“Hello Dean, I have only been doing real estate for the last three years.
Can you please tell me, what is the difference, pros and cons of investing in the note vs investing in trust deeds/mortgages?”

My reply:

George, thanks for your question, let me address this one for you:

First, let’s get down to the basics:

A Note is a promise to pay signed by 1 person to another person. A Note can be unsecured – it is merely a promise to pay, and has no “collateral” connected to it like a car or a house or a boat. A Note can also be secured – usually to a house or a vehicle or boat, for example.

The “instrument” that “secures” that Note to the house (let’s just use the house example here) is the Mortgage or Deed of Trust (or Security Deed if you live in Georgia). I’ll refer to all of these generically as security instruments, by the way.

So that Trust Deed, as it’s also called, specifies what you as the beneficiary of the Trust Deed, can do if the borrower defaults, or breaks any commitments, specified in the Note. That’s where you’ll find references to foreclosure, for example. That won’t be in the Note.

So what happens when you buy a real estate Note, you ask?

You buy BOTH, the Note and the Deed of Trust or Mortgage. They’re part and parcel of the same transaction. Don’t think of them as separate.
Think of them as a pair – like a pair of socks. Whenever you buy a sock, you’ll always get 2. (I won’t go into unsecured liens here – we’ll save that for an advanced topic since I wouldn’t advise you to go out and pursue deficiency judgments Day 1!).

So don’t worry about whether you’re buying a Note or a Trust Deed – you’re getting both. Even if you’re an investor and you’re investing in partial Trust Deeds that are originated by some hard money lender, you should ALWAYS get a copy of the borrower’s Note and the Trust Deed or Mortgage securing that Note.

And just to round this out so that you see what happens as you “work out” your Note and make money from it. I’ll give you two situations:

a) If you end up foreclosing on the Borrower because they default on the terms of your Note (the terms of repayment are always defined in the Note rather than in the security instrument) and you take the property to foreclosure sale, the Note goes away at the point of sale.
Now there’s no more obligation to pay since you took the house. But so too does the Deed of Trust. Instead, you end up with a Deed – title to the house. But there’s no more Deed of Trust since that was just a piece of paper that tied your Note to the House. Now that you own the house that Deed of Trust is gone. So do all Junior (e.g. a 2nd Deed of Trust, a 3rd Deed of Trust, or junior judgments and liens – federal liens and county/city taxes excluded – topic for another post)

So in simple terms here’s what happened: the borrower defaulted on their Note. Since they weren’t paying you on your Note, you said – “well, I’m going to recover my loss on this Note by collecting on the collateral that is tied to that Note – the house.” The word “collecting” just means going through the process of filing a foreclosure action in order to force a transfer of the house from the Borrower to you.

b) if you end up, let’s say, buying a 2nd Trust Deed behind a 1st that is foreclosing, and that 1st takes the property to foreclosure sale, here’s what happens. The day of the sale, your Deed of Trust disappears. It’s gone. Worth nothing more than the paper it’s written on. BUT you still have your Note (in most cases – however there are exceptions to this in certain states with certain types of mortgages, e.g. a note secured by a California purchase money mortgage on an owner-occupied home in 2nd position does not survive post foreclosure on the 1st, but I’m getting off topic here …. !) And some investors just collect on those Notes through the courts, by filing a judgment against someone personally, and then working to collect on that judgment by calling/writing/garnishing wages, etc.

Maybe more than you wanted, but I wanted to make sure that you understood that when you’re buying Notes and when I or most other people online and in the real estate field are referring to buying Notes – we AUTOMATICALLY assume the associated security instrument.

Nothing ventured, nothing gained.

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

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.

You can get a FREE 2-hour sneak peek into the ‘Finding Non-performing Notes’ Course I just finished.

It covers:

- the 4 ways to find non-performing notes
- the difference between Good, Bad and Ugly note brokers (there are
probably 20 Uglies for every Bad, and 5 Bads for Every Good – not
that I’ve been counting)
- the art of “Going Direct”
- the inside scoop about the Yellow Pages
- and lots more

My wife Michelle teases me that buying nonperforming notes is boring enough as it is. so I might as well give you the option to opt out after hearing me praise “the 1R” 18 different times!

OK, but full disclosure here, she’s got a lot of respect for the fact that I can run a nationwide real estate investment business and still drop off and pick up our 1 yr old and our 2 1/2 year old daughters to and from daycare almost any hour of the day.

If you want to learn how to build a note buying business that could send you all the non-performing note deals you’ve ever wanted, without having to work at that once you got it up and running, you’ll definitely want to take a look at the ‘Finding Notes’ Course!
No hard sell here… Just watch the first 2 hours for FREE and see what you think.

Well, I’ve since gotten well over that fear, and YOU’ll get over your fears about this industry – WITH THE HELP OF THE BANKS THEMSELVES!

What is YOUR biggest question or concern about note buying?

Share your most burning note buying question with me and I will do my best to ‘demystify’ it for you in this blog later on.

Tomorrow I’ll be interviewing Janet – who’s been a Secondary Asset Manager (a fancy title for the person who holds the keys for us Note Investors) for years at a national bank, and who’s agreed to answer my (and your) most burning questions about the note buying business.

Get those questions in now, so that you have a chance to get them answered this week!

In the last week, we:

1) Received two checks totaling $7,000 from a borrower in Silver Creek, GA, on a loan we paid $65,100 for (Reperforming Loan)

2) Got a call from a borrower asking us whether we could get her refinanced if she brought her boyfriend on title to her home (Refinance)

3) Learned that a property we just bought a first mortgage on – and that was listed for sale – was just RENTED on a lease option contract (Refinance, Reinstate or Property Sale)

4) Filed for foreclosure on a borrower in Bossier City, Louisiana, who hasn’t responded to any of our letters, and were reminded about the special way that foreclosures are handled in Louisiana (Foreclosure)

5) Bought a $76K first mortgage on a home in San Antonio, Texas worth $160K, and laid out our plan to generate a 50% rate of return on our investment (Refinance)

6) Made an offer to one of our borrowers to sign a Deed-in-Lieu of foreclosure - putting $20K in her pocket and lining up for us a potential gain of over $100K on a $72.5K investment (Deed-in-Lieu)

In just one week in our note buying business, we’ve seen action on all 5 Exiting Options (you’ll learn these in the Course).

WANT TO LEARN MORE?

Join me Tuesday evening 2/26 (TOMORROW) at 7PM, for the first in a series of 4 Note Buying webinars on Step 4: Managing & Exiting Notes. (Again, if you can’t make it, or are reading this too late: no fear… we can still get you access to the replay links.)

If you missed it: we will put on various note buying online courses, for example one on Step 2 of the note buying process – How to Determine a Purchase Price – on any non-peforming note.

Or one on ‘Managing & Exiting’ your Note Buying deals.

Thanks again to all of you who came yesterday! Hope to see you at the next one or on one of the webinars.

Here’s Downey’s non-performing loan portfolio (with thanks to calculatedrisk):

Click ( here for larger image).

What’s interesting here is that Downey’s working to restructure or modify a growing portion of these loans (as are most banks). A full 40% of these assets are now “reperforming” loan mods, which Downey calls its TDRs (troubled debt restructurings). Many reperformers are often sold as well.

Their 8-K quarterly filing can be found here.

Take a look at the note below out of this week’s Economist. We’re sure to see more and more non-performing notes available in the secondary markets – this type of a move would only stem the flow of those notes into hands of private investors.

From this week’s Economist:

America’s housing market may yet justify dusting off Depression-era institutions, such as the Home Owners’ Loan Corporation, which bought and refinanced distressed mortgages.

Here’s a little background on the HOLC (thanks to Amy Hiller at UPenn)

At the urging of President Franklin Roosevelt, the US Congress created the Home Owners’ Loan Corporation in June of 1933 . “Implicit in the legislation which I am suggesting to you is a declaration of national policy,” Roosevelt stated in his message to Congress. “This policy is that the broad interests of the Nation require that special safeguards should be thrown around home ownership as a guaranty of social and economic stability, and that to protect home owners from inequitable enforced liquidation, in a time of general distress, is a proper concern of the Government.

HOLC offices were quickly set up across the country, and applications for assistance were accepted beginning in August 1933. HOLC offered federal bonds to lenders in exchange for mortgages already in default, providing new fifteen-year mortgages at five percent interest to homeowners who were, in turn, expected to repay their new debt to the federal government. HOLC made one million loans across the country between 1933 and 1936, the only years for which it was authorized to make new loans. Eight out of ten of these homeowners paid their HOLC mortgage and kept their homes; the other 20 percent lost their homes to foreclosure by HOLC.

Just to put this into perspective, the US population was 125 million in 1933 – the first year the agency issued loans. Assuming housing / population of roughly 1:4 – that would mean approximately 31 million homes. So the agency issued loans on roughly 3% of the entire housing stock in the country – significant to say the least.

Judging by the steady growth in non-performing assets, the feds may not have a choice but to create such an agency.

A few of the ones we use as inputs into potential future appreciation / depreciation include:

Zillow’s quarterly market survey … this is a useful look at the largest 125 MSA’s using Zillow’s algorithms to estimate appreciation / depreciation both quarterly (Q3-Q4) and yearly (06-07). A summary of the data -is available here.

Another good source of info is First American’s Core Mortgage Risk report – the latest one is summarized right here. First Am has extensive data sources and their analysis is usually good.

And finally, this just in from the National Association of Realtors – year-on-year price changes by MSA. The data seems to track well with Zillow’s MSA analysis (didn’t expect Zillow to track against any comparable, did you – yes, well they’re not as bad as everyone makes them out to be – you just have to know how to use Zillow data).