Which is better for real estate investors – buying a note in pre-foreclosure, buying the house through a short sale, or waiting until the house comes on the market as an REO? That depends on the difference in the discounts expected, the condition of the house, and the likelihood of reaching an agreement with the current homeowner to either move or purchase the note at a discount and remain in the house.
The discount on the note may well be less than the amount of discount the lender will be willing to take for the house as an REO. Having the note gives the note holder considerable flexibility—and some additional risks. The note buyer can decide to set up a new mortgage with the current homeowner, negotiate a “cash for keys” or deed-in-lieu of foreclosure with the homeowner, or may be stuck taking the homeowner through a long, drawn-out foreclosure process. If the latter happens, then the note buyer may well be better off waiting until the home comes on the REO market rather than tying up funds unproductively waiting for the foreclosure process to complete. However, if you have a cooperative homeowner, buying the note presents you with some incredible opportunities.
Let’s say that you have done your due diligence and know that the homeowner is interested in a discounted mortgage and has the income to cover housing expenses if the loan is at 80% of fair market value. Let’s say current FMV for this home is $200,000 and you bought the note at $100,000. Your homeowner then purchases the note from you at $160,000 immediately after you bought the note from the bank. That’s an instant profit of $60,000.
Maybe your homeowner doesn’t have the money to stay in the home is willing to walk away from the property. Once you own the note, you can release them from the note and report it as satisfied. Then you are free to sell the note to a new buyer at the full market value of $200,000 for a profit of $100,000.
Maybe the house is in excellent condition, in a great neighborhood, and all of your monthly cash flow needs are already met through other deals. If that’s the case, and you are able to buy the note at 50% of current market value, you might want to hold onto the property and rent it out. This is a great way to build up a stable of income-producing properties at safe loan to value ratios. After a few years, you will own the properties free and clear and your monthly cash flow will skyrocket.
These examples illustrate that buying the note can be very profitable, provided the note holder does not land in a protracted foreclosure battle with the current homeowner. Since settling for a new mortgage or getting out of a troubled loan with a deed-in-lieu of foreclosure is a much better deal for the homeowner, most should eagerly jump at the opportunity to work with the note buyer.
With all of the fraud the banks committed being discovered and exposed; investors now have a way to get the banks to negotiate on our terms. By investigating the specific circumstances behind underwater homeowners’ loans, we are discovering unbelievable and blatant fraud that can be used as leverage against the banks in order to negotiate huge discounts on note purchases. This allows investors to free homeowners from the burden of dumping money into an underwater home while also doing some incredibly profitable deals with multiple possible exit strategies.
If you would like more information on this awesome strategy, give my office a call at 706-485-0162!