12 ways to profit from distressed real estate bonds

Non-performing notes (NPNs) are a great way to invest in real estate without getting dirty or dealing with toilets, termites, or tenants. It involves buying the defaulted mortgage and promissory note from a bank, hedge fund, or its current owner. Now you are the bank and no one ever calls the bank when the toilet is clogged so you can have a good night’s sleep and a relaxing weekend.

The promissory note, or note for short, is a secured debt attached to the mortgage on the home. Depending on the state, the mortgage is sometimes called a deed of trust, deed of deed, or deed of land, although they are all instruments used to purchase a home. Once the promissory note is paid off, the mortgage and promissory note are marked as paid and the owner has full title to the property.

However, life throws us a lot of troubles, and for some reason someone stops paying the slip. They could lose their job, their spouse, or unfortunately their limbs, and they don’t currently have the money to make the payments.

When this happens, the banks mostly don’t care and want their money overdue now! They’re not that good at getting them to pay back no matter how hard they try, as you can’t squeeze blood out of a stone. They don’t want the property back either. If they can’t get the homeowner to pay, they want to get that bad debt off their books. They sell them in bulk by the truckload to stock or hedge funds, which they then resell to investors by the case or bottle.

These distressed and secured banknotes are available for pennies on the dollar. Ideally, the goal would be to try to get them to pay back. Getting them to repay is goal #1, although it doesn’t always work that way, so here’s a list of 12 exit strategies to take advantage of as investors.

Now that you own the note and you are the bank, you are free to do whatever you want and if you are creative you can think of many ways to get out.

Here are 12 ways to profit from distressed real estate bonds:

1. Refund or change of grade

The #1 goal is to help the homeowner stay in their home and since the new owner paid very little for it compared to the value of the property they can forgive some of the overdue amounts and still make a nice profit only if the homeowner wants to stay. You can lower the unpaid balance, the payments, the interest, or any combination of the three. After 6-12 trial payments to prove good faith, we can modify the loan with any term you want.

2. Acceptance of the note by someone else

Since we own the note, we can find a family member or friend of the homeowner who wants to move in and get them to pay back the monthly payments. If they continue to pay, there is no need to change the terms if this is acceptable to both parties.

3. Resell the note for a profit

Many people look for NPNs, and they can be quickly resold to another investor at a higher price. Sometimes it makes sense to get a small amount upfront rather than spend the time and money on a bill that’s a little too hairy, or you need the money fast.

4. Short Selling

If the homeowner has equity, a short sale is a great way to let them out and get their equity out. It requires our blessings as mortgage holders and a real estate agent to list it on the MLS. It’s a win-win situation for both sides.

5. Deed in lieu of enforcement

If the person does not want to stay, the next resort would be to ask them to sign the deed instead of a foreclosure or DIL to you. Often they do this when they are upside down and just don’t want to have a headache anymore. It allows them to “save face,” exit the business with dignity, and we will not pursue them for amounts owed in excess of the sale price, nor will we file a 1099 with the IRS.

6. Cash for keys

Sometimes they want to leave and have equity or are just stubborn. At this point we offer them cash to leave and sign the deed to us. We usually give them a small amount to show good faith and give the rest after they leave the place cleaned and undamaged. The amount can vary from $500 to $100,000 or more, depending on whether it’s a shotgun shack in the Ozarks or a $3 million condo in Manhattan.

We saw a notice for one such condo and the person living in it was a retired teacher with rent control whose monthly payments were less than the taxes and HOA fees and they didn’t feel like moving. The bill was listed for $1.5 million, so even $500,000 in cash for keys would have been a good deal to make a $1 million profit!

7. Enforcement

Isolation is our last resort when all else fails. In the case of vacant properties, we always start with foreclosure immediately. If the homeowner is still there and refuses to work with us, we’ll close as well. Depending on the federal state, this takes between 2 months and 4-5 years. We will also pursue a deficiency judgment for any outstanding balance owed to us on the price we receive for the sale of the property if we have the property and if they are really idiots we may file a 1099 with the IRS for that amount.

The last three exits above are the starting point to gain ownership of the property and also have multiple exits depending on how creative you want to be.

8. Sell as is

You can then simply sell the property as is to a rehabber or tradesman, alone or with an agent. Advertising on Craigslist or at a local Meet Up is a great way to sell this.

9. Fix and flip

In this case, you’re like a traditional rehabber; They maintain the property, repair it and sell it move-in-ready to a homeowner or investor for more than current condition.

10. Repair & Rental

You can do inexpensive rehab using lower-quality rental paint, carpet, and tile if there is a shortage of rental housing in the area. Although now you are a landlord and you have to take care of toilets, tenants, termites, roof, hot water and all the other issues since you own the house.

11. Fix and sell

This is a great way to create your own paper. They sell the rehabilitated property to a homeowner, either as is or in a solid condition, usually at a higher price than when it was sold. Since you are the owner, you can create a note from scratch and create a mortgage, land or deed agreement with terms that the homeowner can afford and collect the payments just like the bank does for 20-30 years.

12. Repair, rent and sell to an investor

You can sell a “loaded” rental to an investor as a turnkey investment, usually at a higher price than a standard fix & flip. One method is to go 25% to 50% down and write a seller’s return slip, which uses the rents to pay the balance, with a monthly payment that is less than the rent, leaving the investor each month receives some cash flow with the difference. In this way, the tenant pays a large part of the cost of the property.

With so many ways to profit from a defaulted real estate bond, it’s hard to lose money unless you overpay for the bond. There are no bad grades, only overpayment can get you in trouble.