TV shows like Property Brothers and Flip or Flop have inspired viewers across America that they could make thousands of dollars by renovating homes and selling them for profit. However, not only is this type of real estate investment risky, it’s also extremely time consuming and expensive. In a perfect scenario, you’d have to purchase the house at a big discount, have great contractors, come in under budget with materials and construction costs, and sell the home quickly. This can be an overwhelming undertaking for the novice investor.
A different type of real estate investment that you may not be aware of is mortgage note investing. Basically, when a borrower fails to make payments on their home, their loan becomes “non-performing”. When the loan is non-performing, the bank can either foreclose on the home or sell the non-performing loan to investors at a discount. Since banks are not in the business of owning and selling homes, they are often motivated to sell the mortgage note for a fraction of the property value.
Once a note investor owns the non-performing loan, they virtually have the same power as the bank. This provides the note investor with a multitude of exit strategies, such as:
Modify the Loan - the borrower keeps the home and makes the mortgage payments to the note investor.
Cash Payout - the borrower pays the note investor the value of the property and becomes free and clear.
Short Sale - the note investor agrees to sell the property for less than what is owed.
Sell the Non-Performing Note - the note investor sells the mortgage note to another investor.
Sell the Performing Note - once the borrower makes at least 12 months of payments, the note investor can sell the note at a higher value as “performing”.
Deed in Lieu - the borrower no longer wishes to keep the home and signs the deed over to the note investor.
Foreclose and Sell - the note investor forecloses on the home and sells it.
Foreclose and Rent Out - the note investor forecloses on the home and rents it out.
Foreclose and Refinance - the note investor forecloses and creates a new mortgage for a new buyer and collects the mortgage payments.
As you can see, mortgage note investing gives the investor a plethora of exit strategies.