Are They Really That Unreliable?

By Eddie Speed, Editor, REal Income Alert

Last Friday I asked you the question: Would you rather be a landlord or the bank?

Another way to ask it is this: Do you want to make money in real estate the easy way or the hard way?

The hard way is to buy a fixer-upper property, spend three stressful months making it good enough to sell for a profit, and then actually getting it sold. Or you could rent it out, and then you’re responsible for managing tenants – some good, more bad – when you can find them and paying for endless repairs and maintenance.

The easy way is to become the bank instead of the landlord, which you can do by becoming a note buyer.

Remember, a note is that piece of paper you sign, promising to repay the bank that loaned the money in the first place. That note is secured by a mortgage or deed of trust on the property. And there are an estimated 10 million non-performing notes (i.e. people have defaulted on their loan) and several million re-performing notes (i.e. they defaulted but are paying something again) on the market right now.

Now, my 30-years’ experience in this rodeo has taught me that one of the first questions to pop into your head is this: “But if people have defaulted on their mortgage, why would I want to buy that note? They’ve already proved they’re unreliable…”

Let me tell you something, that’s a perfectly natural question to ask. I hear it all the time. And the answer is quite simple: What you plan to do with that note — which is something you decide before making the purchase — is more important than the borrower’s reliability.

In other words, your exit strategy is vital to your successes in the business.

An example will help illustrate this point nicely…

Let’s say John Smith has defaulted on his mortgage loan and through a process of banks bundling and selling their loans to hedge funds, who then unbundled them and made them available to us, we now have the opportunity to buy that note.

Once we own that note, it allows us to make several choices. We could decide to approach John to learnrn more about his circumstances — maybe he lost his job, but is working again… or he was injured at work and is now on disability… or a family member became gravely ill and hospital bills have literally broken his bank — and see if making repayment arrangement might get John paying again. You as his banker would help him with a loan modification. In this instance, that would set up a nice stream of income for you. You now own a re-performing loan.

Or John may be unable to start paying again, in which case you could decide to continue with the foreclosure proceedings and acquire the house at a nice discount. At which point you could flip it or rent it out. This will give you either a nice lump sum, including your hefty profits, or that all-important income stream.

Ultimately, it just depends on what path to the profits you’re prepared to take. That’s the great thing about this business. You’re in control.