Profiting from REO's & Discounted Notes

"A market is the combined behavior of thousands of people responding to information, misinformation and whim." -Kenneth Chang

I think this particular quote fits very well with the current real estate investment climate. The U.S. housing market and mortgage industry are currently undergoing tremendous changes, and these changes are the result of millions (instead of thousands) of people and businesses trying to react to information, misinformation, and whims. Understanding any market, the U.S. real estate market in particular, is not an exact science. It is impossible to make exact predictions. Despite what all of the “experts” want you to believe, no one has all of the answers.

As dedicated real estate investors, we need to do our best to decipher between the true information and the misinformation pouring out of media sources. It is our challenge to gather accurate information and discover the trends that the multitude of change is creating. In order to be successful investors during a time of such great change, we need to cultivate accurate information, avoid misinformation, and do our best to be knowledgeable and well-prepared so we can avoid acting on a whim. The changes in the real estate industry are creating trends, and the successful investors will realize these trends and capitalize while the timing is right. As the mortgage industry continues its tumultuous behavior, secondary markets are evolving. Here is one to keep an eye on.

History/Overview

REO’s
Real estate owned or REO is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction. This is common because most of the properties up for sale at these auctions are worth less than the total amount owed to the bank (negative equity): the minimum bid in most foreclosure auctions equals the outstanding loan amount, the accrued interest and any fees associated with the foreclosure sale.

After an unsuccessful auction, the bank will go through the process of trying to sell the property on its own. It will remove some of the liens and other expenses on the home and try to resell it to the public, either through future auctions or direct marketing through a realtor. REO properties may be poor shape in terms of repairs and maintenance; however, real estate investors will often go after these properties as banks are not in the business of owning homes and so, in some cases, the low price can more than compensate for the condition of the property. REO’s can be found at local auctions, through realtors, and often banks will group a number of homes together, locally or nationally, and sell an “REO pool” to high net worth investors or groups of investors. Buying in bulk can often create even deeper discounts.

Mortgage Notes
A note is a legal document that obligates a borrower to repay a loan at a specified interest rate during a specified period of time or on demand; sometimes also referred to as promissory notes or mortgages. Notes can be associated with just about anything that can be bought and sold – houses, mobile homes, land, cars, boats, condos, consumer electronics, rare books, coins, stamps, antiques, home improvements…the list is almost endless. For our purposes, we will focus on notes attached to real estate, generally referred to as mortgage notes.

A mortgage note is the promissory note associated with a mortgage loan; it is a written promise to repay a specified sum of money plus interest at a specified rate. While the mortgage itself pledges the title to real property as security for a loan, the mortgage note states the amount of debt and the rate of interest, and makes the borrower who signs the note personally responsible for repayment.

Selling notes is a regular market activity that is not new today but that has increased in this market. Securitization, or selling notes, happens for several reasons, including:
· To raise cash.
· For servicing – some individuals/companies create notes, but do not have servicing capabilities.
· Specialized servicing – some individuals/companies are only set up to service performing notes; when a note is non-performing, the note is sold to mitigate risk; there are specific companies specialized in servicing the non-performing notes, with the specific goal in curing them back to performing.
· To mitigate risk – individual/companies are comfortable with certain mix of loans on their books. When this mix is not representative in the loan portfolio, segments of the portfolio are sold to get the total back within bounds.

Notes have a FACE VALUE (the unpaid principal), an INTEREST RATE at which the note is being paid and a TERM (the amount of time left before it is paid off). Buying, selling and trading notes have become big business, and many investors are creating great wealth with this strategy. Due to the "time value" of money which assumes a dollar today is worth more than a dollar at some future time, notes are sold at discounted rates- usually at 60-75 cents on the dollar. In today’s tumultuous market, though, these discounts are even deeper! Like bonds, mortgage notes offer investors a stream of payments over a period of time. When notes are purchased at a discounted rate due to the time value of money, there is built in equity created immediately, and to improve upon this position even further, every month payments will be made to the owner of that note…creating a monthly cashflow, with no hands-on effort!

REO’s and Mortgage Notes Today
The trauma of foreclosure or impending foreclosure has hit home for nearly 1.4 million homeowners so far this year, maintaining the nearly 91% year to date increase versus the last year. That is according to the latest numbers from California-based Foreclosures.com.

Let me share some more statistics….

For the month of October, nationwide 54,418 REO filings were reported to Foreclosures.com - up nearly 24% over the 43,941 September filings. A total of 128,019 pre-foreclosure filings were reported for October - up nearly 31% over 97,984 September’s filings.

In September both nationwide REO filings (43,941 versus 55,952) and pre-foreclosures filings (97,984 versus 117,694) were down over August (16.75% and 21.47% respectively).
When you average September and October filings, you find that pre-foreclosure filings have actually leveled off (down 4%) since August (113,001 current versus 117,694 August) and REO’s have actually dropped significantly (down 12%) from the high August filings (49,179 current versus 55,952 August).

These types of statistics are the basis of the information and misinformation that we weed through each day. We also hear about fault and blame, CEOs stepping down and companies folding. Bottom line is…these are grim numbers for the hundreds of thousands of homeowners trapped by rising mortgage payments, stagnant home prices, and tightened credit markets. And it is expected to get worse before it gets better.

With that said, the impact of the sub-prime mortgage industry is unclear, and the secondary discounted notes and REO market is evolving. Typical buyers are not buying as they have in the past. The large number of foreclosure filings (i.e. REO’s) taken in conjunction with the instability in the mortgage industry leads to a situation where banks/lenders are overwhelmed with the amount of REO’s and non-performing mortgage notes (i.e. mortgages headed to foreclosure) that they must deal with. When a market goes through such sudden and drastic changes, there are always deals to be found for savvy investors. REO’s and non-performing notes are where many investors are finding great opportunities. Homes and mortgages are being sold for pennies on the dollar. Some are being sold for as low as 30 cents on the dollar, but the average for wholesalers is somewhere between 40 and 65 cents on the dollar. This means that if a home or mortgage is worth $100,000, lenders are selling them for around $50,000…clearly a good deal, even if the market has declined a bit.

Who invests in REO’s and mortgage notes and how do they do it?
REO and Mortgage Note buyers are companies or investors with the experience and capital to purchase product and manage or dispose of that product through established systems and channels. If someone is holding a private mortgage, these investors will give cash and take over receiving the monthly payments that were being paid to the previous owner. A Mortgage Note for these investors are home loans or mortgages that are secured by real estate. Mortgage notes could be anything from $10,000 to millions of dollars. Investors in REO’s purchase foreclosed homes from the bank for 40-65 cents on the dollar, and they can then rehabilate the property and sell it at market value or dispose of the property quicker by passing on savings to a local investor to rehabilitate and sell at market value. Anyone can be a mortgage note or REO buyer, but there are hurdles to overcome.

Barriers to Entry
Notes are not cheap. They cost thousands, often tens of thousands, or even millions of dollars. Most note and REO brokers, companies who sell notes and REO’s, will only offer their product in “bundles”; meaning that in order to have access to the discounts, you must purchase a large group of notes and/or REO’s. Clearly this takes a great deal of capital. Mistakes can be very costly. The problems for a newcomer are obvious. Unless you have piles of cash, how do you start? How do you become experienced without making a mistake that could cost you dearly?

PropertyVestors Approach

Finding discounted notes and REO’s can be quite labor intensive. In many cases, it may be wise to be a part of a group that purchases these products. You then have access to the knowledge of the group, you can get larger discounts because the group can buy in bulk (buying power), your investment is spread across multiple notes or REO’s (diversification), and you will have the assistance of the group to service the notes and sell the REO’s.

PropertyVestors is an international real estate investment group that offers a discounted Notes/REO Program. After researching the various ways to approach note and REO buying PropertyVestors established a partnership with a top performing purchaser and servicing arm in order to minimize risk and maximize returns for our purchasers. We investigated only companies that had been purchasing these bulk orders for over 20 years with a strong track record. Special to our relationship is the focus on curing notes; we want to be part of the sub-prime mortgage solution, and do not sell to those interested in foreclosing as a process. In addition, curing and refinancing is the way to maximize returns. So, it is a win-win proposition. Our depth of buyers and competence in this industry has given our buyers a tremendous opportunity to take advantage of today’s real estate market.

Process
1. Visit http://www.propertvestors.com/ to research our investment group further, get access to our free report “Capitalizing on Real Estate in Today’s Economy”, and join as a Member to get access to profitable opportunities.
2. Investor completes a non-disclosure, non-compete document to gain access to the details of the bulk pool.
3. Once the pool has been reviewed and approved, proof of funds and a letter of intent is signed by the investor.
4. Investor is notified of the next pool in their price range.
5. Investor opens escrow account. (No money is taken from escrow until settlement. If settlement does not occur, escrow is returned)
6. Investor receives pool information (mortgage notes, deeds, etc.) and conducts their own due diligence.
7. Contracts executed, settlement completed and funding occurs.

Build a Discounted Note and REO Fortune with Smart Strategies from PropertyVestors
PropertyVestors is an investment group of CEOs, entrepreneurs and savvy real estate investors that are taking active steps to maximize their profits, while minimizing their risk by creating a diversified real estate portfolio. Investors are able to easily apply diversity in real estate geographically and by asset class through its various investment strategies and types of inventory.

Furthermore, PropertyVestors enables investors to capitalize on different market conditions. The strategies include conservative, private lending options; moderate with preconstruction syndication; and aggressive with partner deals in emerging markets, coastal regions and waterfront properties.
With PropertyVestors, you can take advantage of a new investment model and innovative real estate strategies. PropertyVestors’ real estate strategies and ongoing education can position you build your net wealth, while minimizing risk.

For general information about PropertyVestors or its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.

About The Author
Sarah Barry is the founder of PropertyVestors (http://www.propertyvestors.com/). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk. Access to PropertyVestors' three smart real estate strategies enables investors to achieve double to triple digit returns on their real estate investments.