WEALTH BUILDING & LEGACY
MORTGAGE NOTES
• Modify the loan by decreasing the principal, arrearage, interest rate and/ or number of payments, then start collecting payments. Nonperforming notes require that the associated houses be vetted with proper due diligence to meet the investor’s end goal, and you must consider all of your exit strategies. If things go poorly and the borrower stops paying entirely or does not resume payments, an investor can take back the property via either deed-in-lieu, cash for keys or, as a last resort, foreclosure. NOTE INVESTING STRATEGY #2 LEVERAGING PERFORMING NOTES Performing notes, whether they are newly performing thanks to your hard work or have been performing from the outset either via seller financing or be- cause you purchased them that way, are a great way to enjoy relatively passive monthly income. However, sometimes note investors need a lump sum of money, and performing mortgage notes are a great way to get it. An investor seeking a lump sum of money from a performing mortgage note may meet this need via selling a partial share of a note or via a process called hypothecation. “Selling par- tials” involves selling a portion of the borrower’s payments to another party, often for close to or more than what you originally paid for the note. For exam- ple, if an investor owns a 10-year note, they can sell a portion (for example, 6-8 years) of the note borrower’s payments, generating lump sum capital while ensuring a cash flow stream or payoff in the future. Hypothecation involves taking your performing note to a bank and negotiating a direct loan using the note as collateral. The bank will provide a loan, which is then covered by the monthly income of the note. The investor will still receive a cash settlement when the note is satisfied. For
NONPERFORMING NOTE: A loan on which the borrower has stopped making payments. These notes may also be called distressed notes.
PERFORMING NOTE: A loan on which the borrower is making payments on time and in full.
SELLER FINANCING: Seller financing involves the previous owner of the property, the seller, making a loan to the buyer so that this individual can purchase the home for sale. This is a legally binding note that usually holds the home as collateral. Sellers may do this in order to sell quickly, obtain a higher purchase price, or simply because they wish to own a mortgage note that will generate monthly income. PRIMARYMORTGAGE MARKET: The market where borrowers and mortgage originators (usually banks, mortgage brokers, or credit unions) come together to negotiate terms for loans and conduct mortgage transactions. SECONDARYMORTGAGE MARKET: The market where home loans and servicing rights to those loans may be bought and sold by lenders and investors. Most home loans are sold on this market at least one time, and usually far more frequently, over the life of the loan.
3 CreativeWays to Generate Returns Using Mortgage Notes YOU DON’T HAVE TO OWN PROPERTY TO PROFIT IN REAL ESTATE.
DEED-IN-LIEU: When the borrower conveys all interest in their mortgaged property to the lender in order to satisfy a loan and avoid foreclosure.
CASH FOR KEYS: When a lender opts to pay a delinquent borrower a sum of money to help them relocate and, in return, the borrower vacates the property and signs over all interest in it to the lender.
fair market value. The discount will depend on how long the note has been delinquent, the market value of the property, and other circumstances. There are nonperforming notes in every market, no matter how attractive that market may be. Potential benefits to buying nonper- forming notes: • A way to access a hot sellers’ market while getting a deep discount • Lots of creative avenues to convert the
note to a performing asset
by Bill Griesmer
Strategies for nonperforming notes: • Purchase nonperforming notes on vacant houses, then foreclose quickly and convert the property to a rental or flip it after any necessary rehab. • Reinstate the mortgage, meaning the borrower resumes making payments based on the original note parameters and the investor collects payments.
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attractive investment vehicle quickly and to your portfolio’s great benefit. There are three primary ways that investors enter the mortgage note market: NOTE INVESTING STRATEGY #1 BUYING A NONPERFORMING NOTE Nonperforming notes may often be acquired for between 30 and 60 percent of
of distressed or nonperforming notes from the housing crash. Furthermore, increasing numbers of homeowners are opting to sell their homes via seller financing, which re- sults in an increased number of mortgage notes on the secondary market. Many investors find the idea of “being the bank” a little intimidating, but with a little creativity, you can get involved in this
nvesting in mortgage notes has always been a safe, reliable way to
invest in real estate, but lately it’s becoming more popular and mainstream as well. The improving real estate market has made finding good deals to flip or buy for long- term rentals increasingly difficult. How- ever, there are still plenty of opportunities available when you look at the inventory
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