How to do Short Sales – NOT! Try Note Buying…
June 8, 2008 by notebuyingprofits.com
Filed under FAQ, Newbie Topic, Note Buying 101, Short Sales No Good?, Videos
Short Sales – How to do Short Sales – NOT! Try Note Buying instead…
Briana just sent me an email asking me the question re Short Sales below, and since I’ve gotten this one a lot recently, I thought I’d share my response to her with you in case you were curious yourself:
“Hey Dean, how successful are you at buying single notes from banks on a short sale?”
Those of you who know me, or those of you I’ve spoken to in our note buying training over the past few weeks in the Private Access Club, will know the distinction between short sale and note buying.
But in case you wanted yet another refresher, or in case you haven’t heard the comparison, here’s my reply to Briana:
“Briana, thanks for your question. It’s a great one, and one that a lot of people have.
Let me point out the fundamental differences between a short sale and a buying defaulted notes.
SHORT SALE
A Short Sale is a transaction in which a PROPERTY is sold, and all the notes/mortgages on a property are closed out.
The party selling is the homeowner. The party buying is either an investor (intermediary) or a new homeowner.
In simple terms, what this means is that in a short sale, you have a home being sold by the homeowner (let’s call that person Borrower A) – sometimes through an intermediary – to a new buyer (let’s call that person Borrower B).
The new buyer “brings” their own financing to the table, meaning they get 1 or more mortgages / deeds of trust on the property in order to finance their purchase.
So at the end of a short sale transaction, the ORIGINAL loans that Borrower A had, are gone. They’ve been “reconveyed” or “closed out”.
NOTE SALE
A Note Purchase (sometimes called “Note Sale”) is a transaction in which a NOTE is sold.
The party selling is a bank/lender. The party buying is an investor.
There is NO parallel sale of the property as part of this transaction. And the borrower on the Note (the homeowner) is typically NOT aware of the transaction, because they are not a party to the transaction.
In simple terms, what this means is that in a note sale, an investor makes an offer to a BANK on a particular note, and buys the note. Once the note is sold, the investor and the bank both let the borrower (who is almost always, but doesn’t have to be, the homeowner) know that the borrower now needs to make payments to the NEW bank, which is the investor.
As an interesting TWIST here: as the purchaser of a nonperforming note you can (and will) be on the OTHER END of a short sale, which is a lot more powerful, btw.
YOU are the bank now, and YOU can APPROVE or DENY a short sale – which may be very much in your interest (to accept a lower payoff), since you bought the note way below its face value, and there is enough room to forgive the borrower some of the debt – and still make a healthy profit yourself.
Let me show you a comparison between How to Do Short Sales and Note Buying again.
After watching it, you tell me which one is the more powerful strategy:
PS: In case you meant to ask how successful we are at buying single notes from banks rather than larger pools, let me tackle that question too…
It depends on the source, to be honest. There’s one bank that buy non-performing notes from where we cherry pick those notes we want, and pass on those loans we don’t want. A lot of other banks or mortgage companies we work with sell entire pools of non performing notes, so those bids typically end up being on entire pools.
P.P.S. It IS POSSIBLE to buy individual non-performing notes from banks at a discount.
That’s how I got started. And I’m still doing it today, so I definitely recommend it, unless you’re in the $100 million+ range, in which case buying singles may be difficult for you.
P.P.P.S. If you watch the Video on top of our home page at www.notebuyingprofits.com, I am actually showing you my very first note that I bought, which was quite a homerun. (Fair disclosure: this is not some get-rich-quick scheme… and not every deal brings in close to $100,000 in profits, but it’s possible to make those kinds of note buying profits.)
You might also want to check out the many free note buying videos on our site, and then see whether chasing after notes instead of short sales is for you or not.
Hope you enjoyed this post on the difference between note buying and how to do short sales.
The power principle here is that if you do buy the note at a discount and end up working a short sale with yourself in the position of “being the bank” you have a lot more power, flexibility, and options when it comes to working with the homeowner on a short sale.
The credit impacts on the homeowners credit if you are not linked into the major credit bureaus is huge because no “Settled for Less than Amount Owed” tag will show on the credit report.
Furthermore, there are options available once you own the note that are not available to a traditional short sale real estate investor. These include a) Working a short refi for the homeowner and b) restructuring the note and helping the homeowner bring it current.
I’m going to bring these points up in a future episode of The Short Sale Show at http://www.ShortSaleShow.com in the near future.
If a had a list of banks that sold notes to individual investors I would just concentrate on them! My questions and I am sure alot of other people are asking as well is how do you get past the servicer and directly to the noteholder to offer him buy the note! Also should you get a note appraisal
based on current condition of the note before making an offer!
James, you’re absolutely right that working through a servicer is a challenge. Did you listen to Janet’s advice starting at minute 11:20 in Part 3 of Course#1? She’s a note sale manager at a regional bank, and I asked her a similar question “How do I approach the person at the bank responsible for selling notes?”
Offering through a servicer, remember, is Option 1 of the 4 that I cover in the Finding Notes Course (minute 4:54 in Part 1 of Course#1 – which is free here http://www.notebuyingprofits.com/webinarfind.html).
Servicers are tricky – and you have 2 choices on how to get “through” them:
a) bushwhack your way to the appropriate manager in the Loss Mit dept who knows what a note is, first, and who has authority to submit an offer to the investor, second. Be prepared to fax your Auth to Release around, which is totally anathema to the note buying process but sometimes the only way you can bypass the lower ranks
b) figure out who the investor might be, and go direct to the investor. e.g. ASC is a captive servicer for Wells. SLS / Winter Group, Wilshire / Merrill. The last 2 obviously servicer for multiple investors, so even if you had a relationship with the Winter Group, the note might not be a Winter Group note. But that’s your 2nd option.
As to your 2nd question re: getting a note appraisal, there’s no way to “appraise” a note. Remember, here, what a note is – it’s a promise to pay back a large sum of money you get from a bank. The Note is then “secured” to a property by what’s called a Security Instrument (either a Deed of Trust or a Mortgage).
That Security Instrument is what says that IF the borrower doesn’t pay the Note back, then the Lender can come “claim” the collateral “secured” to that note.
So what do you want to appraise before buying a Note? The asset, or the object, that the Security Instrument secures to the Note you’re reviewing. In this case, it’s a property.
So replace the word “note” with the word “property” in your question above and you’re 100% correct.
James,
“If a had a list of banks that sold notes to individual investors I would just concentrate on them! “.
I totally agree. It is one thing to ask for someones private contacts but I don’t see any reason that you cannot say X Bank sells, Y Bank does not. I have invested a tremendous amount of time going up dead ends for the pleasure getting the “We are sick of your faxes and phone calls, We don’t sell notes, do a short sale and quite bothering us.” response.
Rick, I hear your frustration in terms of “just get me the list, dammit!”
Here’s why I don’t do that. I received an email yesterday from a broker I’m working with. It was from a senior manager at Nat City Mortgage, saying they’re selling in $100-200M pools.
Up until yesterday, I didn’t think Nat City Mortgage sold notes, but I couldn’t be certain, only because the last time I’d contacted them was at least 8 months ago.
That’s why, when you mentioned you were chasing a note held by Nat City Mortgage, I didn’t tell you that they didn’t sell. I honestly wasn’t sure if their policies had changed.
Times change. Nat City was written up in the NYT the other day in an insightful article titled: “Regional Banks are Rocked”. And now they’re selling large pools.
You’re good at the direct sell – go ahead and call this senior manager up directly and maybe you’ll be able to buy that Nat City loan regardless of what your own rep told you. (See the Hector story below)
My list of banks that sell (which I’ve confirmed) might be only 20 banks long. Does that mean that I know that only 20 sell? Obviously not. It merely means that I’ve spent time developing only those 20. And I know of another … probably 20 … that don’t sell.
But here’s the catch that I want you to understand. They’ve said “No” to me.
As my mentor taught me. No means “No” today.
Other challenge I see: Someone like you reads a list I put together and thinks: “so I won’t try X or Y or Z because Dean doesn’t have it on his list.” And you miss a perfectly good opportunity right there in your backyard.
I’ll teach you and everyone else everything I know. Getting a relationship, however, is something I want you to do.
It’s when people like you take the initiative to break through to new banks that you actually progress. I know you’re frustrated and tired. I can’t help that.
I can only defend my actions as justified given the strategy I pursue with banks, and that I share with you and with everyone.
No means “No” today. Remember that. It’s like the highschool hotties you chased after. You didn’t turn around after getting turned down just once, did you?
Another example – I thought Chase didn’t sell to small guys. In fact, I worked at Chase and spoke with the SVP Legal Counsel in 2004 re: getting approved to buy from Chase. He told me there were 12 approved buyers. All of them big boys. I found out three weeks ago that there’s a small potato named Hector cherry-picking single loans from Chase out of Florida. A buddy of mine tells me that he sends gifts to this one collector he works with, and somehow gets all his single loan purchases approved.
The rule is simply that … there are no rules. That’s the simple explanation. Selling notes isn’t exactly a regulated activity – it’s not like originating, and it’s certainly not regulated the same way.
Probably not the answer you were looking for, but an explanation of the way I operate on this very specific point of giving out any kind of a “definitive list of banks that sell”.
There are many many more than you will know what to do with.
Dean
I have a list of 70 notes that i want to buy. All of them are either in foreclosure or in bankrupcy. I have contacted the tenants and all of them want to keep their house if they could get it for the appraised value of today. I have a lender that will refinance them at 4.5% if they have a job. All of them are working . I need someone the help me get them and the will get 10% of the profits.