I thought of this crazy idea and wanted to write about it just to see if other people think this could work in practice. I want to state that I have no desire, intention, or ability to actually do this. It was just something I was thinking of and wanted to throw out this wacky scheme for discussion. There's probably reasons why this wouldn't actually work in real life. Besides, it's a bit conniving and questionably unethical.
You buy a house, but never make any mortgage payments. Wait 12 - 18 months and have a friend contact the lending institution to buy the note at a discount. You pay the friend the value of the note and now you have a house that you bought at like half price.
Would this actually work?
I could tell you the fault in your plan, but why even discuss something like this? It’s more than “a bit conniving and questionably unethical”. It’s fraud and fully unethical. A bit like saying “I don’t really plan to rob a bank, but how would I get away with it if I did?”
99.9% of notes are not available to be bought by an individual, let alone one trying to buy a particular note.
You would get foreclosed on.
Your credit would be trashed for years.
Why do you think the note would sell for 1/2 price....it wouldn’t.
Okay, fair enough...
1) I assumed that this would probably amount to fraud, but I still don't really understand why. You're not lying to the bank in order to receive the loan.
2) I was unsure of how difficult it would be to track down and buy the note at discount from the lending institution. I also wasn't sure on whether or not this would wreck your credit.
3) This is admittedly a TERRIBLE idea. As for why to even discuss this, well, I treat it more like a thought experiment than anything else. The intention is to explore potential consequences. I was definitely a bit hesitant to post this here, fearful that the intention of the post would be misconstrued.
It’s an interesting to think about. I don’t think your a bad person for posting this it’s just an idea and a way to think and understand how the process works. Good post !
Interesting thing *
I have been through a foreclosure. Bank was in the process of repossessing the property when my friend decided he wanted to purchase it. Bank would refuse to sell it to him and kept saying "we have to put in on the market or it could look like an inside deal." ....kinda funny in my opinion because I believe someone from the bank was ultimately the end purchaser.
@David Piqueira - I realize this is a "thought experiment", and I actually think it's a useful discussion to help people understand how these things work. So I'm not knocking you for posting the discussion.
But your statement "I assumed that this would probably amount to fraud, but I still don't really understand why. You're not lying to the bank in order to receive the loan" is comical.
That's exactly what you'd be doing. Maybe you've never applied for a mortgage or closed on a home before, but you essentially sign a mountain of paperwork saying "I promise to pay back this loan at $XXX per month for XX years" (the document is literally called a promissory note), "and if I don't pay as agreed I acknowledge the bank can foreclose and take the house back".
Signing those documents without the intention to actually pay is, quite literally, "lying to the bank"...in writing and "under oath" no less (since these documents are typically notarized). It's the very definition of fraud.
And, as others have stated, you can't just walk into a bank and say "I'd like to buy your non-performing note on 123 Main St for half of face value". Such notes usually go to institutional investors on the secondary market as part of a large package/bundle.
And finally, yes, a year+ of missed mortgage payments and a foreclosure will absolutely destroy your credit!
Your (admittedly hypothetical) "plan" is terrible in both concept and execution.
Hope that helps to clarify.
@David Piqueira I'm a note investor and I can confirm that everyone who invests in notes has on occasion known of a specific house they'd like to buy the note on and it's pretty much impossible.
@Wayne Brooks , most 1st liens that are non-performing DO sell for around 50% of unpaid balance. Since the loan wouldn't have been for 100% of the home's value anyway, though, David would not be paying strictly 1/2 price for the house.
@Dustin Frank, a foreclosure sale has to be a public auction. Otherwise what would prevent the lender from possibly accepting a lowball bid just to get their money back and cheating the borrower out of "surplus funds" for their equity? I think we can all agree that would not be cool. However, the friend could have gone to the auction and bid along with everyone else.
Final thought, David, why don't you just buy a distressed note in an area that you're interested in and look for the right criteria to give you a good chance of getting the house? This would be the perfectly legal way to do what you're suggesting. Non-performing Contracts for Deed, particularly if they're vacant or the borrower hasn't made a payment in years, give you an excellent chance to own the house. Ditto non-performing conventional notes that are underwater. Then when the house goes to foreclosure auction, you can set the opening bid high enough that no one will buy it and it will be yours.
@Jeff Copeland Yeah I was wondering if signing the loan paperwork actually amounted to 'promising' payment. Or if it was more like agreeing to particular scenarios (if I pay this thing happens; if i don't pay another thing happens). But you are definitely signing the paperwork with the written intention that you are going to pay. If you do this with no intention of actually paying that is in fact fraud. Crystal clear, thanks!
@Gail Greenberg I'm actually not looking to own property through foreclosure. My current plan is to buy a performing note or two to see how this works, and to determine whether or not I feel comfortable getting more involved with notes as an investment strategy. I'm actually in the middle of determining how active vs passive of an investor I want to be. I like how easy and hands off performing notes could be (however the returns aren't great, comparatively). On the other hand, the ROI from NPN seems outstanding, but it also seems like a lot of work and i'm not sure if I want this to become a semi full time job. Regardless, thank you for the idea, it's definitely a good one to pursue for the person who is trying to get cheap houses through foreclosure.
David, Current workaround on the internet these days on something like this is to preface with:
"I'm just asking for a friend."
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