Here are the questions I answered:

1)      Can I buy single defaulted notes from banks?
2)      I don’t have any money, how can I buy defaulted mortgages from banks?
3)      How do I get a list of banks that sell defaulted mortgages?
4)      What are the biggest risks I run when buying defaulted mortgages?
5)      What price should I offer on non-performing notes?
6)      There is a Short Sale I am doing – do you recommend that I try to buy the note instead?
7)      Where should I go in order to get money to buy notes? (See 2)
8)      Do you have non-performing notes that I could buy?
9)      Can you coach me through my first note buying deal?
10)   What’s the best way to get trained in the note buying business?

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.

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.

Here’s a quick side-by-side comparison:

Short Sales:

1. Point of Entry. A willing borrower you’ve spent time convincing that they’d be a likely candidate for a short sale. And a loss mitigation officer overwhelmed with short sale proposals who often takes forever to get back to you
2. Documentation. Often require borrower financial statements, tax filings, bank statements, pay stubs, hardship letters and HUD-1s
3. Money. If you’re able to close a simultaneous short-sale, you may not have to fund anything. Otherwise, you have to finance the purchase from the bank

Note Purchases:

1. Point of Entry. A secondary asset manager or loss mitigation officer who has perhaps 5 to 30 investors they work with
2. Documentation. After you’ve reviewed loan documents (I cover these in the Determining a Purchase Price course), you have a purchase and sale agreement, and an assignment of mortgage – they will be very similar for all lenders
3. Money. In buying notes, you will need money to purchase the notes – however, there are strategies to pursue certain types of notes that actually require very little capital. More on that later.

And if you’re located in California, these are another few differences:

• Civil Code 1695 doesn’t apply to you (if you’re taking title as part of a deed-in-lieu negotiation, you’re exempt from the constraints on equity purchasers)
• You have multiple exit strategies (as opposed to finding a buyer and getting the property sold). These include refinance, loan modification, selling your note, foreclosing, or getting a deed-in-lieu
• You have no licensing requirements if you’re buying a loan with a singular (as opposed to fractional) interest
• You’re not subject to potential litigation as you are in lease option deals (e.g. your lease option is interpreted as a loan and you’re accused of equity stripping) – in a note purchase, you can simply modify your loan
• You are, however, subject to changing foreclosure laws, since you’re now the lender

And I’ll leave you with this – whereas you may have thought Short Sales were a pain-in-the-butt because of the uncooperative lender you were negotiating with. You may find yourself on the other side of the table if you buy a note - and have an investor come to YOU with an offer asking YOU if you’ll take a discount on your note in order to sell the property.

How’s that for a change of pace?