secondary market. a) Sale to a Related Party If the sale of a re-performing Note is to a related party of Choice Group Homes, Inc., or Choice Investments, then the sale price will be determined using a Present Value (PV) calculation. The PV calculation is based on the monthly homeowner payments, the number of remaining payments on the loan, and a discount rate of 25%. Balloon payments due from homeowners are not used in the PV calculation. Present Value Examples: i) Sales Price = PV = $11,905 Monthly homeowner payment = $250 Term = 235 months Discount Rate = 25% Yearly Cash on Cash Yield = 25.2% ii) Sales Price = PV $14,390 Monthly homeowner payment = $300 Term = 355 months Discount Rate = 25% Year Cash on Cash Yield = 25.0% b) Sale to Non-Related Party The sale price of a re-performing note to a non-related party will be determined by the current pricing in the secondary market. The pricing is expected to be 200% to 400% of the purchase price of the non-performing note. c) Re-Performing Note Warranty i) Warranties are not required, but higher prices can be achieved with a warranty. It is also easier to sell lower quality performing notes with a warranty. The quality is determined by the amount of equity to cover the sale price of the re-performing note. ii) The Choice Investments warranty will provide the purchaser with a replacement re- performing note, if the original Note goes into default for more than six months. Choice investments will attempt to get the defaulted note re-performing again during the six-month
  • 11. Choice Group Homes, Inc. 11 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 period. The value of the replacement note is equal to the original sale price less all homeowner payments received by the purchaser. 4) Note Tracking a) Choice Investments will utilize a software program developed by ZOHO (www.zoho.com). This is a cloud-based software system. The cost is $20 per month per user. 5) Accounting and Recordkeeping a) Choice investments will utilize QuickBooks or an equivalent accounting package.
  • 12. Choice Group Homes, Inc. 12 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 1.4 Responsibilities of Members 1) The members of Choice Investments, LLC will be Choice Group Homes, Inc., and the Private Investor. 2) Choice Group Homes, Inc. will be the Managing Member. Item Choice Group Homes, Inc. Private Investor 1) Note Acquisitions Primary Review 2) Workout Operations Primary Review 3) Sale of Re-Performing Notes Primary Review 4) Note Tracking Primary Review 5) Record Keeping Primary Review 6) Cash Management Primary Review 1.5 Cash Management 1) Choice Group Homes, Inc., as managing member, will be responsible for cash management and payments to trade vendors. Prior to any distributions to members, trade vendors will be paid. Choice Group Homes, Inc. will provide cash flow analysis to ensure there is adequate cash available to pay its vendors. The order and priority of cash payments will be as follows (from first priority to last priority): a) Trade vendors. b) Preferred Return (interest payments) to Private Investor and Management Fee to Choice Group Homes, Inc. i) The preferred return and management fee will have equal priority. c) Distributions to Members (see section 1.6). 1.6 Distributions to Members 1) Choice Investments will make cash distributions to its members in the following order and priority (from first priority to last priority): a) Tax distributions
  • 13. Choice Group Homes, Inc. 13 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 A pro rata tax distribution to holders of Class A and Class B Units, in an amount to pay their anticipated federal, state and local tax obligations attributable to Choice Investments net income passed through to such holders. i) Any Tax Distributions will be deemed an advance towards “Distribution of Excess Cash” listed in item “d” below. b) Distribution of Cash from Previous Pools After the Private Investor’s contribution for a specific pool of Notes is re-paid 100%, then the excess cash generated from the re-performing Notes from that specific pool will be distributed even if additional contributions are made to purchase additional Note pools. Distributions will be made to holders of Class A Units; XX% to Private Investor and XX% to Choice Group Homes, Inc. c) Return of Contributions to Private Investor, as holder of Class B Units, until the Private Investor’s contributions for purchase of a Note pool are returned in full and accrued interest thereupon paid; and d) Distribution of Excess Cash to holders of Class A Units; XX% to Private Investor and XX% to Choice Group Homes, Inc. 1.7 Expenses 1) Corporate Expenses Paid By Choice Investments, LLC a) Management Fee $XXX per note purchased is to be paid to Choice Group Homes, Inc. by Choice Investments. Payments to be distributed equally over twelve months, starting from the purchase date of the pool of Notes. b) Variable Note Expenses/Working Capital Expenses listed below are the estimated average expenses per note. The loan from the Private Investor for each pool of Notes will include working capital equal to $/gile) per Note purchased. Description Cost Per Note Office Supplies $25 Note Service Setup $45 Postage $50 Door Knock $60 Legal $1,800 Private Investigator $30 Notary Fees $10
  • 14. Choice Group Homes, Inc. 14 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 Other $100 TOTAL $2120 c) Note Servicing Fees After a Note is converted from non-performing to performing, Choice Investments will transfer the servicing to a third party mortgage servicing company. The current fee is $15 per month per Note. d) Overhead Expenses General Overhead Expenses Description Cost Per Month Software Access for ZOHO $30 Toll Free Number $50 TOTAL $80 Corporate Legal and Accounting Expenses Description Cost Per Year Legal $1,500 Accounting $1,500 TOTAL $3,000 Expenses Not paid by Choice Investments a) The following expenses are to be paid by Choice Investments as part of its management fee. Choice Group Homes, Inc. will not be reimbursed for these expenses. i) Computer hardware, meals, travel, office rent, copier, internet access, and fax line.
  • 15. Choice Group Homes, Inc. 15 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 1.8 Growth Plans The following chart illustrates the expected quantity of Notes to be purchased and required funding. After twelve months, Choice Investments LLC expects to purchase twenty-five Notes per month. After the first twelve months, Choice Investments will be in a position to create a fund to raise capital. The underlying assets in the fund will be re-performing Notes. The fund will pay its investors a fixed annual interest payment in the 12% to 15% range, and return principal in three years. The capital raised from the fund will be used to purchase non-performing Notes. Total Notes Working Funding Month Purchased Note Cost Capital Required 1 11 88,000 12,100 100,100 2 0 3 0 4 11 88,000 12,100 100,100 5 0 6 20 160,000 22,000 182,000 7 0 8 20 160,000 22,000 182,000 9 0 10 25 200,000 27,500 227,500 11 0 12 87 200,000 27,500 227,500 TOTAL 1,019,200
  • 16. Choice Group Homes, Inc. 16 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 1.9 Frequently Asked Questions Where do you buy notes? • The banks are selling pools to private investment companies and hedge funds. Some of these companies break up their pools into smaller pools that can be purchased by smaller investors. What collateral do you receive? • Promissory note, deed of trust or mortgage, assignment, allonges, and accounting records. • The Assignments is what transfers ownership and is recorded at the local county. What is a Second Position Mortgage Note? • Second position mortgage notes are typically originated when a homeowner finances the full purchase price of their home and needs two loans, typically with an 80/20 split. They also originate from home equity loans. Why Second Position Mortgages vs. First Position Mortgage Notes? • Diversification – The purchase price per asset is much lower than the first position mortgage notes. This results in the ability to purchase a larger number of assets with the same amount of capital. • Leading Indicator – As part of the purchase due diligence, the credit report for the homeowner is reviewed. If the homeowner has a solid payment history with the first position mortgage, then there is a great leading indicator that the homeowner wants to stay in their home and make payments. • Scalability – When investing in “seconds,” the main exit strategy is through the homeowner via a workout agreement. Because of this, assets can be acquired throughout the United States with very little “boots on the ground” operations. • Pricing – There are greater discounts for second mortgages, which lead to greater monthly cash flow and profits. • Competition – The capital that can be invested in distressed second mortgages is too small for large Wall Street investment companies. This market dynamic keeps the distressed second mortgage investment business a niche business without competition
  • 17. Choice Group Homes, Inc. 17 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 from the big players. This results in better pricing economics for distressed second mortgage investors. Why can a private investor get the homeowner to start paying again and the banks can’t do this? • In some cases, the banks will perform a modification with the homeowner. However, the big banks are so overwhelmed with defaulted loans that their main focus is on the larger first position mortgage notes, and they are selling off pools of second mortgages. • Typically, the big banks do not have the creativity or resources to work one-on-one with homeowners to work out a mutually beneficial solution. • Banks need to clean up their balance sheets so they are selling the distressed debt to investors. • As a result of purchasing notes at a substantial discount, there is a lot more flexibility to reduce the monthly payment and/or unpaid balance. This reduction creates a win-win solution, where the homeowner can start re-paying their second mortgage, avoid foreclosure, stay in their home, and the private investor earns an above market rate of return. Can you foreclose from the second position? • Yes, you can foreclose from the second position. • When a note is purchased, the buyer receives the original promissory note signed by the homeowner, as well as the signed mortgage. This collateral provides the buyer with the legal right to foreclose. • The mortgage is assigned to the buyer and recorded at the local county. • As part of the purchase due diligence, the buyer confirms there is an accurate chain of title. Who provides the servicing of the mortgage? • Servicing is provided by a third party mortgage servicing company that provides all of the required accounting and billing activities. The monthly mortgage payment from the homeowner is paid to the servicing company and the servicing company then wires the money to the owner of the note. The typical servicing fee is $15 per month per loan. What is a Self-Directed IRA (SDIRA)?
  • 18. Choice Group Homes, Inc. 18 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 • A SDIRA allows individuals to control the investments within their IRA accounts. Typical investments include notes, real estate, gold, tax liens, and private lending. SDIRA accounts are administered through third-party companies. • Any individual with an IRA, Roth IRA, or rollover 401K can invest in notes through his or her SDIRA. The money in a SDIRA grows tax deferred, just like an IRA with a traditional investment company. A SDIRA account can be set up for both Traditional and Roth accounts. With the Roth IRA, your money grows tax-deferred and withdrawals are tax-free.
  • 19. Choice Group Homes, Inc. 19 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 2.0 Non-Performing Notes Case Studies Workout Agreement with Past Due Payment (completed in 3 months from purchase) Raleigh, NC Purchase Price $ 5,192 Face Value $ 35,523 Discount 85% Arrears payment $ 6,000 New Monthly Payment: $ 207 New Loan Terms: $22,200 Balance, 20 yrs, 9.5% First Year ROI ((9x207) + 6,000) / 5,192 151% Workout Agreement (completed in 3 months from purchase) Millmont, PA Purchase Price $ 5,178 Face Value $ 39,161 Discount 86% New Monthly Mortgage Payment $ 260 Yearly Mortgage Payment $ 3,120 New Loan Terms: $32,365 Balance, 30 Years, 9% Balloon: $6,442 First Year ROI (9x260)/5,178 45% 12 Month ROI (12x260)/5,178 60% Foreclose and Sell House (completed in 7 months from purchase) Memphis, TN Purchase Price $5,400 Face Value $78,211 Revenue from Sale of House $23,000 Gross Profit $ 17,600 Expenses $ 3,627 Net Profit $ 13,973 7 Month ROI (13,973/5,400) 258% 12 Month ROI 443%
  • 20. Choice Group Homes, Inc. 20 Choice Group Homes, Inc. (P) 708-206-6180 (F) 708-206-6181 2.1 Re-Performing Notes Portfolio Example The portfolio listed below is a note investor’s portfolio of re-performing notes that was purchased through a self-directed IRA. The portfolio was purchased from two private investment companies who purchased non-performing Notes, performed the workouts, and re-sold the Notes. It is shown here as an example of the types of returns that a passive investor can realize if they purchase Choice Investment’s re-performing Notes. Choice Investments will have a very marketable product because of the opportunity for a passive investor to purchase our re-performing Notes and realize yearly cash yields above 20%. Re- performing Notes are typically purchased by investors seeking passive monthly income, similar to rental properties. Investors can purchase Notes in their own name, but the Notes are typically purchased through an entity such as an LLC, or through a self-directed IRA account. If the re- performing Notes are purchased through a self-directed IRA, then the account grows tax deferred. If the Notes are purchased through a self-directed ROTH IRA, then the account grows tax deferred and withdrawals are tax free – this a huge opportunity for a passive investor. City, State Position Pur. Date Price Monthly Payment Forney, TX 1st 2/2012 $23,500 $356 Fort Wayne, IN 2nd 7/2012 $7,200 $99 Carolina Beach, SC 2nd 9/2012 $5,600 $242 Pico Rivera, CA 2nd 12/2012 $27,900 $469 TOTAL $64,200 TOTAL MONTHLY INCOME $1,166 TOTAL YEARLY INCOME $13,922 YEARLY CASH YIELD 21.79%