We buy non-performing 2nd position real estate notes on a regular basis. Once we buy a note, we contact the homeowner to negotiate some type of payment plan or payoff. Sometimes we expect a certain outcome and it doesn’t turn out that way. We might of thought “there’s no way the homeowner can afford to keep this place” and then they surprise us by coming up with $50,000 for a payoff. Maybe they cash out a 401k or borrow money from a friend or family member.
That being said, here are some of the possible favorable outcomes that you can expect on a 2nd position mortgage note.
- Performing on a temporary payment plan, usually interest only.
- Performing on a permanent loan mod.
- Performing on the original terms of the loan.
- Short payoff
- Full payoff
- Foreclose and sell the property
- Foreclose and keep the property as a rental “subject to” the existing 1st
- Owner signs Quit Claim deed to us for cash payment (Cash for keys)
There are also some undesirable things that can happen.
- Lien strip in a Chapter 13 bankruptcy.
- Wiped out by foreclosure of Senior lender
- No collection activity due to negative equity or delinquent 1st (loan on hold)
It’s important to think of a loan portfolio as a mutual fund. Buy a basket of loans and expect to get a good yield on the overall portfolio. If you have $100,000 to spend don’t buy one loan for that $100,000. Buy a pool of maybe 10 or 15 smaller, less expensive loans with that money. We just had a loan that I bought for $250 payoff at $2,500. That was a loan that we bought and stuck in the file cabinet and forgot about it. The property went into escrow in a short sale and the title company contacted us for a payoff.
One of our favorite strategies is to take title to the property “subject to” the 1st mortgage and hold it as a rental. The following chart shows how we took ownership to $1.8mm worth of property for an initial note purchase of $83,651.00. Gross rent is about $10,000 with payments to the underlying Senior mortgage and HOA’s of $4,800, so cash flow on these rentals is very good.
The note business can be very profitable and provide both cash flow and sometimes chunks of cash when loans payoff. It’s important to be very thorough on the Due Diligence process and careful with other various aspects of the note business such as who you buy from and the current regulatory environment.
Join us at events in Southern California and nationwide as Gerald speaks on his favorite topic: Investing in real estate notes.