12 Ways to Profit from Nonperforming Real Estate Notes

Non-performing notes (NPNs) 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 current owner. Now you are the bank and no one calls the bank if the toilet is blocked so you have an off night and weekend.

A promissory note or short note is a secured debt attached to the mortgage on the home. Depending on the state, a mortgage may sometimes be called a deed of trust, a deed of lease, or a land contract, although they are all instruments used to purchase a home. Once the note is paid off, the mortgage and note are marked paid off and the owner has full title to the property.

However, life throws many problems at us, and for whatever reason, someone stops paying the note. They may lose their job, spouse or, unfortunately, their arm and at this point they don’t have the money to make payments.

When this happens, the banks mostly don’t care and just want their money gone! You can’t squeeze blood out of a stone, so they’re not that good at making you pay no matter how hard you try. They don’t want the property back either. When the homeowner can’t get them to pay, they want to wipe this bad debt off their books. They sell them by the truckload in bulk to equity or hedge funds, then sell them by the case or bottle to investors.

These default and safe notes are available for coins on the dollar. Ideally, the goal is to try to get them to pay. Getting them to pay is goal number 1, although it doesn’t always work out that way.

Now that you own the note and now you’re the bank, you can do whatever you want, and if you’re creative, you can come up with many ways to get out.

Here are 12 ways to profit from non-performing real estate notes.

1. Pay or exchange the note

The #1 goal is to help the homeowner stay in their home, and since the new owner paid very little compared to the value of the property, they can forgive some of the previous amount, and still make a good profit. 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 change the loan whenever we want.

2. Memorization by another person

Since we own the note, we can find a family member or friend of the homeowner who wants to move in and start making the monthly payments. If you continue to pay, there is no need to amend the contract if it is mutually agreeable.

3. Sell the note for a profit

Many people want NPN, and they can be quickly sold to another investor at a high price. Sometimes it makes sense to get up front with spending time and money on this little hairy note, or you need the money fast.

4. Short sale

If the homeowner has equity, a short sale is a great way to get out and get their equity out. As a mortgage holder and real estate agent listing on the MLS, it requires our blessing. It’s a win-win for both parties.

5. Seizure action-by-shot

If the person doesn’t want to stay, the next option is to ask them to sign the contract in lieu of a lien or DL. Most of the time they do this if they’re upside down, and they don’t want any more headaches. It allows them to “save face”, get out with honor, and we don’t pursue after we owe more than the sale price, nor do we file a 1099 with the IRS.

6. For key money

Sometimes they want to let go and be fair, or they are stubborn. This is when we provide them with the money to move out and sign the document for us. Normally we give them a small amount to show good faith, then, after the place is cleared, we give the rest, and they don’t get hurt. For a shotgun in the Ozarks and a $3 million Manhattan condo, the amount can vary from $500 to $100,000 or more.

We saw a note for one such condo and the person living in it was a retired teacher with rent control, the monthly payment was less than taxes and HOA fees and they had no desire to move. The note was being offered at $1.5MM, so even $500,000 in cash for a key would have been a nice $1MM profit!

7. Prohibition

When all else fails, arrest is our last resort. On a vacant property, we always start foreclosures. If the home owner is still there and refuses to work with us, we close as well. This takes from 2 months to 4-5 years, depending on the state. We also show a deficiency judgment against the price we get to sell the property when we have title, and if they are truly delinquent we can file a 1099 for that amount with the IRS.

The last three exits above are the starting point for owning the property, and there are many exits depending on how creative you want to be.

8. Not sold as-is

Then you can sell the property AS-IS for a remodel or handyman, on your own or with a realtor. Advertising on Craigslist or at a local convention is a great way to sell this.

9. Edit and copy

In this case you are like a cultural reformer; You get a title, fix it up, and sell it more than As-Is, ready for a homeowner or investor to move in.

10. Fix and rent

If there is a shortage of rentals in the area, you can use low-cost renovations using low-quality paint, carpet, and rugs to rent. Although now you are a landlord and you have to deal with all the issues like toilets, tenants, termites, roofing, hot water and other things that you own the house.

11. Adjust and sell

This is a great way to create your own paper. Renovated properties are sold either As-Is or up to the owner, usually at a higher asking price. Since you are the owner, you can create a note out of thin air and a home contract or land contract or contract like a bank for 20-30 years that the home owner can pay and collect.

12. Fix, rent and sell to an investor

You can sell a “loaded” rental to an investor as a turnaround investment, typically at a higher price than a regular repair and flip. One method is to put down 25% to 50% and write a postal note to use to pay the balance of the rent.Since the monthly payment is less than the rent, the investor gets some cash flow each month for the difference. . This way, the tenant pays most of the cost of the property.

Because there are many ways to profit from a bad real estate note, it’s hard to lose money unless you pay a lot for the note. There are no bad notes, only paying too much can get you into trouble.

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