Buying defaulted mortgage notes directly from banks

[Sam Chainani]

I came across following idea from internet about buying defaulted mortgage notes directly from banks. However, I need some more help. Please help. Thanks, Sam

Contact homeowner in pre-foreclosure. When you first approach the homeowners about helping them out of their property, you'll want to let them know that you aren't going to save their mortgage you're just trying to give them a clean escape from having that defaulted mortgage on their credit. After you've spoken with the homeowner and they've agreed to sell to you, have the homeowner under contract to sell their home to you. This is even though you are going to buy the note on their mortgage. You'll just have them sign the contract so they are locked in with you, and the homeowner doesn't turn around to try and sell the house to someone else while you are working with the bank. Once, you buy the note the contract becomes irrelevant.

Go into the bank and ask them if they would consider a Short Sale to you. Usually they'll say yes and begin to give you all kinds of information to turn in for final approval on a short sale. Then, you can come up with, 'Hey, wouldn't it just be easier if I bought the note from you?'

They'll usually jump on your suggestion because it is so much easier to sell the note than get the process of a short sale through their system.

By purchasing the note to the property you basically become the bank. You buy the right to collect the remaining amount left on the defaulted mortgage.

Once you have the mortgage note you have a few options to move forward. You as the mortgage note owner could continue on with the foreclosure, get a 'Deed in Lieu of Foreclosure' or modify the loan.

MY QUESTION:

1. WHAT SELL PRICE SHOULD BE INDICATED ON PURCHASE CONTRACT?
2. WHAT OTHER DOCUMENTS SHOULD I ASK THE HOMEOWNER TO SIGN?

[Dion DePaoli]

This is a viable idea and is no where close to new. That said, it has barriers to completion.

The first and foremost was mentioned. The recovery value of the asset. When asking to purchase a note with a discount, typically that discount is less than what the deed to the real property would sell for. Banks have cheap enough money and most have stabilized their reserves to be able to handle going to open market and getting a reasonable market offer.

So in this situation, where you have a relation with the borrower/home owner it is likely safe to assume if you get too greedy and ask for a heavy discount there will be no deal. Instead, if you you can "pay up" (pay more) for the asset because you have a predetermined disposition then you should pass that capacity to pay to the bank to get the deal done. There is an art to drawing out the right price and not giving away all your profit. Always keep in mind the alternative, the bank has no duty to sell for less than what the open market will bare for the asset. So as an example, if the hose sells for 90% of market value then it is doubtful you will get an added 20% on the table with your discount. Slim that margin up and make a solid offer to the bank and use volume not margin as your driver. Likely leads to more success.

The purchase and sale contract for purchasing a note and security instrument (mortgage/deed of trust) is not the same as real property. I have never heard of any NAR agreement for agents to be involved with notes, that is far from the truth. They do not understand the paperwork and many of them are even good at selling real estate. Most real estate brokers/agents involved with note sales are clueless and screw it up. Get a real estate attorney with some experience in the matter and have them use a PSA and back you up legally, perhaps even help with some due diligence. BTW, deal with banks directly ALL THE TIME.

The monster behind the curtain here is you sort of implied you made a deal with the borrower, which you then did not need to follow through with. If that is not what was meant, sorry for the misunderstanding. If that is what was meant, spend a couple minuets and think about putting some ethics into your work flow.

Upon the ownership of the note, you could offer DIL with no deficiency to the borrower to leave. All you would have to do is satisfy the note. Certainly a viable option. Additionally, as the note own you could approve a potential short sale on the table, whether yours or not. If the note is purchased properly, this can still be your gain.

Other documents for the borrower to sign? For what? You shouldn't be creating contracts supposing you are the mortgagee until you are the mortgagee. That could be dangerous, IMO. So, if you want to put the real property under contract subject to short sale approval, then I guess you can figure that paperwork out. The rest of the paperwork is with the bank or mortgagee and like I said, get an attorney who knows these transactions.

Lastly, the concept of ownership by the bank is a large misnomer. If the bank owns the loan, well...they own the loan. What is being confused in there is some of the lost note affirmative defenses that have come up in foreclosure suits along with a gross misunderstanding of the ramifications of the "Robo-Signing" of 2010. If the institution is a bank, like a small community bank, it is likely a portfolio loan and they own it and always have. If the loan is conventional, it is likely serviced by a mortgage servicer and you will have difficulty getting in contact with the actual investor who owns the loan. There is a chance that investor is a securitized trust which will put your chances closer to zero of getting something done. If I were you and knew something about this industry, I would go after the small community banks. Also, go back to my point of not being too greedy. Figure out a method and process to pay as much as you can while making a good profit for your efforts and risk. There you will find success.