12 ways to profit from delinquent real estate notes

Non-Performing Notes (NPN) are a great way to invest in Real Estate, without getting dirty or dealing with toilets, termites or tenants. It involves buying the delinquent mortgage and note from a bank, hedge fund, or its current owner. Now you are the bank, and no one calls the bank if the toilet is clogged, so you can have a quiet 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 called a Trust Deed, Contract for Deed, or Land Contract, although all are instruments used to purchase a home. Once the note is paid, the mortgage and the note are marked as paid, and the owner has full title to the property.

However, life throws us a lot of problems, and for whatever reason, someone defaults on the note. They could lose their job, spouse or sadly their limbs and they don’t have the money to make the payments right now.

When this happens, banks for the most part don’t really care, and just want your money overdue, now! They’re not that good at making them pay no matter how hard they try, since you can’t get blood out of a rock. They also don’t want to get the property back. When they can’t get the owner to pay, they want to remove this bad debt from their books. They sell them in bulk by truckload to equity or hedge funds, which then sell them by the case or bottle to investors.

These defaulted and insured notes are available for pennies on the dollar. Ideally, the goal would be to try to get them to pay. Getting them to pay is goal number 1, although it doesn’t always work out that way, so here is a list of 12 exit strategies to benefit from them as investors.

Since you are now the owner of the note and now you are the bank, you can do whatever you want, and if you are creative, you can think of many ways to get out.

Here are 12 ways to benefit from delinquent real estate notes:

1. Pay or modify the note

Goal #1 is to help the homeowner stay in their home, and since the new homeowner paid very little for it compared to the property’s value, they can forgive some of the amounts owed and still make a nice profit. only if the owner of the house wants to stay. You can reduce the unpaid balance, payments, interest, or any combination of the three. After 6-12 trial payments to demonstrate good faith, we can modify the loan to any term we like.

2. Assumption of note by another person

Since we own the note, we can find a family member or friend of the owner who wants to move in and get them to start paying the monthly payments. If they continue to pay, there is no need to modify the terms if it is mutually agreed upon by both parties.

3. Resell the promissory note for a profit

Many people are looking for NPNs, and they can be quickly resold for a higher price to another investor. Sometimes it makes sense to get a small amount up front vs. spend time and money on a note that is a bit complicated, or you need the funds quickly.

4. Dirty shorts

If the owner has equity, a short sale is a good way to let him out and get his equity out. Requires our approval as the mortgage holder and a real estate agent who will list you on the MLS. It is a win-win for both parties.

5. Deed-in-lieu of foreclosure

If the person doesn’t want to stay, the next way out would be to ask them to sign the deed instead of a foreclosure or DIL. Many times they will do this if they are upside down and don’t want the headache anymore. It allows them to “save face,” walk away with dignity, and we won’t go after them for any amounts owed on top of the sale price, plus not file a 1099 with the IRS.

6. Cash for keys

Sometimes they want to leave and they have equity, or they are just being stubborn. This is when we offer them cash to leave and they sign the deed for us. We usually give them a small amount to show good faith, then give them 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 Ozarks vs. a $3 million condo in Manhattan.

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

7. Foreclosure

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

The last three exits above are the starting point for getting title to the property and they also have multiple exits depending on how creative you want to get.

8. Sell as is

You can then sell the property AS IS to a rehabber or handyman, on your own 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 flip

In this case, you are like a traditional rehabilitator; you get the title, fix it up, and sell it to an owner or investor as a move-in ready property for more than As-Is.

10.Repair and rent

You can do a low-cost rehab, using lesser-quality paint, carpet, and tile to rent if there is a rental shortage in the area. Though now you own and have to deal with bathrooms, tenants, termites, roof, hot water and all other issues since you own the house.

11. Repair and sell

This is a great way to create your own paper. You sell the rehabbed property, either as-is or repaired to an owner, usually for a higher price than the asking price. Since you are the owner, you can create a promissory note out of thin air and a mortgage or land contract or deed contract that has terms that the owner can pay and collect payments, as well as 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, usually for a higher price than a standard fix-and-change. One method is a down payment of 25% to 50%, and writing a return note from the seller that will use the rents to pay off the balance, with a monthly payment that is lower than the rent, so the investor gets some cash flow each month with the difference. . In this way, the tenant pays a large part of the cost of the property.

With so many ways to benefit from a delinquent real estate note, it’s hard to lose money unless you pay too much for the note. There are no bad grades, just overpaying can get you in trouble.


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