Buying Notes for Dummies
Are you a Realtor/Investor that has been chasing short sales that have taken you months or years to complete?
Are you looking for a new way to hone in your skills as a Realtor/Investor to create new income streams to replace revenue you’ve lost?
Are you looking for a virtually untapped niche to establish your unique marketing proposition as a real estate professional?
As a licensed Texas broker, I can and have said yes to all of these things. Over the past 5+ years, I’ve negotiated and closed 300+ short sales. It’s been a long road paved with a lot of frustration as well positive meaning to the distressed sellers I’ve saved. Let’s be clear here though. Short sales are not rocket science, they are just terribly cumbersome. They always say that you can make the most money in a down market, and I’m finally seeing how.
I’ve heard too many times that those specializing in the REO/preforeclosure market are just not closing enough deals fast enough to make ends meet. Luckily, I was introduced to the concept of buying the nonperforming notes (defaulted mortgages) on these preforeclosure (short sale) properties. Loans/mortgages get sold to other lenders all the time. You end up getting a letter in the mail stating that your loan has been sold, and your new servicer is someone like Wells Fargo or Chase or B of A. It turns out anyone can buy the note (bad debt) as long as they have cash and can prove it.
Because these loans are nonperforming with missed payments by the borrower, the lender is willing to sell the note at a discounted rate. It’s better for them to have the bad debt off the books and to make a little money than it is to keep these defaulted mortgages. Now, this all sounds really easy, but I’m here to tell you otherwise. Just as short sales can be time consuming, so can buying the notes. BUT, buying the note increases your total return on your cash AND reduces the complete sales cycle by about 2/3 of the time it takes for a short sale/flip.
Not all banks sell their notes. They are usually the smaller, local or state lending institutions. Those lenders usually sell in pools (groups of properties) that they have put together, and sometimes they will let you add/detract from their pool, put together your own original pool, or sell them off individually (as a “one-offâ€). The larger lending institutions like Chase, GMAC, Wells Fargo, etc. typically sell their residential pools in minimums of 10’s of millions of $$$. Unless, you are overly wealthy, I would start with a “one-off†to get your feet wet. Most lenders will sell commercial notes individually, but again some of the larger ones require a minimum investment amount in the form of a pool (tape) that they put together.
Honestly, without calling these lenders directly getting to the secondary marketing department or the capital assets desk or the head of loss mitigation, you cannot assume anything. On top of that, banks are changing their policies almost daily, and turnover inside the bank is rampant as well. So, when you actually DO get to the right person, their job might be taken by the next week, and you’re back to ground zero. Expect to be hung up on, for emails to never get through, and to possibly lose some hair during this process. BUT once you get one contact that you develop a rapport with, it could be the jackpot! (I speak from experience on this one.)
Now, you have this contact, and they you send you a spreadsheet (tape) of loans they are willing to sell. You will need to ask what type of color (cents on the dollar) they are looking for and start to evaluate the properties. Typically, they will be asking for around 40-50 cents on the dollar of unpaid balance (UPB), NOT FMV (fair market value) of the property. There are several exit strategies after you decide which properties you are interested in. The first thing I suggest doing is pulling them on Zillow. Zillow will give you an estimate AND will tell you if the property is for sale. If the property is for sale a short sale, this will be the easiest way to cash in on your note investment in the least amount of time. Let’s look at the example below.
123 Smith St.
UPB: $16,000
FMV (as is): $75,000
Listed as SS for $60,000 (according to Zillow)
I think the lender will sell me the note at 40% of UPB (16k) for a price of $6,400.
I call listing agent on the SS as a prospective buyer asking if they have any offer, fishing… The agent ends up telling me they have an offer “close†to list price. I will assume conservatively that it is for $50,000. They have already found my buyer! Yea!
I put in my LOI (letter of intent) and a POF (proof of funds) to the lender to buy the note. Since I’m only buying one, they counter at 50% of UPB for a price of $8,000. They accept!
It takes about a week to get everything on the books. Since this is NOT a change of property ownership and ONLY an assignment of collateral, there are no closing costs, minus maybe recording fees and attorney fees for the escrow account at 5% of my purchase price of 8k for a total of $400. So, at this point I’m $8,400 into this…
I become the lender, and I call the borrower. Of course they tell me about their financial hardship and the SS listing, and I tell them I’m more than happy to work them and their agent. I call the agent informing them that they loan has changed hands and to submit the short sale offers they have received to me.
Well, I get the highest offer, and it turns out the Realtor embellished just a tad… It was ONLY for $40,000. Erggggggg… Well, I’m not greedy, and I want a fast turnaround on my $$$, so I accept the SS offer of 40k. I want to build a good rapport with the listing agent and buyer’s agent, so I agree to pay the full 3% to each which is virtually unheard of in the RE market these days. Let’s say with title, escrow, back taxes, commission, HOA, etc., I have 10% of closing cost that come out of my profit. Out of 40k, that is $4,000. Because it’s a short sale, we will say it took 45 days to close. Let’s just add another week to be conservative.
We have the first week to become the lender, 45 days and additional week for a grand total of roughly 60 days or 2 months. We have a total of $12,400 ($8,400 to buy the note and $4,000 in closing costs) out of our 40k sales price to net us $27,600. The best thing about this scenario is that we are REALLY able to say the homeowner by them escaping from having a short sale on their credit. We are a private lending institution (not a Wells Fargo) and do not care about ruining their credit any more than it already has been. All the homeowner has on their credit report as a result of us buying the note are late pays!!! And you don’t think that will bring referrals for us to purchase the note or at lease more SS listings??? Sound better than a short sale flip? Um…yeah! So our investment on our money with buying the note yields us 69% (27600/40000) of our money, and it only took 2 months!
Typical short sales take 3-9 months. We will use 3 months for extra, stellar SS specialist brokers. There is some make ready at about $1,000 that has to take place. That takes at least 2 weeks, but we will give them the benefit of the doubt because these are SS pros. It goes back on the market, and the property gets an offer of 70k when it was purchased from the lender as a SS for 50k. With commissions and closing costs, $5600 (8%) is taken away from the gross profit of 20k (70k minus the 50k). It takes 30 days to close from there, and our net profit is $13,600 (with closing costs and make ready taken out). Our total sales cycle for the short sale flip is 4.5 months. And that is wishing for the best! This scenario yields us 27.2% on your cash investment of 50k. Not bad numbers… But it doesn’t compare to the ease, $ in your pocket, and savings of 2.5 months with buying the note.
As a real estate AND note broker now, let me tell you what excites me about purchasing the nonperforming note (defaulted mortgages). I have been able to create multiple streams of income from one contact at one lender and to expand my business, geographically as this ONE lender sells notes all over the United States. The hassle and time factor of “fix and flip†is no longer an affliction I suffer from, and the three “T’s†of property management, termites, toilets, and tenants, will never make me cringe again.
123 Smith St.
UPB: $16,000
FMV (as is): $75,000
Listed as SS for $60,000
Offer (from a buyer) $40,000
Just an observation: If the Listing price and offer price are higher than the UPB - then this isn''t a short sale. With these numbers the bank will receive the loan amount in full and the home owner will receive the remaining cash at closing. This is more of a forced sale scenario. Really the home owner should try and refinance. Anywho...
I use the same concept for home owners who are truly underwater.
ie FMV $100,000
current mortgage balance $125,000
2 months behind
We buy the notes in bulk.
When we buy the note we either let the home owner sell the house or we restructure their loan. If they sell the house I can take the house into my name and assign to an investor.
This is an important concept that needs to get out to homeowners more and Realtors should be aware of before jumping into ''short sale'' mode. There are so many advantages to a mortgage principal restructuring. Thanks for the article.
There is nothing else to say except that you are correct. Goodness, I hate it when I make mistakes. But I''ve gotten really good at admitting them.
This specific example is not technically a short sale. The same tactics could be used with the listing agent inquiring about offer because foreclosure is being threatened by the lender (me now in this case). This is actually a deal I''m doing now on a 1-4 family residential propety in Houston, TX. And to prove my credibility, I will be happy to forward all proof of this to anyone that is interested.
The homeowner cannot refinance because their credit is shot. What I am offering the owner in this case is a deed in lieu of foreclosure, $1,000 cash to keep the property in tact, and NO FORELCOSURE ON THEIR CREDIT (just late pays because I don''t care about damaging their credit any more than it already isas I''m just a private "bank" now).
I started as the bank, but now I''m the owner after the deed transfer. From the house being listed on the market for sale, the listing agent has found a buyer for me at $40,000. I''m fine paying 10% (includes 3% to each agent) in closing costs for a payoff of $36,000 to me. That''s a better scenario than assigning to another investor at a price of $20,000. I have a greater spread here.
I have stressed too long and been burned too many times by "holding" properties and becoming a loan servicer/property manager. Life is too short right??? Mortgage principal restructuring is not an interest of mine. I prefer to make QUICK money on the front end and reinvest my profits every 2 months.
BTW, I will be submitting a "revised" and completely accurate follow up on my article. Look out for "Notes for Dummies - Part 2". Watch for it!~
-Amber Gunn
877.255.2770
Texasgreg has it right. I guess Texas law must be a little different than NC. If your example was in NC, this act (taking the owner''s equity) would probably be illegal. Seems like you should get $16,000, which is the unpaid note Balance. You are acting like the property is yours... but you just hold the note. Taking of the owner''s equity must be a TX thing. Why don''t you just foreclose and keep it "clean" by getting a legitimate ownership (trustee''s deed) to the property? Then you can set a trustee sale for $16,000 and if no one bids, sell if for $40K. At least that''s what happens in other states.
I do agree with your numbers on the scenario however you made the statement that "This is an important concept that needs to get out to homeowners more and Realtors should be aware of before jumping into ''''short sale'''' mode. There are so many advantages to a mortgage principal restructuring." as if the homeowner or Realtor could get this done.
Major banks are not modifing or restructuring loans. My belief is that they are waiting to collect the fees they are allowed to charge for nonperforming loans. And they will collect them at the sale of the property.
Niether the homeowner or the Realtor can purchase the note as an investor can for obvious reasons.
Actual return on investment is 223%, your $12,400 investment returned an additional $27,600, so simply looking at it you tripled your money plus a little! Great job! I do the same with buying, repairing, and renting. Your example sounds much more advantageous!!!
Ms Amber.... Either you have NEVER actually bought a note and sold a house OR (being charitable) you have trouble expressing youself in writing.
You see, you can buy a note...which makes YOU the Bank. But you didn''t buy the house. You don''t own the home by buying the note. You still need either to foreclose or to negotiate a deal with the owner.
Otherwise, guess what? The Owner of the house receives the profit on the sale of the home. You receive only the face value of the note, plus weasel charges you may apply.
Scott,
I wondered how long it would take Ms. Gunn to start "Board Hustling" after I read her article.
In her 3rd post she broke the forum rules (which I deleted) by posting her phone number and contact information. Now in my 8 years as a Moderator I have seen them come and seen them go, because I find the ones who need to "Board Hustle" are not on this great site for long.
So save your defense tactics as they did not impress me or I doubt anyone who read what you had to say. Bargain76 has been on the board here for years and has helped many an investor with only impressing others with his knowledge, not his phone number.
John $Cash$ Locke
I stand by my observations. I should have realized it was an exagerated sales pitch, I guess.
This is what Amber wrote in response to the first comment from "TX Greg". I think people are overlooking this.
"There is nothing else to say except that you are correct. Goodness, I hate it when I make mistakes. But I''''ve gotten really good at admitting them.
This specific example is not technically a short sale. The same tactics could be used with the listing agent inquiring about offer because foreclosure is being threatened by the lender (me now in this case). This is actually a deal I''''m doing now on a 1-4 family residential propety in Houston, TX. And to prove my credibility, I will be happy to forward all proof of this to anyone that is interested.
The homeowner cannot refinance because their credit is shot. What I am offering the owner in this case is a deed in lieu of foreclosure, $1,000 cash to keep the property in tact, and NO FORELCOSURE ON THEIR CREDIT (just late pays because I don''''t care about damaging their credit any more than it already isas I''''m just a private "bank" now).
I started as the bank, but now I''''m the owner after the deed transfer. From the house being listed on the market for sale, the listing agent has found a buyer for me at $40,000. I''''m fine paying 10% (includes 3% to each agent) in closing costs for a payoff of $36,000 to me. That''''s a better scenario than assigning to another investor at a price of $20,000. I have a greater spread here.
I have stressed too long and been burned too many times by "holding" properties and becoming a loan servicer/property manager. Life is too short right??? Mortgage principal restructuring is not an interest of mine. I prefer to make QUICK money on the front end and reinvest my profits every 2 months.
BTW, I will be submitting a "revised" and completely accurate follow up on my article. Look out for "Notes for Dummies - Part 2". Watch for it!~"
I know Amber personally, and she is known for her ethical practices and complete transparency. I know she''s a girl, but watch out.
Dynamite comes in small packages.
If the bank has a SS offer of $40K, then why would they not accept that offer and recoup their entire 16K UPB, rather than accept your offer of $6400.
I am not able to understant this. Can you please explain?
First off I would like to say hello to everyone...I''m new hear and "WOW" people are trying to sell their program everywhere....Anywho....My focus is notes because the paper asset is better than owning the hard assets..
.To touch on what I see here is that...Ms. Amber she''s correct on her reply in regards to how a bank would obtain the property with out foreclosing on it..But everyone knows that right? Of course!...Where she blew it was when in one part of her story she bought the note...then later on she addressed herself as a "Note Broker" which one are you??
Also this is addressed to VRUREAL "If the bank has a SS offer 40k then why would they accept an offer of $6400.00"
To give the short version.." Banks Are Not That Bright" which we all know..Remember they are in the lending business not real estate...so instead of spending the money and time on the foreclosure...they''d much rather have the funds right away...That $6400 is worth between $32k to $45k at the fed window for them immediately!
Verses the drawn out process of a SS or FC...All of us here have the same same industry interest and it really bothers me when you have people that want to come here and sell these so called systems that don''t work...It sucks! To me...what works is the collective minds getting together and sharing knowledge to help the next investor achieve his or her goals.....That''s what really works..To me anyway!!
Back to banks...Banks do not really know what they have anyone whith half a brain knows that...Assets managers are clueless...they have a financial degree and ZERO real estate experience and at the same time they need to secure their jobs that''s why they make some of the most idiotic decisions on these assets...Think about this for a second...No bad assets no need for asset managers! Hmm...Ok..I can go on forever but I won''t..I just want to say hello to everyone and..glad to part of this awesome site....