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Bad Notes

July 27, 2018

Bad notes are kinda like bad kids. Bad notes are not completely bad. They can get better. They just need a little love and some compassion. Communication is key when dealing with bad notes.

Good notes can usually be purchased at maybe 10% to 15% discount. That will bump up your interest rate a point or two. Not bad. Bad notes can usually be purchased at anywhere from 30% to 60% discount.

For me, 50% is about what I would want to buy a bad note at. As I mentioned in the last post Good notes there are some other factors besides price. You will want to make sure the property is still in fair to good condition. If not, that will be an additional factor in your discount.

So how to you decide to buy or not to buy. Same things as mentioned before. Condition of the property, BTV (balance of the loan to value of the house) and neighborhood. I would not worry so much as to the payment history of the homeowner.

The homeowner is usually behind several payments or does not make payments on a regular basis. The owner of the note is frustrated and usually at their wits end. They are similar to a distressed homeowner. They want out and quick. That is why they may look to take a large discount.

So let create an example real quick.

A property was sold for 105k and the owner put down 5k. Loan originated at 100k 7 years ago. It is a 30 year loan at 6%. The payment will be just under $600.00 plus taxes and insurance. After 7 years the balance will be somewhere around $89,640. Probably a little higher if they are behind on their mortgage.

Hopefully the neighborhood is decent and in 7 years the value of the properties in the area have gone up in value. The condition of the home is not going to be the greatest because if they are not paying their mortgage, they are probably not taking care of the home very well.

The noteholder is not getting payments for the last few months and does not know what to do. He does not want to foreclose because he does not know what to do. You offer to cash him out at $45k.

He sits back and thinks that he has gotten payments for 6 1/2 years at $600. That comes out to $46,800. He realizes that the balance is 89k, but says OK, I will take your 45k offer.

Now what do you do?? You made a 50% offer and it is accepted. You get an assignment of mortgage and transfer of lien. Record it and the mortgage is yours. There are more details, but basically you need to let the homeowner that you now own the mortgage and they they should make the payments to you.

If they start making the payments on a regular basis, great. Your return from a 45k loan that pays $600 per month will be super. Your return should be about 15.5%. But reality is that things are never that easy. You will probably have to forgive some of the loan or put the back payments on top of the loan.

Lets say the homeowner was 5 payments behind. You talk with them and they want to stay, but cant come up with a big down payment. You can take the $3,000 behind and add it to the $89k that he owes. Now he owes $92k. When you change the terms of the loan it is called a modification.

Modifications must be agreed on by the homeowner and yourself. You need to put the terms in writing and record them with the county clerk or deed records.

This would be a great resolution to the problem. I always advise people to sit down and talk. Again communication is key. Let them know that you want to help them, but you have to get paid every month without interuption. Late fees will apply if payments are not made on time.

So what do you do if they homeowner does not want to pay or cant pay?? START FORECLOSURE PROCEEDINGS IMMEDIATELY. Depending on your state, it will take a couple of months to maybe over a year. They may file bankruptcy that will delay things also. Seek legal advice for what you can and can not do with people in bankruptcy.

Again, I have to say that communication is key. Talk with the homeowners. Let them know that you want them to stay in the home, but they have to pay to stay. Working something out is always the best solution. They may be having their own issues that you can not help them with. Homeowners may want to just deed the house back to you!!

Wouldn’t that be crazy? It happens.

You could pay 45k for a loan and in a few months end up with the house. That is a rehab for sure. Remember the house should have an ARV of over 120k!! I bet you would be able to do some light repairs or just clean it up and owner finance it for at least 100k.

You could probably call some friends who do rehabs and sell to them for 55k or 60k. Making 15k in a few months would not be too bad. Making 15k on a 45k investment in 6 months would end up being a return of over 66%!!!

When you buy bad notes there is certainly lots that can go wrong, but they are also full of potential. You have many different options when you buy right.