Buying pre-selected notes to local properties in foreclosure

[Sean Dougherty]

I am an investor in distressed homes, mainly pre-foreclosures. Long story short...it has become quite a headache dealing with both the home owners through the entire short sale process and then the rehab of the homes. Which is why lately I have been researching note investing.

I have already located and and am in contact with almost all distressed home owners in my county. I have details of all of their mortgage notes, history etc. I have contacted and have good relations with all the prominent foreclosure attorneys as well.

My question is:

Is there any way I can use these tools already in the box to give myself a head start in note investing? I know standardly banks do not sell off one or two notes at a time. But if I had connections both with the property owners and the respective foreclosing attorneys and thus also had access to each individual property's assigned asset manager, could deals be made through that avenue?

Considering they have a buyer come to their doorstep with seller and foreclosing attorney on board, willing to pay for a non performing note,  could it sway lenders to sell?

Any answers/comments/advice is appreciated. 

Aloha from Hawaii

[Joel Hutchinson]

Hello @SeanDougherty

Have you considered making “subject to” offers? It sounds like you are ideally positioned with all the solid relationships you have.

If you are interested, you might want to check out BP Podcast 2 with @KarenRittenhouse. A brief description of her approach is below. 

All the best!

2. As an investor, I never went in aggressively to talk. I never went in to close a deal when I talked to sellers. I always went in to solve a problem. I always went in saying, what is it you need and how can I help you? People would tell me, this is what I’m looking for. This is my pain point. This is my issue. And I’d say, let me see if I can figure out a way to fix that for you. And then I’d get back to them. Because of course, I didn’t know anything anyway so I had to figure it all out. And I just would go back and say, I may not be your best solution but I am a solution and here’s what I can do. And if it doesn’t work for you, I just want to keep helping you. Feel free to call me, ask me questions, and I think it was kind of a mothering response that people liked and was comfortable with.

3. I would say half or less than half were desperate sellers that I bought from. But they always had an issue. They didn’t want people walking through their house. They didn’t want a ‘for sale’ sign in their yard. They wanted to know they could move when their new house was ready to move into. They needed to move quickly because they had been transferred. So many different reasons, that I would go, okay, I can do that. And they were willing to walk away from equity for that just because I made a solution. It didn’t have to be a desperate sale or a need.

4. For four years we bought almost exclusively subject to the existing financing. Over 100 ‘sub-to’ deals. That means you go in and you take over the financing that’s already on the home. A lot of people will say, well, the seller’s not going to let you take over a property and keep the mortgage in their name. But it is very legal. It’s on the hood. We would explain to people when we went in why we could pay more if we didn’t have to get our own financing and if we did take over their existing financing, and it was never a problem.

5. We have not had any issues with lenders foreclosing on ‘subject to’ deals. What we have found is, the banks do know what’s going on but they’re very grateful to have a loan that’s performing. In the beginning, it was a tremendous fear. Oh, my gosh, what happens if one does foreclose due to the ‘subject to’ mortgage? Because we’d hate to do that to the seller. Obviously, it was going to hurt the seller more than us. We did let the sellers know if this would ever happen , you would get the house back. We’ve already paid it down more and we’ve already repaired it. You’ll have an opportunity to come in and rescue your loan, but our priority was always to make their payments first. We didn’t want that to happen and it never did.

6. For someone who wants to start doing ‘subject to’ deals, first go online and read about it. Get all the information you can. Find an attorney who is comfortable with you doing that and will handle the paperwork doing that. In the beginning, that was one of my big dilemmas learning how to do it and also getting an attorney who understood it and was comfortable. In our subject-to documentation, we have two places where the seller signs saying, I understand you are not ultimately responsible to make my payments. And then our attorneys have their own paperwork that they have the sellers sign saying now you know these buyers are not ultimately responsible to make your mortgage payment. So it’s all about disclosure, disclosure, disclosure. And paperwork.

7. We do all of our closings with attorneys. We want all of our seller to be comfortable. We make sure all of our paperwork is done and approved by attorneys willing to defend it in a court of law. I can’t stress strongly enough about making sure that you do everything through an attorney and having good documentation. I’ve seen investor contracts, especially rental agreements where they very much protect the investor, not so much the tenant. And you never want to get into court with a lopsided contract. You never want to stand before a judge with something you’ve done on your own. So I think one of the biggest, best things that we do is work with attorneys and get things done right going in.

8. I've discussed a lot of our offers over the phone because I didn’t have time to run around and telling you that it was going to work. So I would explain to them, I eventually had a form that I would start with the seller’s asking price and then I could deduct prices from there. I could deduct our closing costs, repair costs, things—so that we would get to the bottom of this form and at the bottom, it would come up with the number that I was offering. I always wanted to be able to show the sellers how I came up with my offer price so they knew I wasn’t just making up a number and they weren’t confused. And then I would say, this is what I can pay if I can take over your existing financing. Let me explain what that means. Let me explain why. And then would proceed with, if I go out and get my own financing, of course, it’s going to cost me more and I can pay less. So I would show them that taking over their loan, they would get the best deal. If I had to get financing, they were going to get less. And if they wanted cash, they were going to get even less. So a lot of people like knowing that they’re getting a better price. That’s the first comfort area.