Buy defaulted note instead of short sale?

[Michelle Kasper]

Hi everyone, I have been focusing on flipping short sales for the past couple of years. I recently came across an investor that was buying the note instead of doing the short sale to get around seasoning issues. I just wanted to see if any of you are using this method right now and if in fact it is still a viable way to get deals done considering all the changes that the banks are making.

I would really appreciate any feedback that you might have.

Have a great weekend!

[Bill Gulley]

Hi Sam, this is usually in a pre-foreclosure situation. By pre-foreclosure I'm talking about under performing notes, slow pays as they are called. The borrower is having difficulty, but they may not be in a situation where the lender is about to lower the hammer, but it could be, even after filing the les pendis for foreclosure. There is alot of collection activity on these slow pay loans. They are time and labor intensive for the lender, a real pain in the tail. The loan officer, instead of spending his time dealing with excuses would like to see that borrower go someplace else and be a problem elsewhere. Knowing these loan officers or bankers is a great benefit. Since the loan has not been called due (yet) the loan officer, in the course of conversation they may talk to the borrower about thier options saying; you can get a second job, you can sell the house or maybe you can refinance. The loan officer then might say something like, I know of an investor who works with people in your situation, I'm not saying he can help you, but you could give him a call and see what he could do for you! Now the borrower calls me. I see what the problem is and what kind of deal can be made, if any. I can do many things, but let's say the owner and I reach an agreement, but the loan must be brought current or under my control. I get an agreement signed with the owner as to what our deal is and get an authroization for the bank to talk to me about the loan. Without the authorization, the bank can not say anything to me, it's an active loan. Further, the bank CAN NOT SELL that loan to me without borrower CONSENT! So, I also have a letter signed by the borrower requesting that the loan be sold to me. (Now if the loan were in default and a notice to the borrower had been sent out as required by law, maybe thirty days prior saying that they wer going to dispose of the obligation, say by auction or under a public sale, then perhaps consent would not be required, if the bank itself goes into receivership of FDIC, the government has the right to sell off any and all assets of the bank to the public as it sees fit) But, in these cases, a bank that sells a note without consent would be open to liability. Now, with the letter in hand I then see what I can buy the note for. The bank can sell the loan for less than the par value or the outstanding balance, if they do such discount would be a profit to me. After I have the note, I can modify the loan or do anything as the holder of the note and if it is in defaut, I can take it to foreclosure as well. The owner may give me a quit claim deed as a deed-in-lieu-of-foreclosure. If so, I have now acquired the property for the value I purchased the discounted note for. Since I had to do all that work and modify the note and it allows for costs of collection, any fees I charge for acquiring the note may be added to the note amount. If I do work on the property or what ever I work out with the owner, I could also charge amounts for that work and advance costs to the owner by making a new loan or adding to the existing loan with a modification of the note and deed of trust. Now, when the property is sold, by the borrower for example, title is transferred as customary with my loan being paid off. There is no seasoning requirement here. Let's say I take the property with the Deed in lieu, while I own the property, with lenders seeing this as a forgiveness of debt will not require any seasoning to a new buyer. Seasoning requirements don't apply to note holders taking title to the property.
Purchasing a note is not a real estate transaction, there is no HUD-1. Notes are acquired by assignment and endorsement to the new holder and the assignment is filed for record. Lender's title coverage on the note goes with the note as well. Also, if the lender has made demand to payoff the note, such request to sell the note is a means to do so and the lender really has no choice, but they could require the full amounts outstanding be paid as if it were a sale of the property. It's alot easier than doing a short sale and you can provide the same justification to the bank in a note purchase that you would in a short sale if such efforts justify getting a better deal on the note. While I have not used transactional funding for this type of transaction, I don't know if such funds would be provided by those lenders, but they could be used. You'll need certified funds for the note purchase and since all you need to do is bascially show up with certified funds and no closing agent is involved, the bank could care less what your source of funds is, so they may not even ask for proof of funds, but they could, just to see if they were wasting thier time with you. It's easier than a real estate purchase! Hope you can use this, if you have any questions, just drop me a line. Bill