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.

Jared Lanning, struggling to pay a home loan on which he owed more than his house was worth, was thinking he might just let the lender take back the property. Then he got a call one evening from an Orange County investor who had bought his mortgage.

“I want out of your loan,” said the investor, Evan Gentry, chief executive of G8 Capital of Ladera Ranch, who offered to lower the balance and the interest rate.

Lanning, a crane operator in Englewood, Colo., was skeptical. A phone pitch, after all, had led to his getting the unaffordable loan in the first place. But Gentry was legit: He helped Lanning get a new Federal Housing Administration-insured mortgage — with a $12,000 lower balance. Gentry also paid $5,000 in closing costs for the new loan. Lanning’s new monthly payment is $200 less than before.

Investors — including big fish like former Countrywide Financial Corp. President Stanford Kurland as well as smaller fry like Gentry — are buying loans on the cheap from lenders who want them off their books. By paying less than face value for the mortgages, the new holders can modify loan terms, including shrinking the amount owed, and still make money.

Partner up with a good mortgage broker who can refi you (as the nonperforming note holder) out, and buy as much defaulted paper as you can right now. NoteBuyingProfits.com will give you the tools how to. Speaking of which, make sure you read this update, courtesy of Barney Frank.

Many note investors were slightly subdued – sellers are still expecting more than note buyers are looking to pay – pools of notes don’t seem to be trading as quickly as they were in the 1st Quarter. One rep from GMAC indicated to me that he thinks a lot of banks are “on the sidelines” waiting to see what Congress has in store in terms of a bailout.

But this is only half the non-performing note picture. I spoke to several banks that are looking to sell of their non-performing notes now and into next quarter.

Note Buying Lessons learned? There is no common approach that everyone takes.

Which is what makes this note buying business so interesting – it’s up to you and I to find the banks that are looking to sell nonperforming notes at those heavily discounted prices that we know we can find.

The Secondary Market Conference the MBA hosts is a great place to build relationships. With over 900 attendees, all players (e.g. vendors, investors, servicers, Banks, etc.) in the secondary marketplace) it’s a very good conference to go to.

Let me know if you’re planning to attend and we can meet for coffee.

So Rick was asking me whether he could birddog non-performing notes if he’s able to find some that are available for purchase.

The answer is: Absolutely.

There are two rules in the world of non-performing notes: “he who has the gold, rules” – which you’ve heard before.

But the other one that is even more true is: “he who has the gold is always looking for more and better deals.”

So the key is to be able to line up “a deal” for someone like me – the investor.

Here are a couple of tips:

a) Note Lead vs Note Deal – they’re anagrams for each other, but when you switch the first and last letters, you TOTALLY change the value proposition to an investor – and you completely change your comp structure

b) Note Buying leads are a dime a dozen to an investor – they’re pieces of information that we (the investor) need to spend time and energy on without any guarantees that they’ll pan out. Worse, if you’re a birddog bringing me a note “lead”, I usually discount that lead because it’s coming from someone who isn’t intimately familiar with the note buying business … so I assume it’ll take me more time to turn into a “deal”

c) Deals have none of the elements of a Lead – they’re pre-negotiated (or at least partially negotiated) leads with a clear set of numbers and a clear set of risks already laid out for me. That’s valuable to me – and I’ll usually pay for that type of a referral very differently than for just a Lead

So that being said, let me share with you Rick’s question below, and my answer that I’ve posted as a comment below that. Feel free to comment!

“Dean – me again. At least you know I am studying your note buying material! I am working on my “blasts”. Bankruptcy and Foreclosure leads. I am currently learning the note buying business while I still pursue my regular real estate investing. 2 easy questions:1. I know you are releasing the “Determining the Purchase Price” Note Buying Course in a few weeks but is there a ball park figure I should use on my “blast” offers? You mentioned 70% (of BPO…correct?) but is that too high in the current market? 2. I do a lot of research (which I enjoy) and I come across potential note buying opportunities that I pass over because the dollar amount would be to high for me as a newbie. Is there a way to birddog these non-performing notes to anyone? I will give you an example. Tonight I spent 2 hours talking to a homeowner who responded to my Pre-Foreclosure flier. He has a $124,000 first mortgage that is 4 months behind, no Seconds and no Liens. The loan is from 2004. The tax assessment is $147,000. He thinks it’s worth $165,000 and I think it is worth $150,000. He is getting foreclosed on the first week in May. The lender is…..drum roll….EMC Mortgage…which took over the loan by assignment last year. Is this a type of loan that I could “blast” and then turn it over to someone else for a birddog fee? Thanks, Rick, North Georgia”
See my answer in the comment below!

Why not audit your foreclosure process? Get to know it a little better – and if you’re thinking of investing out of state, become familiar with it.

Here’s a great new resource for you. It’s a study released by Freddie Mac recently that has a very good reference table regarding foreclosure guidelines. See Table A1 in particular, but be sure to read through this report – there are some useful insights for a note investor.  

I’m pulling it together with a number of other foreclosure resources we have in the office, and we’ll make it available shortly for download off the site.

Happy tax day!

I spent a lot of time putting all these together, and making sure that what you are getting now is the simplest and best way to present yourself and your note buying business to your investors! I also released a FREE 84-min Video accompanying them that I suggest you check out if you are remotely interested in how to raise money from investors.

As my mother always told me “if you don’t dress nicely, the girls won’t ever think that you’re put together.”  The same is true with presentations to investors – come across “put together” and you’ve already overcome the FIRST hurdle to raising money which is convincing them that you’ve got a good business model to buy non-performing notes!

Take a look at all the Note Buying Toolkit we put together for you!

a) the City Council passed a non-binding resolution issuing a moratorium on foreclosure sales (just the sale action itself, not the act of starting a foreclosure or of securing a judgment of sale). Note that a foreclosure in PA can take an average of 9 months.

b) Sheriff John Green (the Sheriff’s office carries out the actual foreclosure sale) then responded by postponing Philly’s April 1st sale date by a month. Green is seeking a longer, 6-month moratorium (HousingWire has good coverage on the story) also requesting a moratorium on foreclosures.

The implication on your note buying business is clear (and, by the way, this is the #1 risk in our business since the outcome and impact of such changes is very difficult to predict) – be careful about where you buy loans, and about what’s going on in that particular market. The three metropolitan areas that are the most strongly anti-foreclosure at the moment are: Cleveland, Baltimore and now Philadelphia.

I’ll keep you updated on areas to be aware of when you’re buying notes.

“No relief for consumers is in sight as food and gas prices remain stubbornly high and income growth is anemic,” he predicted.

For buyers of non-performing 2nd mortgages, this is a good sign – your supply is showing no signs of decreasing – and is still increasing rapidly every month.

PennyMac will buy distressed mortgages at rock bottom prices with capital raised from private investors and turn around and sell the mortgages for a profit. The aim, Kurland said, is to avoid home foreclosures and restructure loans so borrowers can maintain payments and stay in their homes.

PennyMac will acquire loans from financial institutions seeking to reduce their mortgage exposure. BlackRock Chief Executive Officer Laurence D. Fink said PennyMac is looking to bring “patient capital to the unprecedented distress in residential mortgages.”

In case you were on the fence about investing in this type of real estate, consider that PennyMac’s executives come primarily from Countrywide – one of the big contributors to non-performing bank notes over the past few years. They know something about the opportunity here.