How To Make Money Buying A Non-Performing Asset

GDNI 04 | Non Performing Asset

 

How do you make money buying a mortgage that no one is making payments on? Gail and Chris give you some great insights on how you can actually do that as they provide different exit strategies and more. They share their personal experience on buying a vacant house on site with several feet of water in the basement. Covering how they make that work, they show how distressed notes come to be and the predictor of who is going to pay and who is not. They also talk about making money and notes with cash for keys as well as foreclosures and the due diligence process. Ultimately, you’ll find great opportunities for you and the borrowers who are struggling to become successful by making a non-performing asset re-perform.

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How To Make Money Buying A Non-Performing Asset

The topic of this episode is how note investing work. We’re going to get into the real question that everyone asks when you tell them you buy non-performing notes, which is how do you make money buying a mortgage that no one is making payments on? That is the great mysterious topic that we hope to tackle. We bought a house. Several are vacant. That used to scare the jeepers out of me. I’m enjoying it now because having a vacant house gives you the opportunity to sell it to a new buyer and create a new note. Instead of inheriting a borrower whose consistency and ability to pay might be very questionable, you have your chance to pick a new one. What happened, in this case, it’s a house in Indiana, a farmhouse in an area with lots of mobile homes in it. It’s a very attractive house. When I showed it to a number of friends like several houses I bought all at once, this is the one they all were like, “That’s nice.”

What’s going to happen here because this is a contract for deeds, the house itself has been deeded to you and me and the borrower has a contract to buy it. We don’t have to foreclose on this person. We could just have done a much briefer legal process to cancel their contract to buy. In this case, it’s vacant. The people have already moved on emotionally and physically and they were thrilled frankly to get my call and be offered a chance to end their relationship with this house. It’s a clean break.

It’s a win-win because they technically were still obligated for the debt of the property. By signing over their rights, we’re also relinquishing them from any additional costs or going after them for any additional costs. We get the property back which was vacant, which is what we wanted not to spend money on legal and may get out of the debt obligation. It’s surely a win-win for both sides.

I do know note investors who particularly if they feel like the borrower is uncooperative and gives them a hard time and maybe causes them to spend a lot of money just delaying the inevitable, they will go after them for the existing debt and not forgive it. You and I are not like that, we’re always about moving forward.

The reality of it is trying to sometimes collect on that, we’re spending a few thousand dollars unless they have the property that you can attach a deficiency judgment. If they don’t have any type of asset, you’re sometimes just throwing money away and then turning to try and collect it. The time and effort you’ll spend is probably worthwhile while focused on other types of investments. One other thing I want to mention about is a lot of people are not only buying something not performing, but they’re buying something vacant with nobody knowing what the inside looks like. That’s true and it can be scary but you also bid accordingly and you acquire properties like this at prices assuming the worst.

If the property fix-up was worth $65,000, there’s nowhere near we’re considering putting a bid and cost of that were in half that value. One thing to focus on or pay attention to is a lot of people may shy away from things like this. There are also some price points where it does make sense to acquire some of these properties, especially when you’re acquiring this part of the pool like we did which had more than a half dozen properties involve.

Having a vacant house gives you the opportunity to sell it to a new buyer and create a new note. Click To Tweet

Now that we have revealed that we bought a vacant house right on the scene with several feet of water in the basement, it’s probably a good time to jump in and explain how you actually make money doing foolish things like that. Let’s give a little background on how distressed notes come to be. People go to banks and get home loans to buy houses. I’m going through this right now. I did a refinance of a home equity line of credit on my house. Even though the mortgage that I was taking out was roughly a quarter of the value of my house, I could not believe what they put me through to get this loan. That was insane. They kept being all banky and being like, “This is what we do.” I wanted to laugh at them because I thought, “You are acting like you’re doing something very scientific here and you’re figuring out that I’m exactly the person you should loan money to. You forgot I buy your mistakes. Every loan that you made that goes bad ends up being bought by someone like us. We just laugh at your vetting procedure, your fantasy that you can figure this out.” There’s only one predictor of who is going to pay and who isn’t. Do you know what that might be, Chris?

I do not.

It’s how big a down payment people put down. That’s probably the most important corollary about who keeps paying and who doesn’t. People don’t want to lose what they’ve gotten into it.

Check the equity. Nowadays, we’re seeing banks lending with 0% down in mortgages. Now they’re coming out with a new FICO score that is going to prop up scores around 500 or 600.

Find those scores on a curve. Is that what you’re saying?

GDNI 04 | Non Performing Asset
Non Performing Asset: A lot of people are not only buying something non-performing but also buying something not knowing what the inside looks like.

 

Yes, there is a gentleman who posted something on Facebook that is supposed to take into account. They’re going to start analyzing people’s checking and savings accounts, which I’m personally not comfortable with them having that access. They are going to start reviewing that to take people who have maybe a 500 score but have some cash. It doesn’t make sense because you’re not paying your bills but you have a cashing account, it doesn’t mean you’re going to start paying your mortgage. That’s a whole other topic we can tackle another time.

We’ll definitely get to that. Banks make loans and they have lots of confidence in the people that they choose. Inevitably they are disappointed and a number of people will stop paying their loans and banks can carry bad loans on their books for a certain amount of time and they can have a certain percentage of bad loans to good loans. At a certain point, they have to sell off a bunch of bad loans and they usually bundle them up in a big bunch like millions of dollars’ worth, it’s a big bank. They will sell them all at once to a big hedge fund and that big hedge fund, the first to buy, will do nothing but buy at one price and sell them to another hedge fund at a bigger price. If they buy at $0.25 on the dollar, they’re paying $25,000 for $100,000 balance. They might turn around and sell it for $30,000 to another hedge fund. The loans keep going down the food chain through the hedge funds. Everyone is taking their little piece until it finally gets to an investment company that is small enough that it’s willing to sell loans just one to ten at a time to smaller investors like we are now.

Similar to most processes of manufacturing almost where someone manufactures it, they sell it to a company with a markup on it. That company sells it to another company and puts a markup on it. It continues down until it reaches the mainstream consumer. In notes, the mainstream consumer is the individual investors like you, I and others who are buying deeds at one, two, five or ten at a time, not at millions to tens of millions of dollars at a time.

I’ve bought them, I know you have too. We’ve bought notes that are less than $1,500, $1,000. They are not the Taj Mahal but they have profit in them if you’re willing to extract it.

Probably I’m going to double digits. I would vet on some assets that I’ve paid under $5,000 score. They look hairy but there are different strategies you can implement to turn those into very profitable notes. Sometimes you may not win on it but typically you will always recover your initial funds.

The investor I have who has been with me the longest, he was with me in my flipping days. When I suggested to him that we transition over to notes, he said to me, “How can you make money buying a mortgage that no one is paying on?” Let’s jump right in. Let’s talk about the basic ways that you do it. First and foremost, the most lucrative exit strategy of several is to get the borrower to start paying again. If the borrower starts paying again and that’s a reperforming note, you can basically take a note that you might have paid about 50% of the unpaid balance for and sell it for about 80% of the unpaid balance.

To use round numbers for people, you may have a borrower who has $100,000 mortgage they cannot pay on and $1,000 monthly payments. You buy that note for $50,000. You get a spread now. If they bought it for $50,000, they owe $100,000. If they start reperforming, you’ll collect twelve, fifteen, eighteen, 24 payments from them and then you can turn around settle that. If you collected twenty payments of $1,000 a month, you’ve collected $20,000 back of your $50,000. The majority of the payments they were making were also going to interest, not the principal. There could be a balance at that point in time, call it $95,000. If you sold that for $0.80 on the dollar or you sold that for $70,000, you’ve got a spread there that is incredible on reperforming loans.

Let’s do the math. What have you done? You paid $50,000 for the loan. You’ve got a payment upfront. We usually ask people for some money upfront which we consider skin of the game to make sure they’re serious about reperforming and not just jerking us around. You get a $2,000 payment upfront or more on a loan that size. You have $20,000 in payments that they made. You’ve got $22,000 in your pocket now. Then you sell the note for $70,000. You’ve collected in total $92,000 on an asset that you paid $50,000 for. In that two-year period that it took you to get it reperforming, you’ve doubled your money.

That is in a perfect world. In reality, the person to get them to make the twelve consecutive payments when they haven’t been making the consecutive payments may take a longer period of time. They may pay eight out of twelve months or ten out of twelve months but eventually typically a lot of times they’ll get there. Another strategy is if they can’t afford $1,000, you can modify the payment down to $700 a month or to try and get them on to that payment so they can keep paying. The other end is if they don’t sell it, you don’t sell it for $0.80. The average person lives in the home for seven years. That’s another component to it is if you can help them to build up their credit, you may hold it for a longer period of time if it’s an IRA or another investment vehicle that you have that they may end up refinancing the property.

A lot of people feel a major ick factor about getting into this business. They picture themselves throwing small children out of their homes into the snow at Christmas time. The reality is that we work harder than anybody, sometimes even harder than borrowers to keep them in these houses because our goals are all aligned. We want them to stay and if they want to stay, we’re all on the same page. Sometimes though they don’t want to stay. There are many borrowers who owe too much money to be able to sell their houses and go. We’re able to come in and just sign the papers that will release them from the bondage of their underwater house. That’s another exit strategy. Generally, we always try to modify the loan, do whatever we need to help the borrower be successful. Our greatest return will come from them being successful in their house. What if they’re not? What if you can’t get someone to start paying again? What do you do then, Chris?

If you can’t get somebody to start paying, then sometimes what you can do is offer them Cash for Keys. A term where they can’t start paying and you may have to start a legal process which does take some considerable amount of time in most states as well as money. Instead of paying that money to an attorney, you can call up the borrower or have your servicer called the borrow and say, “Things aren’t working out. They’ll offer you $2,000, $3,000 Cash for Keys.” Meaning that you hand them back the property and take all your trash and clean condition. They’ll cut you a check for a few thousand dollars, wipe out that debt obligation that they have. That’s typically the first exit strategy I look at when the borrower cannot continue to make payments. They are not being proactive or working on any type of result.

GDNI 04 | Non Performing Asset
Non Performing Asset: If you can help the borrower to build up their credit, you may hold it for a longer period of time.

 

That’s great because you hand somebody some money that can make a fresh start. It’s often great. One of the times though that we can’t do that when we have to foreclose on people is if there are liens on the house. That makes it unprofitable or impossible for us to offer them Cash for Keys and have them sign it over.

I had a loan that the borrower was ready to sign it over. I was going to give them a small amount of Cash for Keys to take the property over but they were using it as a rental. They had a property manager on the property and they weren’t paying the property manager. That’s a little insider tip that I would tell people. Just because you ran a title report before three months ago, if you’re giving somebody Cash for Keys, run an updated title report. This property manager slapped a $12,000 lien on the property. I would have been stuck if I didn’t run that title report owing that $12,000 balance in spite of the Cash for Keys.

What did you end up doing?

I had to foreclose. I first went to the management company and offered them $2,500 and they came back at $11,000. I said, “You’re in the second position. Virginia’s a fast foreclosure state.” It’s not expensive to foreclose in Virginia, thankfully, depending on jurisdiction. Typically, the most expensive part is publications in the newspaper. I went to them and said, “I’ll give you what I invest in my attorney but it makes no sense for me to spend anything greater.” A few days before the foreclosure sale, they called me and said, “We would accept $7,000.” I said, “I’ve already got all my money out the door. I’m a week from the foreclosure sale. Why would I give anything at this point in time?” It’s unfortunate that sometimes people don’t think logically. That’s another way how you can make money in notes with the Cash for Keys. You also got to be careful. Then you start talking about foreclosures. Gail, why don’t you continue to talk about those? What is the process?

It’s interesting that you toss it to me at this point because I am in the middle of my first foreclosure. I don’t know if I’m in the middle because it started almost a year ago. It got interrupted when the borrower declared bankruptcy for the sixth time in five years. Eventually, he fell out of the bankruptcy, which he has done every time. Bankruptcy is supposed to be a tool for earnest people who need some breathing room and some time to get reorganized and figure out how they’re going to deal with all their debt. In this borrower’s case, he has no way to keep all of his properties. He bought about seven rental properties right before the crash in 2008. One or two of them might be up and running, income-producing rentals. The others are all just a mess. He owes tens of thousands of dollars in property taxes on them. In my case, he hasn’t made a mortgage payment since 2012. I had to pay over $11,000 in back taxes to keep it from going to tax sale.

I need not have bothered because two days before the tax sale, he declared bankruptcy to keep all of his properties from going to tax sale. During one of the lulls between his bankruptcies, we got the order of foreclosure from the court. We were waiting for the sheriff’s sale to be scheduled when this bankruptcy came up. I’m waiting actually until his deadline for filing his plan and all the paperwork in a bankruptcy where you’re explaining how you’re going to sort yourself out, how you can make your payments and how much you’re going to pay to all your different creditors. If he doesn’t file that, I expect he won’t because he’s not serious about this. These sales only happened a couple times a year. He wanted to get by this one and have another six months until the next one. I expect I will be able to continue with my share of the sale.

The process is you notify the borrower that you intend to foreclose. They have a period of time to prepare for the legal case. You go to court and get your order of foreclosure. If they don’t contest it and once you have your order, you can schedule the sheriff’s sale. The sheriffs all have different timing and so it could take a long time. This one is in Pennsylvania where I live. It’s taking a long time. Then I found out even after the sheriff’s sale, it’s going to take six to eight months to get the deed. I could be a year away from owning this house.

I’ve been joking lately that you’re halfway through foreclosure when it goes to sale. Typically, it varies in states depending on what’s called the judicial state and the non-judicial. In a judicial, you do have to go to court. Non-judicial is usually a quicker process that it’s not within the courts. The different states have different rules but the foreclosures that I’ve done, except for Georgia. They’ve had months before getting the deeds and then we get into redemption, which can be a whole other topic to talk about in another time. For example, I had foreclosures that foreclose in April time frame. I sold at auction so somebody bid higher than what my bid was and won the property at auction and the courts finally ratified the sale. I had to wait until August or September. Between April, May, June, July, August, five months it took the transfer of that property for the court to ratify that sale. That’s been consistent where I’ve got one in Virginia, that one we’ve talked about earlier. That one foreclosed back in early August.

I still don’t have the deed to that property at this point in time. I have one in Mississippi that I believe I got the deed. People ask because people see online that it takes four months to foreclose and that is in a utopian world with unicorns and rainbows and everything else. I will say that with foreclosures, a lot of the hedge funds and investors don’t like to wait or go through that process. Foreclosure can be very profitable as well. It’s something that you make your money on how much you pay for the asset from the note. Foreclosure can be a profitable exit strategy in some instances.

That’s probably the next question, whether you get a property back because you get Cash for Keys whether you foreclose or whatever. What happens is you have a house. It’s always a matter of looking at what you’ve got. We like to say in notes that every day is Christmas because you’re constantly getting houses that are like presents, you open and you have no idea what’s inside. You don’t know if it’s gorgeous or if there are several feet of water in the basement.

The other thing I got to mention is all of these properties are not anywhere near where you are living. It’s not you physically putting eyes on it, you have somebody doing this for you.

GDNI 04 | Non Performing Asset
Non Performing Asset: You make your money on how much you pay for the asset from the note that forecloses.

 

Some of them are bought in my IRA. I am not allowed to do anything. If I live next door, I would not be allowed to mop up after we pump all the water out of the basement. You get the house back and then the exciting part happens. Somebody goes in and tells you what it looks like on the inside and takes pictures. If it’s a distance away, you can buy your time and pour yourself a stiff drink before you click to open that folder of photographs to see what you’ve got. If it’s a nice house with some real value, then maybe what you want to do is just call up a realtor and have them sell it retail. I would say in my experience that happens maybe 10% of the time with me. I don’t know if you’re doing better, Chris.

I would say about 10% to 20%. I know we have some photos taken of a property that had the water in it. I haven’t had time to go online to look at the upstairs. I’m curious, in anticipation, half-scared, wonder what the property looks like.

At least we can’t smell them. That’s a big plus in itself. I took one back in Indiana. The gentleman who lived there signed it over. There was no trauma to anyone except us I guess when we opened the door and again when I say we, it’s not me. It’s someone far away. He said to me, “It’s a good thing you can’t smell through the computer,” because I’m a huge pet lover. Apparently, these people were as well. The difference is my animals are house trained and I don’t think theirs were. It’s not so nice.

It’s like going to a house with 25 cats. That’s always not a pleasure.

If a house is a mess on the inside, and most of them are to some degree, you’re not going to get a realtor excited about selling them. Then it becomes a matter of what you do with it. The thing that is nice in this business is that we have the opportunity not only to help borrowers who are struggling to be successful with their current houses, but we also in those instances where we take back houses have the opportunity to give somebody else a chance who would never get a loan from a bank. Those people are not as fussy as someone who’s got real money and can buy whatever they want. It’s not like we foist bad houses on people but the economics are such that we’re not going to renovate houses to a nice degree before we resell them to buyers and offer them financing. We will give them the opportunity to buy the house by paying us over the years. For many people, it will be their only shot ever at owning a house.

It’s pretty amazing. I know I’ve mentioned that I’ve bought houses in Flint, Michigan and sold them to people and in those cases, I have cleaned them up. I’ve painted them. I don’t modernize the bathrooms or the kitchens but I make sure everything’s working okay. I have a borrower who bought a house from me. He’s been a little erratic with his payments. He always pays in the end but it’s always a little bit of a cliffhanger of when and how it’s going to happen. He told me and now he apologized. He said, “I’ve really been doing a lot with the house,” and he gave me a list of everything he’s done so far. He took out all the carpet and he’s installed brand new hardwood floors even in the basement. He’s done all of this. He put a new roof on. He put a new garage door on, I knew that was needed though. The one that was there looked like someone had driven into it. I was surprised. I knew he was handy but I had no idea yet such goals. He then said to me, Chris, I’m sure you get this too, “We love this house and we want to be here for the rest of our lives.” He put a new picture window. I want to say, “That’s great, but please pay your mortgage now. I don’t want to threaten you with evictions from this house.” I wouldn’t, really.

In notes, every day is Christmas because you're constantly getting houses like presents that you open and have no idea what's inside. Click To Tweet

That’s one thing too that people need to understand and realize is I don’t judge any of my borrowers because everybody has had different events and different things happen to them. Every situation is going to be different. You can’t put, “This borrower is non-performing, that borrower is non-performing,” in the same bucket. In the sense, yes they are both non-performing but they may have two completely different histories and by working through that and try and get an understanding, that can assist sometimes in which exit strategy you do want to go down. There are a lot of stories like you mentioned where people are having trouble and then renovating the house and getting back on their feet and stuff. A lot of people don’t hear or don’t talk about because it’s not mainstream or it doesn’t get people excited. Everything nowadays seems to be based on what’s the most horrific thing because that’s what people want to hear. For us, we like to talk about some of the good things that happen with borrowers and how we are helping them to get them back on their feet.

What I did on BiggerPockets is I have people who invest in higher level, higher value assets. They are theoretically a better quality of borrower than the people who buy these under $50,000 houses that we buy and sell so many of. People are very snooty. My borrowers are doctors. I see doctors defaulting on loans all the time. Don’t tell me there is any difference. You can buy distressed notes at all different price points. You can buy million-dollar houses that people defaulted on.

I’ve seen lawyers defaulted. I honestly don’t touch them because I know I’m going to be for the fight of my life. I stay away from it. I’ve looked at assets and when I look at the person, they’re an attorney.

That’s pretty cool that you found that out. How did you find that out?

As part of due diligence, which we can talk about in another episode. When I was looking up the borrower on Facebook and note stalk them, I Googled the name with the location. He had his office out of his house. He was an attorney that did a lot of civil suits for things like drunk driving and things along those lines as well. I found it somewhat interesting that some of these aspects, he helps people with debt. He was one who wasn’t paying his mortgage. I thought that was a little odd but it is what it is. When I see that somebody is an attorney, personally I would stay away from that because if I’m trying to go after them, if I had to foreclose to get them, they’re going to possibly try and find any way to extend or continue. We’ve got some borrowers who had some bad things happen and they’re trying to get on their feet. There are also people out there who may not have their moral compass steered in the right direction on some occasions and also try and prolong or find ways out of things as well.

GDNI 04 | Non Performing Asset
Non Performing Asset: Don’t judge any of your borrowers because everybody has had different events and different things happen to them.

 

There are people who game the system. They understand how long it takes you to file the notice that you’re beginning legal. They know how long before the hearing will happen, and they know after the hearing, how long before the sheriff comes. I have to say I’ve been lucky so far. I haven’t run into it. I haven’t had any professional gamesman when it comes to this thing. I want to circle back to the subject of foreclosure because this is something that I didn’t understand with foreclosures. We buy land contract properties and we also buy conventional notes properties. Typically, with a land contract, we don’t have to foreclose, though in some states you do under some circumstances. With conventional notes, you do have to foreclose. When you do foreclose, there is going to be a sheriff’s sale. In every foreclosure, the culmination of it is the sheriff’s sale because although they owe you a certain amount of money on the mortgage, there may be equity. The house might be worth considerably more than they owe.

The foreclosure sale gives the borrower an opportunity to reclaim whatever equity is in there. The house gets sold, the lender gets paid and any other expenses or taxes and such get paid. Then if there’s money left over, it goes to the borrower. For us as note investors, we’re allowed to set the minimum bid at the foreclosure sale to consist of the unpaid balance of the loan, insurance that we’ve paid, taxes that we’ve paid, any money that we’ve advanced on behalf of the house. Also, our legal fees for doing the foreclosure. These will be all part of the giant number known as the payoff amount. You’ve been very strategic. If I’m inferring correctly from watching you, Chris Seveney, it hasn’t been your goal to take back the house. You set your minimum bid at the foreclosure sale, which is the amount of money you’d be happy to get and walk away with. You’ve often set that lower than what you’ve been owed.

Yes, I have. I will typically bid to get to a certain return on the investment. I’m not out there to try and milk every single dollar out of the deal. I have a fiduciary responsibility to any investors but there’s also that volatility risk that comes into play. I’ve got one coming up, the payoff is around $50,000 and the house’s value is right around that value, it might be slightly lower. I’m into the deal for much less. I’m not going to bid 50. I’m probably not going to bid near 50. I’ll probably bid 25%, maybe lower which would still give me significant returns. I would like it to go to auction because if it does and it gets sold, then I don’t have to have a realtor to sell it, to pay a percentage and other costs of holding on for the property.

You don’t have to worry about what it looks like on the inside. When an investor wants to get the house back, they’ll bid the maximum amount that they possibly can, especially if it’s more than the house is worth. That pretty much will ensure that no one else will outfit them and they’ll end up owning it.

I’ve also seen people who think a house might be worth $80,000 and they owed $70,000 on it. They’ll bid the $70,000. It might only be in it for $40,000 and all of a sudden, they take it back and it’s only worth $50,000 or $60,000. They could have sold it at auction. Stop paying taxes, stop paying insurance, stop paying all these ancillary costs that they have on the loan. It’s the term, “Cut off your nose to spite your face.”

You and I are navigating this too because now we have different approaches. When I have taken a house back and then offered it for sale, in most cases, it’s the mommy in me. I want to get the house in order and I do end up putting money into it. I don’t know scientifically that that’s a good idea or that I have been smart by doing that. You have encouraged me to not touch it and let’s just sell it. We’re about to try to do that. I’m very interested to see how that goes.

Typically if I do anything, I get trashed out. A lot of the things like paint, carpet, that can be done by a homeowner where the trash out process, nobody likes to do that. Also, I had a house that I spent a few thousand dollars trashing out because they had a lot of stuff in it. If you look at it before and then after the trash out, which I had an agent do, the house pretty much doubled in value just from getting all the trash out of it. The initial price she had provided me with was somewhere around about $25,000. After we had it trashed out, she mentioned that we would have no problem getting $50,000 for the property.

That was money well spent. Tell me you spent less than $25,000 cleaning.

I spent $2,500. I had two dumpsters, that would give you an idea of how much stuff. Plus, the guy had a truck and he took the last load out of the truck as well. I can share some pictures. The house was completely filled with everything you could imagine. It’s literally like someone was living there for 30 years and just walked out one day. As we started out from the beginning, if you pay the right price, you can still make money in this field.

It also becomes a matter of what do you want to spend your time doing. Do you want to spend your time dealing with a house that needs things before you can resell it? Do you want just the velocity of money? Take less but get it faster and get it fast and go do another deal. It’s always a question.

I like the velocity because we’re trying to get houses cleaned up. I’m in the construction business for my full-time job. The time and effort that you have to spend as well as trying to manage and overwatch contractors that are from afar is very difficult and it takes a lot of time. For me personally, with what I have going on in my life, it’s not that much actually. Notes for me is the velocity. If I take the property, I get rid of it as fast as possible. If it’s at a slight discount, that’s something. At the end of the day, a lot of times I think I’m saving money. Especially at foreclosure because by the time you pay 6% realtor fees, and taxes and transfer taxes, and a lot of these other bills that chew up special insurance and everything else, it adds up quickly. You’re usually 10% to 15% right off the top. If it’s not sold at foreclosure, it’s going to cost you some minimum expenses.

GDNI 04 | Non Performing Asset
Non Performing Asset: When an investor actually wants to get the house back, they’ll bid the maximum amount that they possibly can.

 

The other thing is that part of our due diligence process is to have a realtor tell us what they think the house is worth. The funny thing particularly with the lower value houses, I’ve stopped worrying about that in a way. You and I joke because we used to look for these seasoned professionals to go evaluate our house just from the outside. Now we hire people off of Craigslist for $20 to go just take pictures so we can see the condition on the outside and to validate that the house is still standing. Part of the reason is that what a house is worth is such a variable.

We have realtors who look at our low-value houses and they don’t even want to work with us because they can’t see a way that they can make money. They’ll tell us this house is worth $10,000 or $15,000. Then we look at the same house and we think that’s what it’s worth if you were going to sell it at retail or sell it to an investor as a rental that they’re going to have to fix up. For someone who wants an opportunity to own a house, the house is worth quite a bit. The value, when sold as a seller finance deal, can easily be $10,000, $15,000 even more than what that’s real term with the withering gaze is telling us something is worth.

Everything nowadays seems to be based off of what's the most horrific thing because that’s what people want to hear. Click To Tweet

I’ve also had realtors look at some of my property. One of them tells me it’s worth $250,000 on one note I have. Another one told me it’s worth $150,000. A lot of times there are some that market out of their car to take the pictures. I find the people on Craigslist or another site. They will walk up to the door and take pictures for you. Their bravery is far greater than the realtor. I tell them don’t go in the property but sometimes they do and the pictures that they provide. They talk to neighbors and they ask questions. I got one that I’m doing due diligence on right now. The guy went to take pictures of the property and then found the neighbor next door who owned three houses on the street. It’s near a resort community. The guy wants to buy the house and I’m like, “I have not even bought it yet.” He already gave me an idea that he wants to pay for it. I’m trying to get the due diligence process racked up on this thing because I want to get it under wraps as fast as possible.

I once had that Craigslist person put a ladder up to a house and go up and look at the roof. Extra points for initiatives, but let’s not do that anymore.

We’ve covered a good topic that we’ve had in regards to explaining to people that question of how can you make money on a non-performing asset? We’ve talked a lot about how that can be the case and the other different exit strategies. We give people a flavor for some of the things that can and can’t go well and go wrong for you in notes. Do you have any final thoughts, Gail?

You start with a bad loan. Our favorite strategy is to get them reperforming and to sell the loan for far more than we paid for it. If we get the house back, we can sell it outright, maybe not top dollar. We can sell it for more if we’re willing to spend the time looking for and screening a new seller-financed buyer to create our own performing note. We can foreclose and sell by setting our price strategically at the sheriff’s sale with the intent to either keep the house or sell it and be on to the next deal. That pretty much covers everything. I was going to say you can also burn it down. My first note ever burned down and honestly, I didn’t have an alibi for that night. To all our friends, that is how you make money buying mortgages that no one is paying for. Thank you, Chris. It’s been fun spending time with you. To you and all our friends, let’s say farewell and go out and do some good deeds.

Thank you.

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