The Cat’s Out of the Bag!

Buying, Selling, Creating, & Restructuring Notes Means Big Profits

By Donna Bauer®, The Original NoteBuyer®

I’ve always said that notes are the best kept secret in real estate, but I’m afraid the cat’s out of the bag now.  More and more investors are realizing that notes are absolutely vital in taking advantage of all of the different opportunities available in today’s unusual real estate market.  Whether you want to create notes to buy and sell properties without bank financing, or you want to buy and sell other people’s seller-financed notes, or you want to buy defaulted notes that are held by banks—tremendous profits are available to the astute investor who incorporates note strategies into his overall investment plan.

With banks tightening their lending policies and less and less people qualifying for bank loans, sellers naturally turn to seller-financing to move their properties.  By removing banks from the equation, the number of potential buyers immediately sky rockets when owner-financing is offered.  Since there is no red tape from loan committees or board meetings  to slow you down, the transaction can often be wrapped up as quickly as your title company can complete the title work and schedule the closing. 

In addition to offering a larger pool of buyers and a quick closing, seller-financing often commands a higher sale price than normal for the seller.  Plus, the seller can wind up with a very safe investment offering a higher rate of return than certificates of deposit and other conventional investment vehicles.  Careful screening of the buyer’s credit and employment history helps to ensure a safe investment with minimal hassle.  Requiring a larger down payment can often offset any credit glitches the buyer may have.  Ultimately, the security of the investment lies in the real estate itself.  If the buyer defaults, the seller can foreclose, take the property back if necessary, and resell it again—keeping whatever money was paid on the first sale.

The abundance of seller-financed notes has created an absolutely awesome opportunity in the secondary market for those who want to cash in on the fantastic opportunities in real estate without dealing with the headaches of owning the property—the tenants, the trash, and the toilets, as they say.   Whether you are looking for occasional or part time income or whether you are looking to build a full-time business, buying and selling other people’s seller-financed notes can be very lucrative in today’s market.

Many sellers have been forced to carryback mortgages in order to sell the property, when in fact they really would have preferred to have the cash in hand.  Once the note is “seasoned,” i.e., the borrower has made six to twelve months of on-time payments, you can help the note holder convert the note and mortgage to cash.   And the best part of all is that you can do it without using any cash or credit of your own! 

Notes can be “flipped” very easily without the hassles that are typically encountered when flipping properties.   Simultaneous closes are not an issue when you are flipping the note instead of the property.  Plus, most note sellers realize the time value of money and fully expect to sell their note at a discount, which makes it easier to negotiate nice profit spreads than when dealing with the real property.

Although there are many ways to market for prospective note sellers, it can be as easy as purchasing a list of note holders and sending out letters or post cards.  With my personal direct mail campaign, I averaged a six percent response rate and a one percent close rate.   So for every one hundred letters that I sent out, I closed one deal.

If you have your own money to invest, you can earn exceptionally high returns by buying and holding discounted, seller-carryback mortgage notes.  Most people, however, use a simultaneous close to buy and immediately re-sell the note to a private investor or an institutional buyer.  This enables you to realize a handsome profit right away without having any of your own money invested.  You don’t even need your own credit.  It’s very simple—buy low, sell high, and make money on the spread!   Many times, more money can be made by buying and selling other people’s notes than by dealing with the property itself—and many people aren’t even aware of the opportunity!

Another completely different note strategy, which is often even more lucrative, is to buy defaulted notes from the bank.  For many years, I have encouraged investors to “buy the note” instead of doing a short sale.   Now that short sales are so cumbersome, folks are realizing I was telling them the truth—buying the note is so much quicker and easier!

            One of my favorite strategies is to use the defaulted note as a backdoor to acquiring the property at a steep discount.  I teach how to coordinate your deal so that you can buy the note from the bank and, at the same time, legally and ethically get the deed from the homeowner without any risk or hassle.  Once you have the deed, you can do whatever you want with the property—sell it, rent it, or even move into it yourself!

            If you like dealing with the paper instead of the property, then you probably will enjoy the fantastic profits that can be made by purchasing the note from the bank and restructuring the note with the homeowner.  Buying the note and using a forbearance agreement is the only legal way to keep a distressed homeowner in the property.  This can be a great win/win transaction.  In fact, many investors use this as a ministry to help homeowners who are in default on their bank mortgage.  On the other hand, instead of a long term forbearance, you may want to simply “settle” with the homeowner. 

Often times, you can purchase second mortgages for pennies on the dollar—whether you buy them direct from the bank or as a one-off from a pool of notes that an investor may be selling.  A word of caution though—make sure that you know what you’re doing and you are aware of the risks before buying defaulted seconds.  They are a completely different animal than other discounted mortgage investments and carry a much greater risk.  Nonetheless,  astute investors are making boatloads of money on defaulted seconds!  Many homeowners are anxious to settle these defaulted notes, and have even been squirreling money away for just that purpose, waiting for the opportunity to make a deal to pay off the loan on their over-leveraged house.

            In my life time, there has never been a better time to do notes.  Except for all cash deals, notes are a fundamental part of every real estate transaction.   Once you have an understanding of how to create, buy, sell, modify, or hypothecate a note, you’ll be amazed at the tremendous profits that can be made with notes, not to mention how many more deals you’ll be able to close by incorporating notes into your investment strategies—and you don’t even need your own cash or credit to get started!  Whether you want to acquire properties—or stay clear of properties—notes are a perfect strategy for cashing in on the fantastic opportunities available in today’s unique real estate market!