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What Motivates a Bank to Sell Their Notes?
The Numbers Behind the Numbers
Many investor’s that we deal with on a daily basis are used to dealing with traditional transactions where they make an offer on a distressed property and then buy it and then sell the property for a profit from either rehabbing it or buying it distressed enough. A lot of investors have a hard time grasping the fact that banks would sell their defaulted and distressed notes at a big enough discount to make it worth the investors time to buy the note and still come out ahead.
Most people don’t realize that banks were never set up to handle the huge amount of foreclosures that they are facing. Being a previous vice president on the retail side for one of the largest banks in the United States, they teach you that banks make money on deposits, investments, and most of all, loans.
Banks leverage out their deposits and will make loans 8-10 times of their deposit. So a consumer’s $100,000 deposit allows a bank to lend that amount up to $1 million in loans. The payments and interest that the bank receives from that loan far exceeds the miniscule percentage that they pay back to their customers on checking, savings, or certificates of deposit (or as I call them certificates of disappointments) accounts. So you deposit $100k and the bank pays you ½% a year on that, or $500. The bank is lending that out at $1 million in loans at 5%, or $50,000. That’s a $49,500 difference!
What most people don’t realize is that the bank recycles these loans by packaging and then reselling them and recycling their money 8-10 times as well. So if one $100,000 loan goes bad, that keeps the bank from lending out $1M in loans.
When you consider that defaulted loans also lose their value at a dramatic pace as well on the open market, you understand why banks are constantly calling lenders who are late on their payments. When it comes to foreclosing on a property and then managing the non-performing asset that is no longer bringing in revenue, along with it costing banks 3-4 times what it would cost us as investors in rehab, property management, and holding costs, you realize why banks will work with individuals to try and take advantage of a short sale, loan modification, or loan deferment. Unfortunately, most borrowers fail to communicate with the banks to take advantage of the programs and time frames that can benefit them to stay in their homes.
When you ad in timely foreclosure time frames such as 16 months in Florida to foreclose on a home, you also realize why banks would be glad to sell their notes at a substantial discount, making it a huge opportunity for real estate investors like you and me. And as investors, we can offer home owners opportunities that the lenders can’t, making it a win for all parties involved.
There comes a point that once the banks foreclose on a home, that they realize that they’ve committed to the losses and are at the point of trying to get as much for their REO as possible to try and make up for the losses on the lending side. While it does cost them to hold properties and get rid of them, it’s exponentially expensive on the commercial side when compared to the residential side as property management costs and a reduced “pool” of buyers versus the residential side and the tools available to the banks to move their properties (Internet, Multiple Listing Service, and agents).
Several sources for note sales have fallen away in the last year that banks no longer have at their disposal. With the federal government no longer buying notes, that has lead to a huge void for banks to move their NPN’s and has lead to an increased reliance on note investors to cash in on the bank’s nightmare. A friend once told me,”you will make the most amount of money by living in someone’s nightmare.” Well ladies and gentlemen, buying NPN’s from banks is killing the lender’s proverbial monster under the bed. And as this market continues to evolve, there will be an ever increasing wave of opportunity for investors like you and me.