Today’s REI Classroom Lesson

Today, Scott Carson enlightens us about the 3 reasons why non-performing notes perform really well.

REI Classroom Summary

From the amount of inventory to the price, there are clear benefits to investing with non-performing notes.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Scott: Hey everybody, Scott Carson here and I am today’s guest host of the REI Classroom. Today’s subject is going to be the three reasons why non-performing notes perform better for investors.

Mike: This REI Classroom real estate lesson is sponsored by

Scott: All right everybody. Real excited about this topic. This is something that we focus on on a daily basis at is non-performing notes. A lot of real estate investors, a lot of realtors, and a lot of people looking to get into real estate investing always wonder about what’s this big, cool thing about non-performing notes? Why are notes such a niche or a hot niche topic right now? It’s because literally these three reasons.
First and foremost, inventory. Many real estate investors are doing the traditional things of going after the single borrower who’s got one property, maybe two properties, whether it’s a probate or foreclosure, or pre-foreclosures, or estate, whatever type of deal you’re going after. You’re targeting one borrower, one investor. Me, and the other note investors, we don’t target one investor, we actually flipped, done 180-degree turn and gone after the banks. So literally there are still seven million plus homes under water out there that we are targeting.
So instead of us going after one borrower, we’re going after banks that have hundreds of assets for us to take a look at. We’re seeing these deals 6 to 12 months before traditional fix and flippers, traditional REO buyers, traditional people buying distressed assets from the homeowner. All right? That’s one of the biggest first topics.
There’s so much inventory. You have the 7 million existing homes which is still down from the 15 million underwater homes in 2009 when it was at the peak. We also have this huge wave of loan modifications that are starting to hit the market now, another three to four million loan modifications that were four and five years ago that are now starting to adjust. So we are literally talking about, if you’re a note investor, you have access to potentially 10 million residential homes that you can cherry pick that are underwater where you are becoming the bank. Now that’s the first thing.
The second thing is pricing. The second reason why non-performing notes perform better for investors is pricing. Most traditional real estate investors are used to price and offer it 70% of ARV minus repairs or money costs, that’s great. We don’t ever pay $0.70 on the dollar for an asset. Okay? I take that back, we might pay occasionally, but it’s close to being an REO, but we’re going to be ahead of you guys who are out there looking at REO’s anyway, because we’re buying direct from the banks.
Usually we’re buying somewhere with a 30, 40, 50, 60, 70, some cases 80% discount off of fair market value. Why is that? Well, we’re becoming the bank, we’re taking over. Literally we’re killing the Freddie Krueger that’s killing the banks. All right? The banks don’t like to deal with distressed debt, it’s not what they were set up for, they want to deal with performing debt and they will incentivize us as note investors to take over their nightmares which gives us a lot of opportunity at that huge discounted price to turn the banks’ nightmare into a beautiful dream cash-cow, money making profit for us as investors.
Now the third strategy is exit strategies. There are so many different exit strategies as note investors whether you’re wholesaling the notes like a traditional wholesaler to other note investors. You can literally try to get the borrower to reinstate the property, try to get them to modify. You can let them do a loan assumption. You can approve a short sale. You can go ahead and foreclose, do cash for keys, deed in lieu, get a payoff loan assumption, or foreclose if you need to. There’s literally about nine different exit strategies that you have available to you as a note investor.
Now, most traditional real estate investors will have one, maybe two routes as exit strategies. A, you either repair the property and keep it as a rental, or B, turn around and sell as a REO. And that’s great, but I would rather pay less for the asset, have a bigger pool to buy in, and have multiple exit strategies that are going to put a lot of money in my pocket.
And that’s your lesson for today in the REI Classroom everybody. Scott Carson, “We Close Notes”, check it out. That’s the three reasons why non-performing notes perform better for real estate investors.

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