I received the following question:

“Hello Dean, thanks for your videos, they are very helpful, I only have some questions: what happens if once you buy and own the note, the homeowner files bk? How does it affect the note? And what is the best way to protect yourself from this?”

My reply:

Bankruptcy is a good question to ask about, and yes, it can be one of the scariest things for the uninitiated. You know, it’s a simple fact of life that we fear that which we know the least about. And “BK” as we affectionately call it isn’t something that people know a lot about.

You know, the best education anyone can get on Bankruptcy (and this is the way I taught it to myself, by the way), is to READ THE FREE INFORMATION AVAILABLE ON BK.

If you want to learn about bankruptcy, go to this site right now https://pacer.psc.uscourts.gov/psco/cgi-bin/register.pl.

Register (it’ll cost you 8cents/page that you download – the CHEAPEST and BEST education on bankruptcy you’ll ever get).

Next, select your state, and then type in Smith in the Party Name box.

Select the first Chapter 13 filing you see.

Click on the Case number, then click on the Docket Report, and Run Report (sorted for oldest first).

Read through EVERY entry (you’ll pay 8 cents/page, so consider this roughly a $25 investment in your own education). READ any of the documents starting with “Motion” and any document referring to a Relief from Stay.

Any underlined blue number in the 2nd column is a link to a document.

Then review in detail the Voluntary Petition and the Schedules (should be at the very beginning of the case, and is usually more than 20 pages long), as well as the Chapter 13 Plan if there is one.

Now that you’ve done that, let me give you a brief summary of BK and its effect on a Note Buyer.

First – I consider a BK to be a MISTAKE ON MY PART. If I “lose” a borrower to bankruptcy it means that I haven’t worked with them hard enough or – more accurately – well enough. That doesn’t mean that I personally have to talk to every borrower I have that files BK, but it means that the person I have assigned to that Note hasn’t done their job properly.

Some facts:

-95+% of borrowers file a BK within 48 hours of a foreclosure sale

-A large majority of Pro Se bankruptcy filings (Pro Se is latin for “for myself” meaning the borrower doesn’t file with an attorney) are dismissed (another word for rejected)

-The average bankruptcy that is dismissed will cost you roughly 90-120 days of extra time to foreclose upon

-Bankruptcy DOES NOT affect your lien security in any way, you will still have a secured Deed of Trust or Mortgage on the property (there is one exception – extremely rare, called a “cramdown” in which the borrower is able to get a Note balance altered via the BK court – I wouldn’t worry about this too much – but google it for more info)

-If you see someone with mortgages who is filing a Chapter 7, they are looking to “walk away” with no debt – and are protecting themselves against a deficiency judgment

-If you see someone with a Chapter 13 Plan and an Order Approving that Plan, then you need to look at the Plan proposed (ALL is publicly available for your review), and you’ll see your cash flows laid out for you clearly

-In order to remain in Bankruptcy with an approved Plan, the borrower typically makes 2 payments – 1 to you directly for your regular mortgage payment, and another one to the Trustee that will then be forwarded to you – it’s a simple calculation of the total arrearage you (or the prior investor) is owed, divided by the number of months proposed in the Bankruptcy Plan

An Example: The way your typical Chapter 13 works is that the borrower, say, has 100K on your loan, plus 6K in arrearages, and the home is worth 100K. They propose a 60month plan (max allowable). Each month they’ll make their regular $1,000 payment to you (assume this is a 12% Interest Only mortgage for simplicity), and they’ll make an additional $100 payment to the Trustee (6,000 arrearages divided by 60 months) who will then forward this payment to you.

Can you file another Bankruptcy if your case has been dismissed? Yes if it’s a Chapter 13, no if it’s a Chapter 7 (you can’t immediately refile another Chapter 7).

Can a borrower file, the case gets dismissed, then the co-borrower files? Yes, until and unless the judge dismisses the bankruptcy case “with prejudice” – in which the judge will then say essentially “buddy, no more refiling of any Chapter 13 within the next 180 days” for example. That’s to give you enough time to hold your foreclosure sale and collect on your collateral (the home).

If you want more, I’ve included a Bankruptcy Checklist in the Roadmap that I’ve made available for purchasers of my “A-Z Buying Discounted Bank Notes & Mortgages Business-in-a-Box” course.

Really your best resource is YOU – reading through the information that’s all available on PACER. It’s an AMAZING and CHEAP resource that will teach you more than you’ll ever learn from any course – I promise you.

Dean

I got asked the following:

“A partner and I have been fishing for some tapes and have stumbled across a 200 million dollar package from a major bank, But there’s a broker involved. Would you or anyone of mind have any interest in this?”

Here is my reply:

James, Dean here.

My 2 cents, for what it’s worth. By the way, your broker could be excellent and knowledgeable. If so, kudos to you for finding them. Ask him/her to get you what you want – whatever that may be. Or ask them if the seller would accept a carve-out in line with what your or your partners’ appetite is, even if it’s for 1 or 2 notes!

Now then, onto my soap box…

Before you spend time on any data tape or loan pool, you want to make sure that you understand with whom you’re dealing on the broker side. Is this a “Good”, “Bad” or “Ugly” broker you’ve got? If you don’t know what I’m referring to, review Step 1 “Finding Notes”, Part 2 (you can watch this Video for FREE) carefully on Brokers – then invest in yourself and buy our Biz-in-a-Box course.

Why?

Not because I want to make money off of you, but because you’ll learn what it takes to close a note trade.

So what?

Well if you know what it takes to close a note trade, you’ll be able to figure out if the broker you’re dealing with does as well, or if they’re just a POF/LOI/ABC contract junkie with no clue as to what they’re doing.

Welcome to the lucrative world of notes, where more and more people are getting into the game.

Not a lot of those people have much of a clue of what they’re doing, so you’ll probably be seeing more and more of these large note pools.

Chasing this broker and this pool could be a big waste of time for you (I’m 99% certain it will be).

Why? Well banks usually would send a $200m pool to established brokers and their established client base. So now the question is: is the broker you’re dealing with an “established” broker. Once again, knowing what it takes to buy, close on, and manage, notes, would help you to evaluate whether your broker is very good or less than good. Hence my recommendation to buy the A-Z Biz-in-a Box course I just put together (see How to buy Notes site for details – and watch hours & hours of it for FREE first, if you so please).

Let me put it another way – and please don’t take it the wrong way – this has NOTHING to do with you, and everything to do with the broker. If you were a hotshot broker who was a pro at brokering note pools, would you EVER send a $200M data tape to someone who was “unvetted” so to speak (e.g. someone who hasn’t closed on at least a $50M pool, for example – I’m referring to you here)?

I certainly wouldn’t – it’d be a complete waste of my time.

OR if I did, I would make damn sure to review the HELL out of that unvetted person before sending a tape through.

So ….

Did the note broker you’re in touch spend a lot of time grilling you/your partner on how many/how, etc. you’ve closed in terms of notes?

If not, you can be pretty confident that you’re dealing with an “Ugly” or “Bad” broker, in which case I’d walk away.

Those types of brokers usually end up wasting everyone’s time shoving large pools around with no clue as to how they’ll sell, who the seller really is, and creating paperwork for everyone involved.

My two cents, for what it’s worth!

My recommendation – spend your time on something that “makes sense” to you.

Follow your gut. Ask yourself – does this broker sound like he/she knows what they’re doing? Are they hiding behind POFs, LOIs, ABCs etc.? What was the last pool they closed. How large in terms of UPB, at what discount, how many loans, did the bid require fades, was it service released or service retained (e.g. test them here, based on your learnings – believe me – you can TEST someone after studying my How to buy Notes Course – I cover A LOT of useful info to SAVE YOU TIME in dealing with brokers).

Then spend your time dealing with people who are “real”. If this broker passes your sniff tests, then ask them for something that makes sense to you. Or ask them if the seller would accept a carve-out.

Don’t become another broker in the chain on some mega-million pool that you waste your time on. Chances are more than 50% that that pool is already traded by the way.

Regards,

Dean

PS: Check out our main site for lots more no-nonsenese info on How to buy Notes.

I recently received the following:

“… If a had a list of banks that sold notes to individual investors I would just concentrate on them!

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 quit bothering us.” response. How can I success in how to buy defaulted loans?”

Here is my reply:

“…, 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 is selling 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 of defaulted loans.

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 defaulted loans (which I’ve confirmed) might be only 20 banks long. Does that mean that I know that only 20 sell notes? 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 defaulted loans.

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. This goes for BUYING DEFAULTED LOANS as well!

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 to buy defaulted loans right there in your backyard.

I’ll teach you and everyone else everything I know. Getting a RELATIONSHIP to buy defaulted loans from, 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 when Buying Defaulted Loans

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 defaulted loans”.

There are many many more notes around than you will know what to do with.

Dean

However, I just finished the “Closing on a Note” Course for you – 4 hours and 23 minutes of no-nonsense note buying training and review divided into 4 parts (or 4 DVD’s if you prefer the hard copies).

And, as usual, watch the first hour (in this case: 90 min) for FREE!

Take a peek:

A couple of things to keep an eye out for (don’t laugh at my lame attempt at a music video – it’s “inspired by actual events” as they say in the movies):

• Fades – what they are and how to use them (minute 23:06 in part 1)
• Pulling apart the $405 million pool (minute 38:35 in part 1)
• How to tell between the Banker who’s the “Easy & All” vs. the one who’s the “Some & High” (minute 6:50 in part 2)
• Deconstructing your Competition – better known as the Johnny-Clegg-note-entertainment-bonanza – turn up the volume on your computer speakers and enjoy (minute 19:11 in part 2)
• The 43-minute drilldown on the one document you sign in a note purchase (starting at minute 2:59 in part 3)
• Boarding a loan – the A-Z checklist (minute 6:07 in part 4)

Enjoy. This is the final of the 4 note buying courses that I’ve just finished.

16 hours chock-full of no-fluff information, training, and insights to give you a leg up on the competition as you launch or grow your note buying business.

Note: I will very soon release most the material I created in one big package. Enter: ‘A-Z Buying Non-performing Bank Notes Business-in-a-Box’ – coming up shortly…
Actually, hint: you can check out the offer already if you click on the order link on the ‘Closing on a Note’ Course page. (One could argue I am giving away the farm here…) Plus, there will be even more valuable goodies in there that are not mentioned yet on the order link. So stay tuned for that.

Talk soon,

Dean

So here’s the question, which Brian K. posted in a comment on an earlier post, and which I’ve received numerous times over the past two weeks in my free 20-minute sessions …

“If I need money to buy a note, should I chase down notes or secure money first?”

So in order to answer this one, let me tell you a little story about Dean Engle and his early non-performing note purchases:

1. $23,500 – 1st note I bought. It’s there in black and white on the homepage (first video). All from my own money
2. $54,000 – 2nd note I bought. I didn’t have enough for this one and I didn’t have any other sources of financing lined up so I convinced my wife that she’d do better buying me a note and getting 13% on her investment, plus 2 points, than holding her Cisco options which were underwater (!)
3. $26,000 – 3rd note I bought. I invested out of my self-directed IRA
4. $14,500 – 4th note I bought. Also from my self-directed IRA
5. $23,000 – 5th note I bought – and my 2nd quick flip. I sold it for $30,000 within a month, but funded it from my self-directed IRA (had it under contract before I purchased it, but couldn’t close it in a single transaction so had to come out of pocket)
6. $8,750 – 6th note I bought. None of my own money – brokered deal on which I made $2,000 (YOU DON’T NEED MONEY FOR ALL NOTE DEALS!!!!)
7. $66,500 – 7th note I bought. I used hard money for this one – so I put up 25% of the note cost ($16,625) and the investor put up the rest, at 4 points and 13%
8. $12,500 – 8th note I bought. From my self-directed IRA
9. $153,550 – 9th note I bought. Used the hard money lender again that I’d used on my 7th note. Same terms
10. $7,000 – 10th note I bought. From my self-directed IRA

I want to point out three very important points about this list of notes:

1) You can buy small notes, for very little money
2) It doesn’t have to be your own money
3) You don’t need to have ANY money – you can broker notes or bird-dog notes (see #6 in the list)

I learned very slowly that I could go out and get money from someone to fund my notes. And here’s who that person was who funded that first note (note #7): a foreclosure auction buyer – (maybe you call them trustee sale buyers in your state).

Here are the three reasons why I like auction buyers when you’re starting out note buying:

• They know more about notes and non-performing notes than most lenders (after all, they’re dealing with banks and trustees and foreclosures all the time in their business)
• They can place a value on a property faster than anyone. Usually they’ll have completed a driveby of the property (if they even need to do one – some of those guys know their county so well they can judge value just based on a street address!)
• They can make a decision to fund a deal very quickly – as long as you have the right paperwork to give them, they can usually fund the next day if you need it

So how would I answer Brian K? With one of TWO recommendations:

1. Decide you want to be a bird-dog, and broker notes – to get it started.

OR

2. If you want to BUY your own notes, then line up the money first. Then chase the notes.

If you know you have no more than $50,000 available yourself, then you can chase notes worth less than $50,000.

But as I just suggested to Rick the other day (Rick’s in north Georgia chasing notes himself, and admits he has about $100,000 available of his own cash), why not line someone up at a 25-75% split and “leverage” yourself up?

Rick’s $100,000 could then be worth $400,000 in note purchases.

AND he gets to learn from someone with deep experience in buying foreclosures if he chooses his hard money lender right (you learn from every deal and every relationship)

Ah, but I hear you asking me: “so how do I convince my hard money lender to lend me money?!”

It’s simple – one of my Oklahoma readers used the Basic How-to-Raise-Money toolkit file – you know the one with those 2 deal summaries I wrote up on the southern California note and the Portland Oregon note? (If you haven’t already: watch my FREE 84-min Video on How-to-Raise-Money NOW!)

Well they used that EXACT document and showed it to a handful of target investors and said: “This is what we’re looking to do, would you fund something like this if we came to you asking for your money?”

That little document opened doors for them. They’re in talks with a number of those investors now. Why? Because it lays out a sample deal in simple terms that any investor will understand and appreciate.

And think of it from the investor’s perspective – especially the auction buyer’s perspective – they MAY look at you and think “hmmm, this is cool – I can use [YOUR NAME HERE] to learn something about bank notes, which I’m hearing all about right now. Maybe he can go find them, I can fund them, and we can work them out together.”

If you set it up right, and pick your partner right, this could be a very nice win-win relationship!

So, ACTION STEP: find out the next foreclosure trustee sale or sheriff sale or auction in your county, and GO THERE. And see who you meet. Strike up a conversation, say you’re starting to buy notes and looking for hard money.

I’ll be amazed if you don’t meet at least 1 investor who’s interested in hearing more about note buying!

And ACTION STEP #2: go out there and start Finding Notes and if you find one you don’t have the money for – BROKER it to someone who does. At least you can make some good money! (We pay 1% of the acquisition cost, for example, for notes or pools smaller than $1million – not that I’m recommending you to just come to us with notes – but rather to give you an idea of what you might be able to charge other note buyers, at a minimum.

That’s the equivalent of $1,000 on a relatively small $100,000 note. Better than working at the office!

I get asked all the time ‘But, Dean, how do I find non-performing notes?? Do banks really sell notes to individuals?”

One person just told me “hey, I walked into my local bank branch and asked if they had non-performing notes for sale and they told me “no, we don’t sell notes.”

Well, if you want to get serious about figuring this out – AND shortcut your learning curve dramatically: it’s all in my ‘How to Find Non-performing Notes Course (4 hours+ jam-packed information on exactly the subject of ‘how to find non-performing notes’).
You can watch the first 2 HOURS for absolutely FREE. Take a peek:

If the bank doesn’t have either of the first two departments, then make sure that you aim straight for the top of their loss mitigation department – you don’t want to get stuck in mid-level manager hell.

And then once you get that person on the phone – tell them that you buy non-performing notes, anything 90 days or more delinquent, tell them where you typically buy notes, and if they ask you for what your typical pricing is, tell them you can price up to, say, 85% of UPB (unpaid principal balance). (You don’t want to kick yourself out of contention for buying notes when you haven’t even gotten a foot in the door, and if the bank’s asking about price, make sure that you convey that you don’t skimp!)

As to the secret of how to get through to the right person – and what it REALLY takes to break through to that bank representative: it’s covered in detail starting at minute 11 of Part 3 (the third hour) of my ‘How to Find Non-performing Notes‘ Course.

I bid a pool of non-performing notes held by a trustee for a bankrupt mortgage company. Two loans were missing collateral files. One is a loan on a Florida property. Ouch – Florida judges are increasingly strict on lost note affidavits and missing notes in general. In some cases, they’ll throw out the foreclosure proceeding if you don’t have the original note, or appropriate documentation. 

Scurrying as fast as I could, I was able to track down a copy of the note that was in storage at the title company office that insured the note (this was a 2006 loan).  (One of the things that you’ll learn more and more about me is that I like to get my hands dirty on as many note buying deals as I can – it allows me to learn more and more about everything that can happen in our world of non-performing notes – I’m not a “hands-off” trainer in any way).

Fingers crossed … we’ll be able to sail through a foreclosure with a lost note affidavit, but without the original note.

How did I price? I took an extra 15% off my bid due to the missing note issue. Why 15% and not more? I needed to play it safe on the bid. But the home’s value supports a higher bid. I feel we have a better than even chance of being able to foreclose, and then use the foreclosure to help us negotiate a refi or a deed-in-lieu with the borrower.

If you want to learn more about the science part of pricing notes, take a look at our ‘Determining Price’ Note Buying Course. 4 hours+ just on this topic alone. And you get to watch the first hour for free…

[To put in perspective how this fits into the overall note buying game plan, check out this Mind Map.]

As usual, watch the first part for FREE… (In this case one hour & 40 minutes!)
Take a look:

-> Learn the 3 steps to nailing a property’s price

-> The difference between AVM’s, BPO’s and comps, and what to look for with each

-> Go on a trial run on property values with me (literally watching over my shoulder) on a nonperforming note in Naples, FL – and follow the loan that went from $520,000 to $250,000!

-> Title – the ins and outs, and who to use to pull title reports

-> Learn what to look for when it comes to understanding your borrower

It’s all in the course. So take a look, and learn how to really price nonperforming notes – without ever leaving your office (living room?).

Again, just check out the first hour and 40 minutes for FREE and get more details over at NoteBuyingProfits.com.

The loss rate on those 2nd mortgages, originated by OwnIt Mortgage which filed BK in 2006, is estimated to be close to 60% at this point, and the bonds have seen their ratings drop from AAA to junk in the course of a year.

The reason for the losses? Well, the numbers seem to be pointing to more borrowers stopping payments on their 2nd mortgages altogether.

Ken Andrews, a savvy San Diego bankruptcy and foreclosure attorney who represents borrowers, has what passes for sound advice for borrowers with those 2nd mortgages - just stop paying. And for those who aren’t quite satisfied with the pesky 2nd remaining secured on their home, he’s got a solution for them – strip the lien by filing a Chapter 13. It’s worth reading his recent piece here.

So what’s the big deal? As a note buyer, you need to be increasingly aware of some of the changing incentive structures for borrowers. A lowering of the social stigma against foreclosure and bankruptcy could be a harbinger of larger numbers of BK’s in your portfolio.

Not that that’s automatically bad. Bankruptcy postpones the completion of a foreclosure proceeding, when the Bankruptcy’s dismissed. And when it’s approved and discharged, it creates a set of cash flows that can be much steadier than a typical performing loan.

So follow the masses here – stay ahead of the curve ball – and think about taking advantage of the borrower BK note buying opportunity.

Defaulted paper gets charged off in all states, though, so don’t just assume that because a state is holding steady in terms of pricing, that it wouldn’t present a note buying opportunity.

See the map below or click on it to be taken to Freddie Mac’s page.