12 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 observe 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 observe, or observe 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 observe is paid off, the mortgage & observe is marked as paid, and the owner has complete title to the character.
However, life throws many problems at us, and for in any case reason, someone stops paying the observe off. They could lose 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 edges 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 character 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.
These defaulted and secured notes are obtainable for pennies on the dollar. Ideally the goal would be to try to get them to repay. Getting them repaying is goal #1 goal, though it does not always work that way, so here is a list of 12 exit strategies to profit from them as investors.
Since you now own the observe, and are now the bank, you can do in any case you want, and if you are creative, you can come up with many ways to exit.
Here Are 12 Ways To Profit From Non-Performing Real Estate Notes:
1. Repay or Modify The observe
The #1 goal is to help the homeowner stay in their house, and since the new owner paid very little for it compared to the value of the character, they can forgive some of the past due amounts, and nevertheless make a nice profit, though only If the homeowner wants to stay. You 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 observe By Someone Else
Since we own the observe, 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 observe 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 observe 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 confront,” exit with dignity, and we will not go after them for any amounts owed over the sale price, in addition 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 observe 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 observe was being offered for $1.5MM, so already a $500,000 cash for keys would have been a good deal to have a $1MM profit!
Foreclosure is our last resort when all else fails. On a vacant character, we always start foreclosure right away. If the homeowner is nevertheless 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 character 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 character, and also have multiple exits depending on how creative you want to be.
8. Sell As-Is
You can then just sell the character 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 acquire title, fix it up, and sell it to a homeowner or investor as a move-in ready character 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 character, 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 observe out of thin air, and a mortgage or Land Contract or Contract for Deed that has terms the homeowner can provide 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 observe 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 character.
With so many ways to profit from a defaulted real estate observe, it’s hard to lose money unless you pay too much for the observe. There are no bad notes, just overpaying can get you into trouble.