Anyone Buy Defaulted Paper?

General Real Estate Investing
1

Has anyone here made any money buying defaulted paper secured by real estate?

I have not pursued this avenue very much, but I think I just purchased a good one. It got me thinking that there is probably a lot of opportunity going this route to either get the property “through the back door” so to speak, or make money restructuring the paper for a payoff.

I did a quick search here through the archives, but I didn’t turn up much.

Does anyone here invest in non-performing notes and mortgages, mechanics liens, or similar instruments? If so, how’s it been working for you?

2

Yes I have had great luck with this!

I mostly purchase after I have short sold the lender! Here is an example of one this week!

Appraised value $159,000.00

First mortgage 94,000.00

Second mortgage 38,900.0 (prior to short sale)

short sold the second to 5k and paid off the lien now I am the second lien holder!

So I will own that Property for $99,000.00 Now I will sell that property for $110,000.00 to another investor or I will sell that property for $159,000.00 and carry a second mortgage to a non-qulified buyer for 20% So I will create a new note for the buyer for $31,800 that will pay me $302.48 a month and after 2 years they will still owe me $31,632.04

Is that what you were asking?

3

Howdy Valgolas:

I bought a $28K note for $4K once. The owners did not want to sell the property so I bought the note. I posted the property for foreclosure and the owners showed up at the auction. The balance on the note was even more than the $28K face value but I bid $28K. I was hoping to get a dollar more but would not take a dollar less either. I ended up with the property and converted it to a duplex and got a govt grant too for some of the repairs. It rented for $700 on side A and $500 for side B for years until my BK in 2000.

2nd mortgages can be a bit more risky. That is why I offer such a large interest rate when I borrow on 2nd mortgages.

4

I haven’t delved into this avenue of investing yet, but have researched it and planned for the future with it in place. I believe that Steve Cook has some books/courses on this as well.

There is a lot of ways to work defaulted loans secured by real estate, and make a ton of money in the process.

Defaulted notes (especially 2nd and 3rd position notes) are sold VERY cheap. 10 cents on the dollar or less in most cases.

One way, of course, to make a profit is to finish/start the foreclosure process. If the primary loan is low, then you can possibly get a property with a decent 1st mortgage rate/term/value. Of course, this works best in states with no redemption rights, but can work anywhere.

Another is to restructure the note into a good loan. In alot of cases, the borrower IS now capable of making a payment, but not make up the back payments and fees, or not able to make the current payment amount. Restructuring the loan so that the borrower can make the payments is very profitable. See REO’s posts. A $32K note leaves the borrower still owing you $31K in 2 years. Interest is your friend if you’re the bank!

Also, if the note becomes a good (paying) note, it becomes saleable. A 2nd lien can’t get the money a 1st can, but still can be sold at 50-60% of value for a performing note. A $30K note bought for $3K, resold for $15K is good money in my book.

You can also offer a discount to the borrower (something that few lenders do). Again, in many cases, the borrower is capable of doing something to make the note profitable again, but usually not what the lender is wanting. Take Ted’s example, a $28K note bought for $4K. If Ted chose, he could have offered to consider that note paid in full if the borrower could make a $14K payment within 30 days (for example). If not, the foreclosure can still take place, but if the borrower gets the $14K, then you’ve made $10K in 30 days for very little actual work.

Of course, this works much better on lower priced notes (mechanics liens, for example).

Raj

5

is there an easy way to find out if there is a second mortgage on a house? And if you find one with a second, can you call the 2nd holder directly?

6

is there an easy way to find out if there is a second mortgage on a house? And if you find one with a second, can you call the 2nd holder directly?

Yes, do a title search and all of the recorded liens will show on that. In most cases, any unrecorded liens will not be considered valid, so if it’s not listed, then it’s not there.

You also need to check to make sure that the taxes have been paid on the property as well. Again, in most cases, tax liens come before ANY other liens (especially IRS liens), so very important.

Raj

7

Thanx raj, I will be sure to do due dill. Do I need to work with the HO to buy the note or can I call the bank directly? And if I buy the 2nd does that mean I can redeem if the HO does not, or can the first lien holder jump in first

John

8

John,

I don’t know what state you’re in, so you’ll have to find out about the particulars on the laws within your state as far as redemption rights go. I do know that the 1st position loan will ALWAYS be ahead of you (as 2nd lienholder) in anything. For example if they foreclose, then you would only get any money IF there is any left over after theirs is paid off (in full, including fees), which is seldom. If you, as a 2nd lien, foreclose, you would have to either pay off the 1st or assume the note (check your state laws on this as sometimes it’s possible for the 2nd to just start making the payments, sometimes, it needs to be paid off).

If you are trying to buy the note (as opposed to shortselling it), then you do not have to talk to the homeowner at all. The lender usually as the borrower sign a paper saying that the lender can sell the note without the borrower’s permission, so they can sell to whoever for whatever.

Keep in mind, this isn’t as easy as it sounds. What works best is buying 2nd’s from local, small banks or better, from individuals. It’s rare that a larger bank will even talk to you about buying an individual note. They routinely sell packages of notes to other lenders/investors.

Hope it helps,

Raj

9

Thanks , guys! It looks like you have had good success with them. It also looks like there are several ways to use them, depending on the situation. I’ll have to do some more research on these.

The one I purchased a little while back was a third mortgage. I got it from a contractor who had installed a swimming pool on a house. There was a dispute of some kind about the workmanship or something, and the homeowner has stopped paying on the note. The contractor who sold me the note (at a deep discount to the face value) said that he did not have the funds or the time to try to go through a foreclosure, so he just wanted to get something for it before he wrote it off entirely. He also indicated that he did not have the funds to pay the first and the second mortgages if he had to take back the house at the foreclosure sale. He estimated little or no equity in the property beyond the total value of the notes, so foreclosure did not seem like a reasonable strategy to pursue.

My due diligence shows something different to me. Both the first and the second mortgages are current, and the value or the property gives me plenty of equity to work with here. The second note should pay off in about four years, so my security interest will move up to second position behind the first mortgage. Also, the note I purchased has good language in it. It is written for 15% originally, but it allows for all unpaid balances and fees due to accumulate “at the highest interest rate allowed by law” if it is not kept current. I’m not sure what this rate is for Florida, but I assume it is 18% or greater. I’ll have to check on this. Anyone here know the Florida usury limit?

Also, this is all secured by waterfront property in Florida. I think I’ll let it run for a little while longer!

So here is my take on this: The collateral is appreciating, the senior liens are paying down, and my note balance is growing at a high rate. What if the mortgagor never pays me? One day (in about sixteen years), I will be in first position on this property with a note balance that exceeds the value of the property. This assumes the average appreciation rate for Destin, Florida costal waterfront homes will be somewhat less than the usury rate limit in Florida. At that point, I’ll ask the owner for a deed in lieu for the property, or foreclose.

I always wanted a home on the beach for my retirement years!
Do you think it will work out that way?

10

Check your state, but in TEXAS - mechanics’ liens are superior to first mortgages. In our state, you’re actually in first position not third.

I’m no lawyer, and I’ve never pursued this line of investing, but it would seem that if you foreclosed on the property, the junior lien holders would have to buy you out or you would own the property outright. Again, I could be completely off as my knowledge ot clouded titles is limited.

11

How about this for a scenario:

$750K ARV
$656K 1st, 4 mos behind
$186 2nd, 1 mo behind

Almost-new house in very good condition. NoD is coming soon but not yet served. Obviously they’re upside down here. It was suggested to me to try to buy the 1st at a huge discount. But what about the 2nd, would they be willing to discount at this early stage of arrears?

What would you do? how much would you pay, how would you go about it, and what would be your exit?

12

I think porn and beer would be better use of your $$

13

^^^ You honestly thought I’d even consider throwing one red cent at this deal? That’s funny! :biggrin

Oh no - I plan to spend 5 minutes on the phone calling the lender to see if they are open to selling the note. Gonna offer max of 50% of the value of the house and use private money to do so. I won’t know until I try. If I have to foreclose I can expect an investor to pay 60-65% of value for the house at auction. At least it will give me a conversation with the bank which I can use if I want to try a short sale or a REO in the future. Someone is going to buy the house, why not me?