Welcome to Real Estate Divas! Today’s topic is all about how to make huge profits with non-performing notes (NPNs). Whether you’re a seasoned investor or just starting out, understanding non-performing notes can open up new investment opportunities for you. Let’s dive into what they are, why they’re profitable, and how you can take advantage of them.
Non-performing notes are essentially mortgages that the borrower has stopped paying. When a borrower defaults on their mortgage, banks or lending institutions are left with non-performing loans (NPLs) or non-performing assets (NPAs). These notes are essentially “pre-foreclosure” assets, meaning the borrower hasn’t made payments for 90 days or more.
Banks often prefer selling these non-performing notes at a discount rather than dealing with the foreclosure process. This is where savvy investors like you can step in and scoop up these notes for a fraction of their original value.
- High Profit Margins: You can buy these notes at significant discounts, often for 60-75% of the unpaid principal balance (UPB) or 50-60% of the broker price opinion (BPO). This means you’re already starting with a great deal.
- Multiple Exit Strategies: Unlike traditional real estate investments, non-performing notes provide multiple ways to profit, whether through loan modification, short sales, or foreclosure.
- Less Competition: With fewer investors venturing into this realm, you can often find exceptional deals that are not as highly contested.
- Big Banks: Large banks like Bank of America and Wells Fargo usually sell non-performing notes in large packages. These are often bought by hedge funds but may not be the best starting point for individual investors.
- Local and Regional Banks: Approaching asset managers at smaller banks can yield opportunities for one-off purchases. Be specific about wanting non-performing assets to avoid being directed to traditional REO departments.
- Credit Unions: These institutions may not have as large a selection, but they are worth checking out.
- Nationwide Servicers: Companies like Mr. Cooper and Ocwen service loans for multiple lenders and often have non-performing notes available.
- Hedge Funds: These funds buy large packages and may sell off smaller chunks.
- Brokers/Investors: Seasoned note investors often have deals available.
What to Watch Out For
When buying non-performing notes, beware of:
- Unpaid Property Taxes: These can become your responsibility.
- Contractor Liens: Previous unpaid bills for work done on the property.
- Lien Position: Ensure you’re purchasing a first-lien position to avoid complications.
- Missing Documents: This can complicate your ability to take possession of the property.
Due Diligence: Critical Documents
You need various documents to make an informed decision:
- Original Note
- Warranty Deed/Deed of Trust
- Closing Statements
- Borrower Underwriting
Typically, you’ll be looking at:
- 60-75% of UPB: This is the unpaid balance of the mortgage.
- 50-60% of BPO: This is the estimated market value of the property.
Always choose the lower of the two percentages to ensure you’re getting the best deal.
Finding Cash to Purchase Notes
- Joint Ventures: Partner with other investors to share the cost.
- Lines of Credit: Business lines of credit or home equity lines can provide the needed funds.
- IRAs: Self-directed IRAs offer a tax-advantaged way to invest.
- Private Lenders: Network to find private money lenders interested in funding your deals.
Foreclosure Laws: Judicial vs. Non-Judicial States
- Judicial States: Require a judge’s approval to foreclose, making the process longer and more costly.
- Non-Judicial States: Allow for quicker and more straightforward foreclosures.
Exit Strategies
Loan Modification
Get the borrower back on track by restructuring the loan. Lower the payments, extend the term, or reduce the loan balance. Here’s a quick example:
- Original Loan: $90,000
- Modified Loan: $50,000
- Monthly Payment: $563.01 at 9% interest over 30 years
- Annual Return: $6,756.12
- ROI: 21%
Short Sale
Approve a short sale quickly and avoid the lengthy traditional process. Example:
- Purchase Price: $23,100
- Short Sale Approval: $40,000
- Profit: $16,900
- ROI: 73%
Deed-in-Lieu of Foreclosure (Cash for Keys)
Incentivize the borrower to leave peacefully, avoiding the foreclosure process.
- Cash for Keys: $2,000
- Rental Income: $850/month
- Annual Income: $10,200
- ROI: 26%
Real-Life Example 1: Lorain, OH Property
- Address: 615 West 22nd Street, Lorain, OH
- Details: 4 beds, 2 baths, 1,612 sq ft
- UPB: $68,393.24
- BPO: $42,000
Loan Modification Strategy
- Reduced Loan: $50,000 at 9% over 30 years
- Monthly Payment: $402.31
- Annual ROI: 21%
Short Sale Strategy
- Approved Sale: $40,000
- Profit: $16,900
- ROI: 73%
Deed-in-Lieu Strategy
- Cash for Keys: $2,000
- Rental Income: $850/month
- Annual ROI: 26%
Real-Life Example 2: Johnstown, NY Property
- Address: 123 Main Street, Johnstown, NY
- Details: 4 beds, 1.5 baths, 2,400 sq ft
- UPB: $47,000
- BPO: $62,500
Loan Modification Strategy
- Reduced Loan: $50,000 at 9% over 30 years
- Monthly Payment: $563.01
- Annual ROI: 21%
Short Sale Strategy
- Approved Sale: $65,000
- Profit: $17,675
- ROI: 37%
Deed-in-Lieu Strategy
- Cash for Keys: $5,000
- Whole tail Sale: $80,000
- Profit: $27,675
- ROI: 58%
Communicating with Borrowers
It’s often best to handle communications yourself, especially if you’re looking to modify the loan or negotiate a deed-in-lieu. This personal touch can lead to better results. However, if you’re scaling your business, you might want to use a service company.
Final Thoughts
Don’t be afraid to start with small deals. Non-performing notes can offer high returns and multiple exit strategies. Ensure you understand the risks and do your due diligence. Consulting with professionals can also help you navigate this profitable investment space. Happy investing!
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