In my last newsletter, blog post (whatever you want to call this thing), I discussed ways that a real estate investor can acquire real estate at steep discounts by marketing to homeowners that have fallen behind on their mortgage payments and how you can find these opportunities from banks and mortgage note sellers.
However there are some great strategies for acquiring properties for pennies on the dollar by buying the mortgage note first. Especially when buying non-performing mortgage notes. Below are the two ways to take back ownership of a property when you own the mortgage note.
These are options available to any bank or mortgage lender and they are also available to you if you buy a mortgage note.
- Deed in Lieu of Foreclosure: Some homeowners facing foreclosure may voluntarily transfer the property deed to the lender to avoid further debt buildup and to save their credit from taking a massive hit. Although this can at times require some negotiations with the homeowner/borrower, as the note owner/lender you can often negotiate a “cash for keys” with your borrower that goes something like this: “Mr. Borrower if we proceed with a Deed In Lieu of Foreclosure where you deed your property back to us as your current mortgage lender, we can skip the entire foreclosure process and save your credit. Then you can have X number of weeks to move out and when you are ready to leave, as long as the property remains in good condition, we will give you $5,000 in exchange for the keys”Often, if the borrower has a lot of equity, they will not take this option, but this can be a very lucrative arrangement for the note investor who now has ownership of a property after buying a mortgage note for much, much lower than the value of the property (if you buy the note right). It also helps the borrower by providing them more time to find a new place to live, gives them some money to get settled and saves their credit. Following a Deed-in-Lieu, you now own the property and can do whatever you want with it.
- REO Acquisition: When you buy a non-performing mortgage note (or when your borrower on a note that was once performing stops paying for one reason or another) the other available outcome is to foreclose on the borrower. Although the foreclosure process in each state differs, it usually ends with the property going up for auction at the foreclosure sale. Depending on the property value, condition, location and the total balance owing on the mortgage note, there may be times when the property remains unsold at auction, and it becomes an REO property. REO stands for Real Estate Owned. It refers to a property that has been repossessed by a lender (owner of the mortgage note) after the borrower defaulted on their mortgage. At this point, you as the owner of the note that just completed the foreclosure process are the new owner of the property.
Although it is not my current strategy, (I prefer buying performing notes or non-performing notes where we can work with a willing borrower to get them paying again) many note investors pursue non-performing notes with the goal of eventually owning the property, either through a Deed-in-lieu of Foreclosure or through a foreclosure itself.
Want to learn how you can get started investing in mortgage notes? Schedule a Free Real Estate & Note Investing Strategy Session with me today!
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