There is a reason real estate investors can make money by picking up cheap defaulted property from the banks.  Banks need to get rid of those foreclosure properties.

You may think that negotiating with banks in order to get them to give you a discount on their property is practically impossible!  It is possible and real estate investment deals go through with the bank every day.  Here’s why.

Why You can Get Discounts on Default Properties
Banks are rated in their ability to work out deals with homeowner in default.  That means they are rated for how much cash they hold in reserve to cover each mortgage should it default and how well they work with the homeowner in order to keep a property from foreclosing.  Some banks may hold as much as 8 times the default mortgage in cash reserve, which for a standard $100,000 mortgage is as much as $800,000.  They are required by law to cover that mortgage in case it goes sour. The banks can’t use this money, invest this money and they certainly can’t use the property.  It just sits there tied up for as long as that mortgage is in their books.

So a bank will accept a short sale on a property or a mortgage note purchase primarily because of the reserves they are required to set aside.  They want that money freed up so they can invest that reserve money and make profits. 

Your best deals come from the bank right before the end of their fiscal year or right before their auditing. 

How eager the Banks are to get rid of Default Properties!
A particular real estate investor was interested in a small home in default.  The investor began discussions with the bank that held the homeowner’s mortgage to see if they could negotiate a deal.  He was holding out for a sale price of $37,500 on this property and he wanted to make the sale as a note purchase.  The bank was being difficult.  They didn’t want to sell the property that low and they wanted a short sale deal on this property.  The deal didn’t work out all three parties went their separate ways.

About 6 months later the bank calls the real estate investor back up to see if he is still interested in buying the property.  They were willing to let him have his previous price of $37,500 and let him have the property mortgage through a note purchase.  In fact the bank needed to do a note purchase. 

They had foreclosed on the homeowner during those 6 months, but neglected to show up at the sheriff’s sale.  This naturally messed up their foreclosure. 

The only way they could sell the property was by a note purchase.  There may have been a lot of investors interested in this property, but because the investor had been holding out for a note purchase six months prior the bank remembered him and called him up to see if he was still interested in investing that property.  Even better the investor saw what a pinch the bank was in and managed to negotiate an even lower sale price on the note purchase of $30,000.

Banks are not in the real estate business, they are in the money lending business.  The only use foreclosure as a last resort to recover some of their money.  This process takes a long time though and it’s messy.  Banks are much more willing to sell the property, work with the homeowner or take discounted short sales and note purchase deals to recover their loan.

When working with a bank on a short sale you may find that the bank is insisting on the right to file for a deficiency judgment against the homeowner for the write-off amount.  However, it is possible to stop the banks from filing a deficiency judgment!

The homeowner can end up in trouble even when you work with them to purchase that foreclosure property.  There are many steps to the arrangement of a real estate investment deal, so it’s easy to forget a few little details, such as the deficiency judgment!

Lots of times in a short sale, the bank will agree to your offer, saying, ‘alright, we’ll take your deal and sell you the property for $60,000, but we’re still going to get a judgment against the homeowner for the remaining mortgage debt.”  This debt on a mortgage of say $100,000 can be $40,000 that the homeowner will still be responsible for in the face of a court ordered deficiency judgment. 

A deficiency judgment basically says that the homeowner is still responsible for the remainder of a mortgage to the bank, when that bank sells the property for less than the mortgage.  Banks are required by law to either get a deficiency judgment on the property or send the homeowner a 1099 Form showing the bank’s write-off of $40,000 as income for the homeowner.  There are ways to deal with the 1099 Form so that the homeowners on the foreclosure property don’t have to pay taxes on that ‘income’.  However, a deficiency judgment can attach itself to the homeowner’s new property mortgage if they get another home and can remain with the homeowners for up to 2 years. 

It’s very important to negotiate with the banks to also keep them from filing that deficiency judgment when the property sale goes through.  Sometimes you’ll come across a bank that just insists on filing for that deficiency judgment.  They may have their reasons, but it is a big problem for your homeowners and your deal. 

Stop the Deficiency Judgment by Becoming the Bank
You can avoid this deficiency judgment for the homeowners by buying the mortgage note from the bank instead of the property.  This way you become the bank because you hold the mortgage.  Changing the short sale deal to a note purchase is a simple matter and all you need to do is get the bank’s agreement on the deal.

If you are the bank, you have the right to decide if you will be sending the homeowners a 1099 Form or if you will be getting a deficiency judgment against them.  Which way do you think you’ll go?

Of course, you’ll opt to send the homeowners a 1099 form instead of getting the deficiency judgment. A big part of foreclosure investing means working with the homeowners and helping them out of a problem mortgage.  Plus, it’s a lot less work to send the 1099 Form.

Property investing sounds like a great idea because you can make large returns on your money.  However, you can make the same profits with less effort when you buy mortgage notes instead.

Everyone thinks that buying mortgages is some complicated process reserved for the professional property investors that have been in the business for some 30 odd years.  However, the process of buying a mortgage note is easy and a great way to make profits.  You have the chance to get a great return on your investment without involving yourself in a lot of maintenance and effort with the bank. 

The great thing with owning mortgage notes is that you have all of the security of the real estate because if the homeowner doesn’t pay you, you can still foreclose and take the house back.  So, you’ll just end up back in the real estate game with that particular piece of property, but at least you got some payments on the property over the years.  On the other hand, as long as the homeowner pays you as agreed you don’t lift a finger, you just take the money to the bank. 

This is because when you own the mortgage note, you essentially become the bank.  Do you think the bank cares whether the homeowner keeps up the property they’ve mortgaged?  No, all they worry about is getting their monthly payments. 

As a mortgage note investor you don’t have to deal with The Three T’s.

• Tenants
• Termites
• Trash

When you become the bank, you’ll have a lot more free time.  It’s much easier to be the bank, than to be the property manager or the property owner trying to sell. 

It Takes Forever to Get My Profits!
True, you are waiting for monthly payments on the property and this may be the clincher for some property investors.  Rather than a lump sum profit you must wait for your profits over the term of the mortgage, which can be decades. 

However, if you’ve got the money to invest in several mortgage notes you’ll be able to live well and still make those profits on the monthly income you receive.

Most people worry about getting a mortgage.  They never bother with the process of creating a mortgage or what’s in it for the banks.  When you buy your first mortgage note you’ll become the bank and see why it’s good to be a mortgage note investor.

You may come across properties with multiple mortgages in your real estate investing.  These property deals can be a real hassle, but it is possible to negotiate with the multiple mortgage holders.

Sometimes you’ll come across properties in your real estate investing that have multiple mortgages.  In order to get your discounted sale on this property you’ll often need to negotiate with each mortgage holder separately.  This can get difficult.

Negotiating with the First Mortgage Holder
Usually it becomes a real hassle when you negotiate a short sale deal with the first mortgage holder, which is often the bank.  The bank may say, okay we’ll let you purchase this property for $60,000 and we’ll take a $45,000 write off on the mortgage.  However, since we’re taking such a big write off, we’ll only let the second mortgage holder take a $1,000 for their claim to the property. 

Remember, when it comes to property sales, its first come, and first serve.  The first mortgage or lien holder on that property gets control of that property, that mortgage and gets to say what everyone else behind him gets for their claim.  This may be all of the cash or it may be none. 

As you can imagine the second mortgage holder won’t take too kindly to this deal.  They’ll probably hold up the short sale by telling you that they won’t sell unless they get $5,000 for their claim, instead of the $1,000 that the bank wants them to take.  Many real estate investors stay well clear of properties with multiple mortgages, but it’s possible to make the deal work.

How to Get around this Conflict
You could spend your time as a go between for the different mortgage holders, trying to get everyone to get along.  Or you can just make a note purchase! 

Rather than making a note purchase for the first mortgage you buy the note on the second mortgage!  That’s right, go ahead and pay the second mortgage holder the desired $5,000 for their position as second mortgage holder.  You become the bank again and willingly accept $1,000 for the short sale.  Thus, the deal can close and you don’t have to waste valuable time being the bank’s gopher.

Any time you run into an obstacle in a deal, you should ask yourself, ‘what would happen if I bought the note?’   Can’t get the second mortgage holder to accept the bank’s offer?  Buy their note!  The bank won’t let you give the default property holder a little cash for their trouble?  Buy the note!  It’s an amazingly easy way to think outside the box and still make your money.

There is more than one way to invest in the real estate market.  Now you can tap into a little known section of the industry using short sales to purchase properties with little or no equity and still make a profit!

You know that it’s possible to buy a house that has little or no equity in it for less than is owed on the mortgage!  Yes, it’s possible.  Let’s say that you, as a property investor come across this homeowner who is behind in their mortgage with the bank.  On the current real estate market the defaulted property is worth $100,000, but the homeowner is actually in debt for $115,000.  It is possible for you to get that homeowner’s house for just $70,000.

This seems impossible, but a little known practice called, “Short Sales” in defaulted note buying allows you to purchase property that is over financed and has little or no equity in it!   This is basically when you work with the bank to renegotiate the selling price of the house and the bank writes off the remainder of the mortgage. 

Getting Started with the Short Sale
When you work with this homeowner, you will become the homeowner’s advocate or intermediary with the bank.  So the first thing you’ll need to do is get an “Authorization to Release Information”, and fax it to the bank so that you can negotiate with the bank.  This basically means that the homeowner is giving the bank permission to speak with you concerning their mortgage.

When you contact the bank you’ll want to explain to the bank the reasons why they should be willing to let go of the house for less than it is valued and for less than is owed on the mortgage.  This involves putting together a little package with information that the bank may request from you and extra information that you include on the condition of the house.

For example; the house may need a new roof.  There could be all kinds of deferred maintenance and it needs all kinds of repairs.  You could even point out that the housing market is declining in the area or point out that there are loads of other houses on the same street that haven’t sold.  Basically, you present your case to the bank explaining the reasons that they should let the property go cheap.  Be sure to include digital photos of the damage to the property or the decline.

Using the Short Sales technique it is possible for you to work with the bank to reduce the selling price of that defaulted property.  You are able to purchase it from the homeowner for a reduced price and the homeowner can get out from under this mortgage without it being on their credit. 

All you need to do is approach the banks professionally, put together a good case for reducing the price (such as needed repairs to the property) and for good measure include some digital photos of damage or neglect on and around the property.