While investing in unprofitable real estate notes, or NPNs for short, can be a great way to get insured returns above average 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 could 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 in NPN is overpaying for the note by not researching the property’s actual value as-is versus comparable move-in-ready prices, or comparisons, and adjusting your price. Consequently. There’s a saying; There is no bad grade, you just pay too much for one grade.
The property is usually not move-in ready so it will be priced lower, and if you don’t take it into account, you will 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 on light repairs would give you a $ 10-20,000 raise.
Other options are to rent it out for cash flow and hopefully it appreciates. Then in a few years, it can be sold at a higher price. Either sell it with landlord financing to people with lower credit scores for a higher price, or sell that tenant-laden “rent” to an investor like a cash flow machine.
2. Wrong location
When buying an NPN in a rural, bankrupt, 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 lower the price to get rid of it. No family wants to live in the middle of nowhere, or in a war zone, or without basic necessities like grocery stores, gas stations, or general merchandise stores.
3. Do not visit the property
Imagine if you buy a ticket and find 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 price much lower than what you paid. At least it won’t be a total loss, the land has value. It just depends on whether a builder finds the location good enough to invest.
Or if the property is damaged, knowing the extent of the damage before paying for it is priceless in terms of saving you a lot of money. Sometimes it’s better to leave a smelly deal than to risk the investment if it doesn’t make sense.
4. Not confirming the status of your lien
You are told that you are buying a Senior or First link on a home, then you discover that it is actually a 2nd or Junior link. This could be due to the seller’s incompetence or negligence to know what they were selling, or a Junior lien could have foreclosed and if left unchallenged you are now the Senior lien holder and you are now a Junior. You still have the right to claim the debt, although you are not first in line now.
5. Don’t look for lawsuits or links
One of the first things we do after narrowing down the list of NPNs or REOs we are considering buying, and before paying, is run an O&E (occupancy and liens) report. which shows how many liabilities are linked to this property.
The owner could have been sued in the past or owed federal, state or county taxes, and a bond placed on the property. This would result in you now being responsible for paying that if you get a deed signed 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 to, although in reality they don’t want the house. .
6. Don’t check taxes
There are a plethora of taxes, penalties, and fines that can be imposed on property at all levels of the government hierarchy. From city fines for not mowing your lawn or leaving trash, you have a host of agencies that can penalize you from water, electricity, trash, and schools. You also have county property taxes and the penalties you receive for not paying them. If you ignore them, the county can sell the tax lien to someone else, and after a redemption period that is typically one year, you could lose the property.
The state can also put a link for income taxes, child support, and any number of issues. Then you have the federal government that can put a link to the property because it does not pay its income tax. We just bought a ticket that had $ 67,000 in taxes, fines, links, and total fines. We intend to foreclose to finish them off and possibly sell the house to the owner.
7. Failure to verify if you are bankrupt
Bankruptcy is not the end of the world for the note investor; many times they are a good thing. A Chapter 7 will eliminate all unsecured debt like credit cards, etc., leaving more funds each month to pay for your house than 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 do not complete it, causing them to continue to owe the debt.
If you have a lower lien and there is no principal, you can usually lose your entire investment if the lien is removed in bankruptcy. They still owe the debt, even though it is not guaranteed, and you can get a judgment against them that will be on your credit. If they tried to buy another home or car in the future, that debt would still be there and they would have to arrange something with you for the court to mark it as paid in full.
8. Land leases
Failure to verify land leases means you could lose your entire investment at the expiration of the lease, depending on the waiver 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 townhouses can be considered a form of land lease in the sense that you do not own the land, only the building.
9. Buying from Joker racers with daisy chains
We have seen people who offer to sell tickets 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 do not 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 most likely that person will get it from somewhere else, and so on, and this can go on for a while, with each link in the “daisy chain” adding cost to the purchase price.
10. Buy from people who will scam you.
Sadly, there are people who will rip you off in this business, and some still call the note business “The Wild West.” A dishonest employee can convince you that they are the owner of the promissory note and send you your money. To avoid this, the use of an escrow to keep funds safe, combined with a document scrubbing service from a Document Custodian, ensures that they “sign” that the collateral or document file identifies the seller of the promissory note. / mortgage is really the owner, and they are not trying to scam you. Then the escrow can be released, which is the only way to prevent this fraud.
Here are ten different ways we have seen you can lose money in the Note space of non-productive real estate.