While investing in Non-Performing Real Estate Notes, or NPNs for short, can be a great way to earn above-average guaranteed returns compared to the roller coaster stock market or 1% on a CD. Although like all investments, there is no guarantee that you will make money. In reality, if you are not careful, you may lose some or all of your investment.
We have put together a list of all the ways we can tell you can lose money in the Distressed Asset Arena.
Ten Ways to Lose Money on Real Estate Notes:
1. Paying too much
We believe the #1 reason you can lose money on NPN is paying too much for the note by not researching the actual as-is value of the property compared to comparable move-in ready prices, or offsets, and adjusting your price accordingly. consequence. There’s a saying; There is no bad note, just paying too much for a note.
Typically, the property is not move-in ready, so it will be priced lower, and if you don’t account for it, you’ll be forced to make a lot of profit when you go to sell it. The solution would be to see if putting $3-10,000 in light repairs would give you a raise of $10-20,000.
Other options are to rent it out to get cash flow while hopefully appreciating. Then, in a few years, it can be sold at a higher price. Either sell it with owner financing to people with lower credit scores for a higher price, or sell that “loaded rent” with the tenant to an investor like a cash flow machine.
2. Wrong location
When buying an NPN in a rural, run-down, or crime-ridden location, even if it’s in excellent condition, you’ll have a harder time selling it when you need it, and you may have to drop the price to get rid of it. No family wants to live in the middle of nowhere, in a war zone, or without basic necessities like grocery stores, gas stations, or general merchandise stores.
3. Not visiting the property
Imagine if you buy a ticket and find out that the house is no longer there! It could have caught fire, or the city could have condemned it. This will result in the loss of most of your money, and the only thing you can do is sell the land for a much lower price than what you paid. At least it won’t be a total loss, the land does have value. It just depends on whether a builder will find the location good enough to invest in.
Or if the property is damaged, knowing the extent of the damage before you pay is invaluable in saving you a lot of money. Sometimes it’s better to get out of a bad deal than to risk the investment if it doesn’t make sense.
4. Not confirming your link status
They tell you that you are buying a higher or first lien on a house, then find out that it is actually a second or lower lien. This could be due to the seller’s incompetence or negligence in knowing what they were selling, or a lesser lien could have foreclosed on the mortgage and, if left unchallenged, is now the master lien holder and you are now a minor. You still have the right to claim the debt, although now you are not the first in line.
5. Do not look for demands or links
One of the first things we do after narrowing down a list of NPNs or REOs (real estate or owner holds title) that we are considering buying, and before paying for it, is to run an O&E (occupancy and liens) report that shows how many liabilities are linked to this property.
The owner may have been sued in the past, or owed federal, state, or county taxes, and a lien on the property. This would result in him now being responsible for paying that if he gets them to sign a deed-in-lieu of foreclosure. Only a foreclosure on the property would possibly remove most or all of the liens or liens on it, considering that IRS liens have a 1 year redemption period in which they can pay off the mortgage if they want, even though they really don’t want the home. .
6. Not checking taxes
There are a myriad of taxes, penalties, and fines that can be imposed on a property at all levels of the governmental hierarchy. From city fines for not mowing the lawn or leaving trash, there are a number of agencies that can penalize you, from water, power, garbage, and schools. You also have county property taxes and the fines you get for not paying them. If you ignore them, the county can sell the tax lien to someone else and, after a redemption period of usually one year, you could lose the property.
The state can also put up a link for income taxes, child support, and any number of issues. Then there is the federal government that can put a lien on the property because you did not pay your income tax. We just purchased a promissory note that had a total of $67,000 in taxes, penalties, liens, and penalties. We intend to foreclose on them, and possibly sell the house back to the owner.
7. Not verifying bankruptcy
Bankruptcy is not the end of the world for the note investor; they are often a good thing. A Chapter 7 will eliminate all unsecured debts like credit cards, etc., leaving more funds each month to pay for your house that would have gone elsewhere.
A Chapter 13 is a payment plan, and house payments are usually part of the payment plan. It takes 5 years to complete, and many people don’t complete it, leaving them still in debt.
If you have a smaller lien and no principal, you can generally lose your entire investment if the lien is removed in bankruptcy. They still owe the debt, even though it is not secured, and you can get a judgment against them that will be in your favor. If they tried to buy another house or because in the future, that debt would still be there, and they would have to work something out with you in order for the court to mark it as paid in full.
8. Land Leases
Failing to verify land leases means you could lose your entire investment when the lease expires, under the surrender clause. It is not your land, and if the owner wants to do something else with it, well, there is nothing you can do. Condos and townhomes can be considered a form of land lease in the sense that you do not own the land, only the building.
9. Buy Joker Brokers with Daisy Chains
We have seen people offer to sell notes that are number 5 or 6 in a chain of what we call “Joker Brokers”, and our policy is not to avoid them for many reasons, #1, they don’t own the note. , and not dealing with the owner is asking for trouble. #2 is that they usually get it from someone else. And then that person will most likely get it from somewhere else, and so on, and this can go on for a bit, with each link in the “daisy chain” adding a cost to the purchase price.
10. Buying from people who will rip you off.
Unfortunately, there are people who will rip you off in this business, and some still call the ticket business the “Wild West.” A dishonest employee may convince you that he owns the note and send you the money from him. To prevent this, the use of an escrow to keep funds safe, combined with a document clearance service from a document custodian, ensures that you “sign” that the document’s guarantee or file identifies the seller of the note/mortgage really is the owner, and they are not trying to rip you off. Then the escrow can be released, that is the only way to prevent this fraud.
Here are ten different ways that we have seen that you can lose money in the Delinquent Real Estate Notes space.