The 11 Exit Strategies of Nonperforming Notes

Foreign.

This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property. For panties on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host CEO of We Close Nodes, Scott Carson.

Hey real estate investors.

If you have ever wanted to dive into the sexy side of real estate and become a note investor and not just somebody that owner finances properties or buys and sells on terms, but somebody who's actually buying debt from lenders, mortgage bankers, hedge funds on distressed real estate on both residential and commercial properties. Now is the perfect time. And guess what? We have our upcoming three day workshop here in just a few days on July 25th, 26th and 27th. That's right, that's a Friday. Saturday, Sunday. You can join me live on Zoom and our Note Buying for Dummies workshop. We'll go through the Fs of how to find, fund and flip non performing notes at huge discounts without having to use your own money. And we'll show you all the different ways you can make money being a note investor. Day one's all about how we find these deals from banks, hedge funds and how you can automate the process of connecting with these people and get tapes and listen to you over and over again. Day two is all about raising capital and marketing. We'll show you how to tap into thousands of IRA investors who are looking for deals to fund and how to communicate and how to contact them and get them to fund your deals. And day three is all about the flip the exit strategies. Putting deals together we'll mix in due diligence. We'll mix in the marketing side along with the structure side. So much stuff in three days live on Zoom with yours truly, the note guy, Scott Carson. Make sure you get signed up by going to Note buying for dummies.com or click on the three day workshop tab on our workshop. Get signed up today as we're still running discounts and you too can soon become a no buyer.

Foreign Good morning, good afternoon, good evening everybody. Welcome to this episode of the no Close show. As always, Scott Carson. Excited to be here with the day. Today's episode is kind of the part three. In our three part process. We talked previously about how to find non performing notes in different ways that we find assets. Previous episode we talked about different ways to fund. Today's episode is all about the the flip or the exit strategies. Now whether you're in performing or non performing notes, you gotta understand these exit strategies. One of the biggest misconceptions is especially people in the performing notes space, like, oh, I'm just buying performing notes. I won't have to deal with any foreclosures or I want to deal with any defaults. That's wrong. Every person that's in a note investing needs to understand their options. Because if you don't think that your borrower will ever at any time default or fall behind a payment to go through a financial hiccup, you may only be dealing with a small fraction of deals. I know there's one investor out there, oh, I've never had a foreclosure because I've done cash or keys. That's great and that's awesome. But it means you're probably being pretty picky about what you're buying and you're not, you know, you don't really have any type of real big buying platform because look, foreclosures happen, defaults happen and they're going to happen more now Tom, than they have in the last couple years. I mean people are struggling to get by. So you need to know the different exit strategies that are available to you. And I'm not going to go too deep and I'm not going to go into the nitty gritty of each exit strategy. We go more in depth in our three day virtual workshop and I encourage you to check it out@nobuyingfordummies.com check it out, it's on sale right now. Host that class once a quarter. So if you missed the most recent one, guess what? Get signed up for the next one. You'll get the replays the previous one. You start learning now. But exit strategies are important because you got to know how the heck are you going to make any money? And that's kind of what we'll talk about, how each strategy is phased and how you make money with each one. So let's just start from the beginning. And this is the first strategy that a lot of people come into the note space is it's not necessarily buying a note, but it's wholesaling note. And yes, you can wholesale notes just like you do traditional property. And a wholesale in a note. What are you going to make? Well, you basically it'll vary what you make. It all depends on how good a deal you can negotiate in the front end. Now you can wholesale performing notes, you can wholesale non performing notes. It's more profitable on the non performing side because you can get a bigger chunk in there, depending how big a discount is. But with performing notes, the most you're probably going to see is probably a one point, maybe one and a half point spread on a wholesale fee. All right. And that's on the funding amount you get. You get beyond that, you're really. Unless it's a, a great discounted performing note, you're eating almost the profit. So 1%'s pretty normal. That's what we'll pay on a performing note if it makes sense. And we still have to see an 8% yield to us on our side on top of that fee. But put it under contract, flipping the contract. Wholesaling is wholesale. Just make sure you know what the heck you're doing. And a non performing note, our wholesaling is gonna be a whole lot bigger. I mean maybe it's three points. If it's a portfolio, maybe it's two, two points. You might be splitting that within one or two people or it could be a flat 5,500. I mean I've had wholesale fees from 500 bucks to 100 grand before on an individual note deal. So just know what you do. You always want to make sure to leave meat on the bone, especially on the non performing side. So anytime you start getting above 65% of value or UPB on a non performing side, you're really going to narrow down. I've seen people like try to flip stuff, non performing stuff at like 75% of the, you know the value of the property when the there was no equity there, very little equity and it's just too high. You just not leave enough meat in the bone. So keep that in mind. Wholesale and first strategy, you're not really a buyer, you're not really an investor. We've done a previous episode on why wholesaling. You're really not an investor, you're just a paper flipper. It's great to make some quick cash. You gotta do all some work and you might as well just raise capital to take the deal down because you'll make more money. But wholesaling, it's kind of quick enough. You're not really buying anything. You just got to make sure that your buyer is going to fund the deal. Because if you end up having your buyer flake on you, then you're caught holding a bag. You can burn a bridge. You don't want to do that. Okay. That's the first strategy for a lot of people in the note. But the second strategy is once you buy a note especially it's not performing is Just to reach out to the borrower and say hey, what's going on? Let's try to get the borrower to reinstate the loan and start paying on time again. That's the greatest thing is if you can get a bar, especially buying a non performing note that's occupied and reaching out to the bar in the first 30 to 45 days either yourself or through a third party service, which is I would recommend is getting that bar back on track. Now they're making monthly payments, hopefully they're back on track. Maybe they're bringing a little bit extra to the table, some extra skin in the game to allow you to reinstate it. And that's great. That's, that's cash flow. That's what we're looking for. We only wish borrowers got back on track in a timely fashion. Sometimes it's, it's, you know, 60 of the time you usually get a borrower back on track, it's occupied. You know the other 30, 40% is going to go happen one of the different ways. But that's the best way get it reperforming. No attorney fees, no rehab costs. You may not even pay the taxes. If the bargain can pay taxes. Taxes are past due. But that's the great thing. Got somebody living in the property who wants to take care of it. Hey, bingo bango. That's in the note lottery. I like to say a re performer 12 months from now of 12 on time payments that notes now reclassified as re performing. It gives you a whole different exit strategy on the later routes which we'll get to. But reperforming your service is going to make shouts and try to make right party contact. Part of your due diligence you want to do is make sure you have numbers or contact information either through skip tracing or through the servicing notes from the previous servicing company or the existing servicing company to make sure you can reach out. Why would a borrower start performing with you versus the existing seller, the bank? They just might may not be financially savvy. We found that some servicing companies are just downright horrible in borrower outreach where there's always an automated message, there's nobody they can talk to and you're not dealing with the most financially savvy people out there. They need somebody to talk to, take a payment of the phone, how they send it in or how to set up. Ach, you just got to be able to talk to people. Especially the lower the asset class, the more you've got to have somebody on the line there and One of the greatest things that worked for us in getting people to reinstate was just to send a letter out a week after we close, say hey, we want to keep your house, your notes been sold, we bought it, you're behind. Give us a phone call to get back on the right track and let's work with you. Okay? And get them to reinstate. That's a great thing. Now if they can't reinstate the loan, then you kind of go to plan B when it comes to the performing side and this is offering up or seeing what they can qualify. As far as a trial payment plan, first, that trial payment plan, you probably want it to be at least six to 12 months. I prefer 12 months for tax purposes because then it's classified as a long term capital gain until you modify it. After 12 months. If somebody's bringing a big chunk to the table and they want to do a loan modification, I still going to want to make payments on time for at least a minimum of six months. Six payments on time. It may be a reduced payment, maybe normal payment plus some extra. That trial payment plan numbers can vary on what you see. And then after that temporary, that trial payment period, then you modify the loan. And once you modify the loan, those new terms are fixed. You can't, you know, if you modify a loan and the bar misses a payment immediately, it goes non performing. You can't go back to what the previous terms are. So if you've forgiven some balance or reduced interest rates or forgiven past due payments, those things are gone. You can't go back and recollect them. This is why we like to make sure that a borrower is making a trial payment plan for 12 months. After 12 months, okay, yeah, modify, we'll do a lot of great things, forgive some debt off it if the value is not there and go from there. But you know, doing a trial payment plan to a loan modification is the biggest plan. If you get a borrower wants to a loan modification immediately, I say look, if you haven't been paying on time for a while, let's do a trial payment plan because I don't want to lose that ace in the hole being able to go back and start the legal process for everything that they're owed, not just the new stuff. Once the loan modification goes through, okay, now you have, you can do whatever you want, you know, as you know, and modifying terms or adjusting terms on a trial payment plan, just get them making payments. That's the whole idea. Get them making payments and go from there. And of course if they can't make the payments, then you got to go to Plan C, which is one of these next strategies. And the next strategy I'm talking about is see if they have something that can come in and do a loan assumption. You know, we as investors often hear me talk about subject to deals. Maybe they have something that can take over the loan subject to the existing terms. A friend, a family member, maybe another investor looking to buy in that area. I'm not opposed to a borrower letting somebody assume the loan. And yes, you can let the borrower assume. It used to be previously all mortgages were assumable. Then I think after 85, the VA loan was the only thing that's assumable. Look, as long as I'm getting paid, I don't care whose name is on the check. As long as that check clears or that cash is still green, that water comes through, I don't care if it comes from Johnny Smith, who's not related to Mrs. Smithers, who owns the house, or whoever my lender is. Don't care. Now, what I would like to know is know the information and all the contact information for that person taking over the loan. I prefer to go ahead and have that borrower, that new borrower, or the person assuming the loan to fill out some sort of financial document so that I know that they can actually afford that. Now, I'm not going to adjust the payments. It's going to stay as is. If they want to get a new loan that's origination, then they need to buy the property and go that route. That's a whole different strategy. If I'm doing a loan assumption or even a modification, I don't have to be Dodd Frank compliant. I have to jump through an MLO process. You want to have your servicing company handle the paperwork for that. But I'm not originating any loan with the loan assumption. If somebody wants a new loan, the new terms, interest rate reduce sf. Well, guess what? Then you're buying the property on terms. You need to bring some money down for that. If I'm letting you just take it over, you're taking it over as is. Unless you're going to bring some money to the table. Then we'll go from there. Then I'm willing to modify the loan and then go from there. All right, But a lot of assumptions, they're still happening. We've let people single loans, and it's. It's a powerful strategy that a lot of people forget about as an option. Do you have somebody, a family member, friend, Whatever. Who would like to take over your loan. If they can't make payments, they can't do a mod, they can't find somebody, don't have anybody, then what you want to do is look to a potentially take the asset back. Look, Mr. Mrs. Smith, I know you can't pay your payments on somebody you can't pay, so you really can't say. So let's do a deed in a loom. Let's see what deedaloo foreclosure. So if you're having a foreclosure on your record that's going to affect you for seven years, you're just going to have late pays. Let's have you deed the property back to us. When you deed the property over to us, they deed the property over, we forgive the debt, they're walking away. We now own that property as an reo. In some places it's called cash for keys. If you need to motivate the borrower to get up and move. And we've done cash keys anywhere from like 500 bucks to 10 grand. You know, it varies. The more they can leave it and clean, the more I'm willing to work with them. If they're gonna leave it dirty, not gonna do it, they've got to sign that deed in lieu first. And then, then I may give them a week to get out, but they've got, I don't incentivize them with one check. It's got to be okay, I'll give you 500 bucks to sign this over and I'll give the remaining 1500 if it's two thousand dollar cash or keys, 1500 a week later when you, you know, give the keys to my realtor and the property's got to be swept out, it's got to be in clean place. But it's not going to be clean. I'm not going to give you, I'm just going to enforce it and go from there. But you got to make sure it's clean. And you want to make dang sure before you accept the deal that you've pulled. Title and make sure there's not a second mortgage or any outstanding liens against the property that will appear into a first lien position should you release that first lien. Okay? Now if there is a second on the property or a lien of some sort, then you would want to do a consent to judgment. This gives you the right as the lender to go in front of a judge and say, hey judge, the borrower's consenting your judgment let's go ahead and expedite the foreclosure to wrap up and get rid of the second. Now, if there is a second, I always will reach out to them first and offer them 1500 bucks to go away. They won't play ball with that. That's fine. We'll go the foreclosure route. One thing to keep in mind if you're buying condos is that there may be HOA fees outstanding. Double check that, see what state you're in. You may be able to negotiate a safe harbor ruling when you only got to pay six or 12 months of the original HOA fee or one percentage of the original sales price. But that's an important thing. Instead of just accepting a deal, you want to get a consent to judgment so you can wipe out those HOA fees. Okay, now maybe they, they the house is in condition. Maybe it's in a hot market. Maybe you don't want to deal with taking the property back, having to market it, clean it up and fix it. Maybe it's in good shape. So maybe allow the borrower to the next strategy. Let's do a short sale. Short sales are starting to creep back up here. Now, previously to this, when there's all this equity, you wouldn't have short sales. People would just they need to get out of the house. They would just sell their property listed on the mls, hire a realtor and be done. Because they had this equity, they could sell the property. Now that equity has switched her a little bit, you know, started having negative equity again. Or people don't have the money or the room in between what they owe in the property that have a house, maybe they're underwater limit. They don't have the money to pay the commissions or any slight repairs. So short sales are starting to make a rebound. In a short sale. This is where we accept to take a loss. Let's say our payoff is 220 grand. Let's say the property is only worth 200 grand. Well, that's $22,000 that the bar doesn't have to come out of pocket. So, so we would allow them to list this property for sale. We would accept us taking a short, hoping that we could get 90 cents on the dollar. And one of the most important things as an investor, if you got a borrower that's going to do a short sale, make sure it's listed on the mls. Make sure it's not with their best friend forever bff who can drag out a short sale, make sure it's with a Non related agent. Make sure the agent lists the property at 85% of value so that you get a multiple offer situation and get foot traffic. If they just listed for the full value and based on our numbers I just gave you, let's say they come and listed 200. Well if it says third party approval required, you're not going to get a lot of foot traffic. People don't want to wait around 30, 60, 90 days for a short sale. They want to be able to get in a property immediately. So if you listed at 85% of value, that's going to give people some incentive to hang around to get a deal. And at 85% you're probably going to get multiple offers, hopefully in which allows for you to work against them to bid that bid up. So maybe you Only settle at 90, 95 since are you taking a bigger loss, a lesser loss? I mean hopefully if you're buying a $225,000 note and $20 a property, you've only paid like 100, 220. That extra 20, 25 grand above your 200,000 you're not going to see anyway. So you're not really taking a loss. It's more of a paper loss and you could technically write that off if you got a good bookkeeper. So short sales, great. Have them list the property for sale. If you don't see any activity in the first 30 days, then I would cancel the short sale and then go back to doing a deed, lieu cash receipt, keys or consent to judgment on that aspect. But do not allow the borrower in this situation on a short sale to dictate showing times. No, no, no. We, you. If we're going to do a short sale and not come after you for anything any that we're shorted on, we got to be able to show that property any given time. You got to keep it in clean. We don't expect you not to keep it crystal clean, but we got to keep it kind of clean. If you've got dogs, we got to move those dogs somewhere else. If you got stinky litter boxes, hey, we got to put the cat with a new friend or make sure you're cleaning up that litter box on a regular basis. But nothing against, I love animals. But if you're trying to sell a property, it's one of the most important things about do not let the borrower dictate showing history. Like I said, don't get any showing. Then you're going to go say hey, we're not going to do this. We're going to go straight back to a demon of cash for keys and then we'll handle the sale. In that case, I'm going to give the borrower you're moving out. You've had a month in. And I would tell them this, look, if we don't have an offer in a month, we're going to go back to deal. You will need to move out of the property in two weeks after that. Okay? So it's important to set that. Now in some cases, a borrower may just be able to show up with a cash payoff if they, you know, some of them are going to drag things out and maybe they don't have a lot of money, but maybe they don't know the options available. Maybe they can go to their, their friends and family and borrow money. They're not going to be able to go get a new loan from a bank, especially if there's late payments on their credit. But maybe they can go cash in their 401k or an IRA. Those things can take a little bit of time to do. Or they can take a loan out against their retirement accounts. That's a possibility to get a cash payoff. You could also do a settlement. If someone wants to stay in a property and it's worth 100, you know, 150, maybe you bought it 100, maybe give the, the guy or gal a $10,000 break. If you can pay this off at 140 or 150 and do this in 60, 90 days, we'll give you a settlement on it. So those are options. You do pay off settlement. Most important things, you got to put the settlement in writing and, or the payoff in writing and put a date when that payoff or that settlement is no longer good. Outline. Your servicing company can help handle this or you can write it up because last thing you want to do is put no, no date and that that settlement is basically good in perpetuity. Nothing. No, you can say, hey, this is only good to the end of the month. Your payoff is good at the end of the month or it's only good such and such by date. After that date, this payoff is no longer valid. And that's an important thing because if you have somebody comes back, oh, I want, I want to do that. Well, no, that time is expired. That ship has sailed. It's now cost you more money because now we've accumulated more costs with servicing and insurance and money costs along the way. So a payoff can happen. You're going to see a higher chance of payoffs on the lower valued assets. But it's not unheard of happening on higher assets as well too. For you, of course, let's say you're working through this and you're, you're just striking out. Bark can't pay. It's in a longer market, nobody wants to assume the loan. They can't pay you off, can't do a settlement and you don't necessarily want to go to the legal route of foreclosing. Then here's the thing. If you bought that note cheap enough, sell it to somebody else. If you're in a state that's got a little longer foreclosure time frame and you want to go through the six or 12 or 18 or two years depending on what market in sell that note to somebody else. If you can make 5% on a non performing note deal and do that in 90 days, well you take that time. So you technically made a 15% cash and cash return. If you can make a 10% profit in 90 days, guess what? 10% in 90 days times 4, that's a 40% profit. Okay, so the numbers on that, I'm sorry, 5 times 4 would be 20, not 15. Sorry. So that's one way to think about it. And that's, this is what you see a lot of funds do because they're buying in bulk. They immediately start reaching out to the non performing borrowers. They give them their time frame, they give them 30 days to come to the table. They don't come to the table in 30 days, then they're looking to offload that at a 10, 20 or 30% market. Whatever they can get from individual note investors will come in and buy that note because that's still a great annualized ROI in the long run for their fund. They get their capital back in, they make some profits and they can put that money back in to buy more assets. The bars that want to stay great, they become re performing notes. That looks good for the portfolio. And that's really what you see with note funds is it's going to be buying non performing to get them reperforming. Those that don't reperform, they start to go on the liquidation. You know, liquidation pile in 90 to 120 days so they can still make good money. Now if you don't want to sell the note and you're okay with the bar not paying you well, nobody's okay with that. But you're okay for the long haul because you bought cheap enough, guess what? Foreclosure is the next option and each state has a different foreclosure time frame. It's as fast as 21 days here in Texas, all the way up taking three years in New York or Puerto Rico. Out there you have judicial, non judicial foreclosures. Non judicial foreclosures are like Texas, Georgia, Virginia, North Carolina, Missouri. If you judicial foreclosures be like Florida, Illinois, New York, New Jersey, those are much longer time frames and it can cost you anywhere from like 750 bucks to foreclose, say in Harris County, Texas, all the way up to like 10 grand or more in New York. So keep that in mind. Foreclosure happens. There's a time frame. You just got to talk to an attorney and start going that route. And I would immediately. If you can't get a bar doing something in the first, if you don't get any response in the first 30 days, send it to an attorney. If you start getting a response back and forth and you're working through that's right, give the bar an opportunity to come to the table, do something and see. But they don't follow through kicking the attorney and let them deal with attorney. You can always stop the foreclosure or suspend the foreclosure while the borrower is working out as long as they're following through on the process. Now of course if they're in trial payment plan or mod, you want to definitely stop that foreclosure, suspend it for at least six months to make sure that your borrower is going through. But don't stop the foreclosures, just suspend it and then if they make start making six on time, it's then you can stop the foreclosure because you can always start it back up again and go from there. All right, now let's, let's, let's recap those really fast. Wholesaling, reinstatement loan mod of a trial payment plan loan assumption. Doing a dealer cash for keys, doing a short sale, a property sale, giving a cash cash payoff or settlement a little bit selling the notes. If you don't want to go through the work, going through the foreclosure. That leads us to two other strategies here. So we mentioned earlier that the first idea is to take a non performing note and get it back on track. Right. Well that gets back on track for 12 months is now considered an on time or performing note or re performing. You can now resell or sell that re performing note back to the market. There's plenty of note investors out there that are buying reperforming notes. I'm one of those guys. If I can get a double digit return 12 or higher, I'm definitely interested. There are funds, banks, institutions, hedge funds that are looking for reap performing paper. They can get an 8 to 10% ROI that you know you're looking pretty good. So if you bought a note at 50 cents and you can now sell it at 85, 90 cents after a year of on time payments and some extra skin in the game, it's a pretty good ROI to you too. So that's a true win win across the board. That's not going to adjust the terms of the loan or the loan modification. Just make sure that your loan modification, you're selling it based on the terms of a loan model, not the extra per month or anything like that. And then last but not least is something that happens a lot of times if you're going to the foreclosure process. A borrower will file bankruptcy the day of or try to avoid a foreclose and that'll happen especially is the higher up value assets you get. Bankruptcy is going to fall of 12 categories. It's going to be either a BK chapter 13 is what they all have to file first and that is submitting. They'll have to submit a BK workout plan and that's basically a nine page PACER report, shows all the everything they owe, what they plan. They submit a payment plan which would be basically a five year loan mod. Now if they don't follow through on that plan or the plan doesn't make sense, you can always kick that plan out, say no judge, this doesn't make any sense. You know a normal mortgage payment is $800. They want five, you know, 50 bucks a month. That's not going to work. You know, it's got to make logical sense. You just got to hire attorney or your servicing company can help provide an attorney for you. Find an attorney that represents you in the bankruptcy court. Of course if they can't qualify for BK chapter 13, it may be a BK chapter 7 which is a liquidation of debt, which means they don't, I mean yeah, with credit cards if they write does it mean they just forgive the debt on the house? They basically have to turn a house over that point and you know, move out. They don't get to keep the house. All right, they've got to sell a house up. Of course, bankruptcies too. Some people will file bankruptcy because of medical bills or credit cards. They if they're on time with their mortgage, they don't have to file bankruptcy and put the mortgage in there. They keep making the existing mortgage payment on time. So there are some creative bankruptcy defaults to help them. Like I said with medical bills or credit card debt, stuff like that for you. But bks are not bad. BK chapter 13s, there's a lot of funds that like those. They're considered a premium because they've got a payment plan. If you get one of those, that's a great day for the most part. If they stop paying, like I said, you can have the bankruptcy discharge and finish the foreclosure and go that route. But once again, those are really the 11 extra strategies. Once you foreclose or take a property back, I don't care what you do, that's your choice. All right, you can sell the property, you can keep the property, you can owner finance. I would not do a lease back. I've had people in the past, I'm going to lease it back to the bar. That is a bad idea. If they couldn't pay a mortgage payment which is going to be cheaper than market rent, they're sure as I'm not gonna be able to pay rent. So don't lease it back. That same individual that's just asking for a lot of bad luck to do that. So if they get the borrow out and either sell the asset off, which is my favorite strategy, doing an owner finance thing into it, your ROI is going to be good. If you want to turn a rental, hey, you're in the note business, not the rental business. That's great. Another whole job for you as well. But that's up to you. Maybe some, maybe it's an asset in a state or area that you like and that's fine added to your portfolio on that aspect. But I'm a big plan of getting that capital in and then going back and rebound, you know, doubling down as I can. So those are roughly the 11 exit strategies. Once again the recap. Wholesaling, reinstatement, you know, back on track. Third is doing a trial payment plan to a loan modification for a loan assumption. 5D loom or cash or keys. 6 is a short sale. 7 is getting a payoff or cash settlement. 8 is reselling the note. A non performing to another note investor, let them take it over. 9 is foreclosing. 10 is reselling the performing note with 12 months of payments and then 11 is if the borrow files bankruptcy can either be a loan mod BK 13 or taking the property back in a BK chapter 7. So cover all these things a lot more in depth and like I said, our three day virtual Note Buying workshop. You can get signed up today at Note buying for dummies.com we cover a lot in three days. This is just a drop in the bucket from the last three episodes. I'd love to have you take apart and join us in that class. We can't make it live. Don't worry, the replays are included and we'll kick you to the next live class that you can attend as well. But go out, take some action everybody and hopefully we'll see at the top. Bye Sam Ra.