The mortgage meltdown has put many hard-working good people in tough situations where foreclosure is their only option. Even though this market has created the best buying opportunities in decades, there are more people just like a homeowner I recently ran into. I thought this case study might inspire you as you purchase mortgage notes. Let me explain…
I was recently offered a non-performing 1st mortgage note (there was no 2nd) for $20,000 in a neighborhood where the average comparable sale is currently $50,000. The underlying asset, a nice 3 bedroom brick house in a cul-de-sac is in great condition. The homeowner is still in the house but was moving out because they knew they could not afford the mortgage payments anymore. I also found out, the homeowner fell behind in their payments due to an adjustable rate mortgage. This is a very important bit of additional information. The homeowner was able to stay current in their mortgage payments when the payments were approx. $700 a month but as the payment kept adjusting they fell behind, no longer able to afford the payment that had ballooned to $975 a month. I had to interview the note holder several times to get this additional piece of information but as you will see, it becomes quite valuable..
The most obvious and common approach for banks would be to foreclose on the homeowner and take back the property. Yet, I decided to take a different approach and you can too. Having done proper due diligence on the situation prior to purchasing the note I wanted to talk directly with the homeowner before I went the foreclosure route. I arranged to meet the homeowner at the house. I let them know over the phone I was not looking to evict them or give them an ultimatum, I just wanted to talk.
When I arrived I asked the homeowner if they were interested in staying in the property if I could bring their payment back to $700 a month with them being a tenent? It was at that moment that I saw one of the biggest smiles I’ve seen in a long time. She was ecstatic about the idea and agreed to deed the property to my company. In exchange, we would sign a 2-year lease option with rental payments locked in at $700/month for those two years. The stability in payments gives her a chance to stay in her home and my company owns the property without going through a foreclosure process. Upon some examination of the deal some investors would say I leased the property for too little, after all I have three other properties in the same neighborhood for $800/month. What I factored into the equation that if I proceeded with the foreclosure, I would face attorney costs, vacancy costs, repair costs to get the property clean and ready for the next tenant, and carrying costs without any income. In this case it was a true win-win scenario; I was able to lower the rent rate, save on the additional costs and most importantly help someone stay in the home the love.
My experience in note investing has taught me, when notes go from performing to non-performing that is the best time to evaluate each situation to see if there is a true win-win for both parties. Have experience a similar situation? Share your success story. I appreciate your readership and your feedback.
Photo Courtesy: Pretty Sparkly Things