Non-Performing Notes (NPNs) are a great way to invest in real estate, without getting dirty or dealing with toilets, termites or tenants. This involves buying the defaulted mortgage and promissory note from a bank, hedge fund, or its current owner. Now you’re the bank, and no one ever calls the bank if the toilet is clogged, so you can have a restful night and weekend.
The promissory note, or promissory note for short, is a secured debt, attached to the mortgage on the house. Depending on the state, the mortgage may sometimes be referred to as Trust Deed, Contract for Deed, or Land Contract, although they are all instruments used to purchase a home. Once the note is paid, the mortgage and note are marked as paid and the owner has full title to the property.
However, life gives us many problems and for some reason someone stops paying the bill. They could lose their job, their spouse or unfortunately their members and they don’t have the money to make the payments right now.
When this happens, most banks really don’t care and just want their money past due, now! They’re not very good at getting them to pay back no matter how hard they try, because you can’t get blood out of a rock. They don’t want the property back either. When they can’t make the owner pay, they want to wipe that bad debt off their books. They resell them in bulk by truck to investment funds or hedge funds, which then resell them by case or by bottle to investors.
These defaulted and secured notes are available for pennies on the dollar. Ideally, the goal would be to try to get them to pay back. Getting them paid back is the #1 goal, although it doesn’t always work out that way, so here’s a list of 12 exit strategies to take advantage of as investors.
Since you now own the note and are now the bank, you can do whatever you want, and if you’re creative, you can find plenty of ways out.
Here are 12 ways to profit from non-performing real estate notes:
1. Refund or modify the ticket
Goal #1 is to help the owner stay in their home, and since the new owner paid very little for it relative to the value of the property, they can forgive some of the overdue amounts, while realizing a good profit, however only if the owner wishes to stay. You can reduce the outstanding balance, payments, interest, or any combination of the three. After 6-12 trial payments to show good faith, we can modify the loan with the term of our choice.
2. Note taken over by someone else
Since we own the note, we can find a family member or friend of the owner who would like to move in and get them to start paying the monthly payments. If they continue to pay, there is no need to change the terms if it suits both parties.
3. Resell the note for a profit
Lots of people are looking for NPNs, and they can be resold quickly for a higher price to another investor. Sometimes it makes sense to get a small amount up front rather than spending time and money on a note that’s a little too hairy, or you need the funds fast.
4. Short selling
If the owner has equity, a short sale is a good way to let them out and get their equity out. This requires our blessing as the mortgage holder and a real estate agent who will list it on the MLS. It’s a win-win for both parties.
5. Deed in lieu of foreclosure
If the person doesn’t want to stay, the next exit would be to have them sign the deed for you instead of a foreclosure or DIL. Often they will if they are upside down and just don’t want the headache anymore. This allows them to “save face”, walk out with dignity, and we won’t pursue them for amounts owed beyond the sale price, as well as not file a 1099 with the IRS.
6. Cash for keys
Sometimes they want to leave and they have equity, or they’re just stubborn. That’s when we offer them money to leave and we sign the deed. We usually give them a small amount to show their good faith, then give the rest after they leave the place clean and undamaged. The amount can range from $500 to $100,000 or more depending on whether it’s a shotgun shack in the Ozarks or a $3 million condo in Manhattan.
We saw a note for such a condo, and the person who lived there was a retired teacher with rent control, whose monthly payments were less than taxes and HOA fees and they had no desire to move. The note was offered for $1.5 million, so even $500,000 cash for the keys would have been a bargain for a $1 million profit!
Foreclosure is our last resort when all else fails. On a vacant property, we always start foreclosure right away. If the owner is still there and refuses to work with us, we will also foreclose. It takes anywhere from 2 months to 4-5 years, depending on the state. We will also pursue a deficiency judgment for any balance owed to us on the price we get for the sale of the property when we have title, and if they really are jerks, we can submit a 1099 to the IRS for this amount.
The last three exits above are the starting point for getting title deed, and also have multiple exits depending on how creative you want to be.
8. Sell as is
You can then simply sell the property AS IS to a rehabilitator or handyman, alone or with a real estate agent. Advertising on Craigslist or at a local Meet Up is a great way to sell this.
9. Repair and return
In this case, you are like a traditional rehabber; you get the title, fix it, and sell it to a landlord or investor as a move-in ready property for more than as is.
10. Repair and Rent
You can do a low-cost detox, using inferior paint, carpeting, and tile for rent if there’s a shortage of rentals in the area. Although you are now the owner and have to take care of the toilets, the tenants, the termites, the roof, the hot water and all the other problems since you are the owner of the house.
11. Repair and Sell
It’s a great way to create your own paper. You sell the rehabilitated property, either as is or repaired to a landlord, usually for a higher price than the sale. Since you are the landlord, you can create a note from scratch, and a mortgage or land deed or deed that has terms that the landlord can afford and collect payments, just like the bank for 20 to 30 years.
12. Repair, rent and sell to an investor
You can sell a “loaded” rental to an investor as a turnkey investment, usually at a higher price than a standard fix & flip. One method is to drop 25% to 50% and write a seller’s deferral note that will use the rents to pay the balance, with a monthly payment less than the rent, so the investor gets cash flow each month. with the difference. . In this way, the tenant reimburses a large part of the cost of the property.
With so many ways to take advantage of a defaulted real estate note, it’s hard to lose money unless you overpay for the note. There are no bad grades, just paying too much can get you in trouble.