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Posted over 8 years ago

Twelve Ways To Profit From Non-Performing Real Estate Notes

Non-Performing Notes (NPN’s) are an excellent way to invest in Real Estate, without getting dirty, or dealing with toilets, termites, or tenants. It involves buying the defaulted mortgage and promissory note from a bank, hedge fund, or its current owner. Now you are 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 note for short, is a secured debt, attached to the mortgage on the house. Depending on the state, the mortgage might sometimes be called Trust Deed, Contract for Deed, or Land Contract, though they are all instruments used to buy a home. Once the note is paid off, the mortgage & note is marked as paid, and the owner has full title to the property.

However, life throws many problems at us, and for whatever reason, someone stops paying the note off. They could loose their job, spouse, or sadly, their limbs and they don’t have the money to make the payments at this time.

When this happens, the banks for the most part really don’t care, and just want their money past due, now! They are not that good at getting them to repay no matter how hard they try, as you can’t squeeze blood out of a rock. Nor do they want the property back. When they can’t get the homeowner to pay, they want to clear this bad debt off their books. They sell them in bulk by the truckload to equity or hedge funds, which then sell them off by the case or the bottle to investors.

Since we own the note, and are now the bank, we can do whatever we want, and if you are creative, you can come up with many ways to exit.

Here Are Twelve Ways To Profit From Non-Performing Real Estate Notes:

1. Repay or Modify The Note

Our #1 goal is to help the homeowner stay in their house, and since we paid very little for it compared to the value of the property, we can forgive some of the past due amounts, and still make a nice profit, though only If the homeowner wants to stay. We can lower the unpaid balance, payments, interest, or any combination of the three. After 6-12 trial payments to show good faith, we can modify the loan with any term we want.

2. Assumption Of Note By Someone Else

Since we own the note, we can find a family member or friend of the homeowner who would like to move in, and have them start repaying the monthly payments. If they keep paying, there is no need to modify the terms if it’s mutually agreeable to both parties.

3. Resell The Note For A Profit

Many people are looking for NPN’s, and they can be resold quickly for a higher price to another investor. Sometimes this makes sense to get a small amount upfront vs. spending time and money on a note that be a little too hairy, or you need the funds quickly.

4. Short Sale

If the homeowner has equity, a short sale is a good way to let them exit, and get their equity out. It 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 does not want to stay, the next exit would be to ask them to sign the deed over to you in lieu of foreclosing or a DIL. Many times they will do this if they are upside down, and just don’t want the headache any more. It allows them to “save face,” exit with dignity, and we will not go after them for any amounts owed over the sale price, as well as not filing a 1099 with the IRS.

6. Cash For Keys

Sometimes they want to leave and they have equity, or are just being stubborn. This is when we offer them cash to leave, and sign the deed over to us. We typically give them a small amount to show good faith, then, give the rest after they leave the place cleaned out, and not damaged. The amount can vary from $500 to $100,000 or more depending if it’s a shotgun shack in the Ozarks vs. a $3 million Manhattan condo.

We saw a note for such a condo, and the person living in it was a retired schoolteacher with rent control, whose monthly payments were less than the taxes and HOA fees & they had no desire to move. The note was being offered for $1.5MM, so even a $500,000 cash for keys would have been a good deal to have a $1MM profit!

7. Foreclosure

Foreclosure is our last resort when all else fails. On a vacant property, we always start foreclosure right away. If the homeowner is still there, and refuses to work with us, we also foreclose. This takes anywhere from 2 months to 4-5 years, depending on the state. We will also pursue a deficiency judgment for any balance owed us over the price we get for selling the property when we have title, and if they are really jerks, we can submit a 1099 to the IRS for that amount.

The last three exits above are the starting point to obtaining title to the property, and also have multiple exits depending on how creative you want to be.

8. Sell As-Is

You can then just sell the property AS-IS to a rehabber or handyman, on your own, or with a Realtor. Advertising on Craigslist or at a local Meet Up is a great way to sell this.

9. Fix & Flip

In this case, you are like a traditional rehabber; you obtain title, fix it up, and sell it to a homeowner or investor as a move-in ready property for more than As-Is.

10. Fix & Rent

You can perform a low cost rehab, using lower quality paint, carpet, and tiles to rent out if there is a shortage of rentals in the area. Though you are now a landlord, and have to deal with the toilets, tenants, termites, roof, hot water, and all the other issues since you own the house.

11. Fix and Sell

This is a great way to create your own paper. You sell the rehabbed property, either As-Is or fixed up to a homeowner, typically for a higher price than selling. Since you are the owner, you can create a note out of thin air, and a mortgage or Land Contract or Contract for Deed that has terms the homeowner can afford and collect the payments, just like the bank for 20-30 years.

12. Fix, Rent, And Sell To An Investor

You can sell a “loaded” rental to an investor as a turnkey investment, typically for a higher price than a standard fix & flip. One method is 25% to 50% down, and write a seller carryback note that will use the rents to pay the balance off, with a monthly payment that is lower than the rent, so the investor gets some cash flow each month with the difference. This way, the renter pays off much of the cost of the property.

With so many ways to profit from a defaulted real estate note, it’s hard to loose money unless you pay too much for the note. There are no bad notes, just overpaying can get you into trouble. If you have any questions, please contact us directly.



Comments (16)

  1. So if I'm new to buying notes or deeds;is wise to go out and call the banks to get the notes in bulk. I have a group that is looking to purchase these notes in large tapes. So I thought about just calling the banks , maybe the small banks in my city?? 


  2. Hi, you asked the same question 8 times. It's better to use a licensed servicer to do it as they are debt collectors. I do send letters after they review them, and they include a mini-miranda at the bottom, and have made phone calls, again, after a mini-miranda that we are debt collectors. You just need to be careful with saying wrong things, or making too many contacts, etc. Its best to outsource it to your licensed servicer for the most part. Good luck.


  3. Hi Christopher I have question.After purchasing note,there is time to contact home owner. How do you contact home owner,so you call him by your self,or you hire some body else like real estate attorney.what is the best way to contact home owner. Thank you

  4. Hi Christopher I have question.After purchasing note,there is time to contact home owner. How do you contact home owner,so you call him by your self,or you hire some body else like real estate attorney.what is the best way to contact home owner. Thank you

  5. Hi Christopher I have question.After purchasing note,there is time to contact home owner. How do you contact home owner,so you call him by your self,or you hire some body else like real estate attorney.what is the best way to contact home owner. Thank you

  6. Hi Christopher I have question.After purchasing note,there is time to contact home owner. How do you contact home owner,so you call him by your self,or you hire some body else like real estate attorney.what is the best way to contact home owner. Thank you

  7. Hi Christopher I have question.After purchasing note,there is time to contact home owner. How do you contact home owner,so you call him by your self,or you hire some body else like real estate attorney.what is the best way to contact home owner. Thank you

  8. Emma, thanks for writing, can you refer to the specific section of Dodd/Frank that you referring to? Also, we normally don't buy any notes in California, and even if we did, our loan servicing company, Peak Loan Servicing is licensed and they do it in all 50 states. They can also modify a loan in any state since they are a RMLO Peak Mortgage. Hope that helps.



      1. Hi Christopher I have question.After purchasing note,there is time to contact home owner. How do you contact home owner,so you call him by your self,or you hire some body else like real estate attorney.what is the best way to contact home owner. Thank you

      2. Hi Christopher I have question.After purchasing note,there is time to contact home owner. How do you contact home owner,so you call him by your self,or you hire some body else like real estate attorney.what is the best way to contact home owner. Thank you

      3. Hi Christopher I have question.After purchasing note,there is time to contact home owner. How do you contact home owner,so you call him by your self,or you hire some body else like real estate attorney.what is the best way to contact home owner. Thank you

  9. Hi Christopher,

    You say "since we own the note, and are now the bank, we can do whatever we want, and if you are creative, you can come up with many ways to exit."

    How are you able to get past California's strict regulations plus Dodd-Frank regulations that restrict an individual's ability to "collect on debt" without having a mortgage broker's license?

    Emma


  10. Hi Justin, there are no stupid questions, so I'll do my best to answer. We purchase them direct from hedge funds or equity fund, and are making contacts with banks to buy direct. Be very careful buying them from brokers, as if they are not direct, there usually are multiple brokers who will increase the price accordingly. You can buy off FCI or similar exchanges, though you have to do a lot of digging as the ones we tried to buy were very expensive, and had a lot of baggage and the owners refuse to face that reality. 

    In order to not overpay, you need to know about the property, its condition, its location, similar properties, and having experienced boots on the ground to assist.

    We are having great success joint venturing with investors who would like to have access to good notes, and an experienced guide to help them find, perform due diligence, workout, and dispose of them. George Antone of the Wealthy Code brings this up in his seminars; you can't know everything, so joint venture with the experts who focus on that niche. PM me with any questions.


  11. I have a stupid question. Where do you go to purchase a NPN? How do you determine if you would be overpaying?


    1. Hi Justin, I missed this for some reason. We have spent years cultivating relationships with funds that sell their junk. You can also try an exchange, and we broker performing and non-performing notes also. You can poke around on facebook or linked in also. The biggest thing is you can't chose the city like you can a property to flip. You get what you get, and the majority of the ones we purchaser are outside of Texas. PM me if you have any more questions.