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Short Papering the Short Sale
Buying the Note From The Bank
Many individual are very familiar with what is currently going on in the current real estate market with the number of foreclosures and home owners in trouble. Financial hiccups can happen to anyone and unfortunately as a society; the United States is a highly UN-educated group of people when it comes to finances. As an investor, having the knowledge and education on what options are available to homeowners is only useful if you actually put it to work. While many investors, realtors, and homeowners are familiar with a short sale transaction where the property is sold at a loss the bank with the institution taking a loss on the underlying note and or asset, most people don’t realize that banks have been doing something very similar since the beginning of banking.
What I’m talking about is also called a short paper transaction or buying the note from the lender. Banks have been selling their notes to other banks. If you have ever bought a house and closed with one specific lender, I’m willing to bet that you at some point received a letter stating that your mortgage company has changed.
The great thing is that this can also take place on an individual basis as well where an individual like Nancy Notebuyer, calls up Wells Fargo and buys a specific mortgage. Nancy at that point then becomes the actual bank and holds the mortgage or “paper”. Payments from the home owner are then made to Nancy and she has all the rights that the bank had. This can be very attractive in times where the homeowner starts to default on their mortgage. Nancy could modify the terms of the loan (change interest rate, defer payments, reduce principle, or even perform a friendly foreclosure or accept a deed in lieu of foreclosure where the homeowner just hands over the keys and walks away).
What’s extremely attractive to an investor is that there is very little paperwork involved with buying the note, unlike short sales! Where short sales can drag on for months and sometimes years (I know of one situation that took 60 months to close), the difficult thing is just finding the right department inside of the bank to have them approve the sale of a single note.
This department is often referred to as the secondary marketing manager, warehouse line manager, or non-performing note department. This department is almost always separate from the loss mitigation department and short sale department and can often be in different states or cities than the traditional customer service and servicing departments. Tracking down the right department can often take numerous phone calls and transfers. But once you get a hold of the right person, all that is usually needed is an official offer on the note, proof of funds, and a quick closing date.
While the loss mitigation office of the bank is constantly trying to collect payments to get their loans back in a performing status, the secondary marketing department is trying to get rid of bad debt so that it does not affect their ability to lend as a bank or institution. Some banks only prefer to sell notes off in bundles or “pools”. If this is the case and you have one specific note that you are talking about, the institution will often pull similar notes into the pool by geographic, type, loan size, and property type to make the pool that much more attractive and saleable.
So what does this mean to you as an investor or a home owner in this situation? As an investor, you will need a source of cash and have your due diligence done on a property and be able to close quickly. As a homeowner, you have some options as well.
I always suggest to the home owner that they need to have the property listed for sale with an experienced real estate agent! Honestly, your agents are the most important part of a real estate team and if you as an investor or home owner don’t take care of your agents or go behind their back, you deserve everything bad that happens to you! Anyway, have your agent list the property for short sale and start actively marketing the property and working with loss mitigation to get the property discounted. The home owner needs to stop making payment on the note for 60-90 days for a short paper transaction to work because the bank will not usually sell off a performing asset. Once the note becomes defaulted, the bank will then look to sell off the note at substantial discounts. The further the note goes into default, the bigger the discount for the investor. The key is having the agent keep the property out of foreclosure by working the short sale side as this is critical in states like Texas where there is such a short foreclosure timeline (21 to 51 days).
Let me give you a couple examples of what can happen. You have Amber Agent, Harry Homeowner, Bob Buyer, and Nancy Notebuyer. Harry comes to Amber to help him sell his home that he is behind payments on, upside down on just needs to walk away. Amber starts to negotiate a short sale but gives Nancy Notebuyer a call because she knows that Nancy can buy the note from the bank.
While Nancy is calling the bank, Bob shows up as a potential buyer for the home so he submits an offer to Amber to buy the home on a short sale. Let’s say that Harry’s home was originally worth $500,000 (which is what he owes) but it is now only worth $400,000, so he is upside down on his payments. Bob has made an offer to buy the property with an offer of $350,000, which is what he considers a fair price.
While Amber is hammering the bank to get them to reduce what they will accept and keep the property off of the foreclosure steps, Nancy is getting the bank to accept her offer of 50% of the UNPAID BALANCE of the note. In this case she would be offering $250,000 on the $500,000 note. Let’s say the bank accepts Nancy’s offer. Nancy wires the money to the bank, and the bank assigns the note and collateral to Nancy. Nancy has just become the bank!
Harry Homeowner and Amber Agent are notified that their mortgage has been sold to another lender. Nancy Notebuyer can do a multitude of things at this point. She can approve the existing short sale offer of $350,000 from Bob Buyer and gross a quick $100,000, paying closing costs, realtor’s commission and anything else the bank would OR would not normally pay. She could even give some money back to Harry Homeowner for move out expenses or part of the profit if they are friends.
If the offer from Bob were to fall out or not be able to close, Nancy could either take the property back in a friendly foreclosure where Harry just turns over the keys and walks away after deeding the property back to Nancy. Nancy would then be responsible for listing the property for sale and trying to sell it above what she paid for the note to make a profit. She would be basically selling her own REO or Real Estate Owned property.
If Harry was suddenly able to afford the home again, Nancy could restructure the loan or do a loan modification on the property, take what was owed in back payments and modify the loan. Once Harry started to pay on time for 12 to 24 months, he could go get a refinance on the property. Hopefully, values would have gone back up again at that point so that he could refinance the full note of $500,000, but if they didn’t Nancy could still approve a refinance for $350,000 or whatever the value was as long as it was still profitable and greater than what she initially paid to purchase the note (in this case $250,000).
As you can see, there are several ways to work a short paper or note purchasing transaction. The easy part is AFTER getting the bank to say yes to your offer. For an ideal discount for the investor to buy the note, the mortgage needs to be at least 60-90 days late, otherwise the lender will still want premium pricing for the note. In markets like Texas and California, banks will go as low as around 60-70% based on the market being better than in places like Florida (20-40%) and Michigan (10%). Obviously, there is some negotiation with the bank and the more you buy, the bigger the discount. These percentages are just based on some previous negotiations but can change as the market change.
We are a nationwide buyer of nonperforming notes (defaulted loans), both residential & commercial. Increase your profits in a 1/3 of the time, & stop messing with short sales!