12 ways to profit from unprofitable real estate notes
Posted On July 6, 2021
Notes of Default (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 promissory note from a bank, hedge fund, or its current owner. You are now 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 home mortgage. Depending on the state, the mortgage can sometimes be called a Deed of Trust, Contract of Deed, or Land Contract, although they are all instruments used to purchase a home. Once the note is paid, the mortgage and note are marked as paid and the owner has full title to the property.
However, life throws us a lot of problems and for some reason someone stops paying the note. They could lose their job, their spouse, or sadly their limbs and 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 their money to be past due – now! They are not that good at paying no matter how hard they try, as you cannot draw blood from a rock. They also don’t want the property back. When they can’t make the landlord pay, they want to wipe this bad debt off their books. They sell them in bulk by truckload to mutual or hedge funds, who then sell them by the case or bottle to investors.
These past-due and secured notes are available for pennies on the dollar. Ideally, the goal would be to try to get the money back. Getting them to pay is goal number 1, although it doesn’t always work that way, so here is a list of 12 exit strategies to profit from them as investors.
Since you are now the owner of the bill and now you are the bank, you can do whatever you want and if you are creative you can find many ways out.
Here are 12 ways to profit from unprofitable real estate notes:
1. Pay or modify the promissory note
The objective n. # 1 is helping the owner stay in his home, and since the new owner paid very little for it compared to the property’s value, he can forgive some of the overdue amounts and still make a nice profit. only if the owner wants to stay. You can reduce unpaid balance, payments, interest, or any combination of the three. After 6-12 trial payments to show good faith, we can modify the loan for whatever term we want.
2. Assumption of note by another person
Since we own the promissory note, we can find a family member or friend of the landlord who would like to move in and have them begin repaying the monthly payments. If they continue to pay, there is no need to change the terms if both parties agree to each other.
3. Resell the promissory note for profit
Many people search for NPN and they can be quickly resold for a higher price to another investor. Sometimes this makes sense to get a small amount up front vs. spending time and money on a bill that is a bit complicated, or you need the funds quickly.
4. Short sale
If the owner has equity, a short sale is a good way to let him out and get his equity. It requires our blessing as a mortgage holder and a real estate agent who will list you on the MLS. It is beneficial for both parties.
5. Deed-in-lieu of foreclosure
If the person does not want to stay, the next way out would be to ask them to sign the deed in lieu of foreclosure or a DIL. Many times they will do this if they are on their stomach and just don’t want the headache anymore. It allows you to “save face”, walk out with dignity, and we will not pursue you for any amount owed over the sale price, nor will we file a 1099 with the IRS.
6. Cash for keys
Sometimes they want to leave and they have equity, or they are just stubborn. This is when we offer them cash to go and sign the deed for us. We usually give them a small amount to show good faith, then we 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 is a shotgun shack in Ozarks vs. a $ 3 million condo in Manhattan.
We saw a note for said condo, and the person living in it was a retired rent-controlled school teacher whose monthly payments were less than HOA taxes and fees and had no desire to move. The ticket was being offered for $ 1.5 million, so even $ 500,000 cash for keys would have been a good deal for a $ 1 million profit.
Foreclosure is our last resort when all else fails. We have a vacant property, we always start foreclosure right away. If the landlord 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 pursue a deficiency judgment for any balance owed to us on the price we get for selling the property when we have the 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 obtaining title to the property and also have multiple exits depending on how creative you want to be.
8. Sell as is
You can then sell the property AS IS to a rehab or handyman, on your own or with a real estate agent. Advertising on Craigslist or a local Meet Up is a great way to sell this.
9. Fix and flip
In this case, you are like a traditional rehabilitator; You get the title, fix it, and sell it to a homeowner or investor as a move-in-ready property for more than it is.
10. Fix and rent
You can do a low-cost rehab, using lower-quality paint, carpet, and tile for rent if there is a shortage of rentals in the area. Although you are now a homeowner and you have to deal with the toilets, the tenants, the termites, the roof, the hot water and all the other problems since you own the house.
11. Repair and sell
This is a great way to create your own paper. Sell the rehabilitated property, either as is or repaired, to an owner, usually for a higher price than the sale price. Since you are the owner, you can create a note from scratch and a mortgage or land contract or deed contract that has terms that the owner can pay and collect payments, just like the bank for 20 to 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 & flip. One method is 25% to 50% down payment and writing a return note from the seller that will use the rent to pay the balance, with a monthly payment that is less than the rent, so that the investor gets some cash flow. of cash 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 profit from a defaulted 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.