Are you a real estate investor who likes the idea of building wealth? Buying real estate notes might be right for you.
We invited Paige Panzarello, CEO of Cashflow Chick, to share her expertise about building wealth with notes when inventory is low, and property prices are too high for any good deals.
Panzarello draws on her 20 years of experience and $150 million in real estate transactions completed to explain the fundamentals of buying real estate notes and how they generate profit.
Keep reading to learn more about building wealth by buying real estate notes.
To understand what buying real estate notes means, you need to understand what a note is.
Notes are a promise to pay or a debt instrument. The note's debt can be secured or unsecured:
Also, notes can either be performing or non-performing:
An advantage of buying real estate notes is that you become the bank.
Another advantage is that by not buying hands-off investing--you're not a landlord. Instead, you own the promise to pay, not the property.
The type of note you buy will depend on your risk tolerance and investing strategy. But, Panzarello prefers to invest in non-performing real estate notes.
Non-performing notes provide good value for a real estate investor. When you buy a non-performing note:
Building a network is the best way to find deals for buying real estate notes.
Through your network, you may find deals buying real estate notes from the following:
How do you make money buying real estate notes? Usually, you'll buy the non-performing note at a discount on the unpaid principal balance.
The following example uses figures for educational and illustrative purposes only. The figures are not a guarantee of performance.
Here is an example of how you might make money buying real estate notes:
Since it's non-performing and the person who has the note is not paying anymore, you can buy the note at a discount.
In this instance, let's suppose that the discounted note price is 50% of the current market value of the property:
You are all in for $45,000 but have equity of $35,000. The equity is the home's current market value minus the cost of buying the note: $80,000 CMV - $45,000 note = $35,000.
But how do you tap into that equity?
The way to make money buying real estate notes is through one of the many flexible exit strategies.
When you invest in notes, you need to be aware of the difference between judicial and nonjudicial foreclosure states.
In general, you want to avoid judicial foreclosure states because they take more time and money to foreclose.
Foreclosure is usually the last resort, but since you're in the first position:
Here is an example of how foreclosure may work out.
A short sale usually takes 3-6 months. An example of a short sale looks like this:
This exit strategy generally lasts 3-6 months. You get the property instead of foreclosing, which acts as complete repayment of the loans.
Once you have taken possession of the house, you can:
Getting the loan reperforming can take between 6-12 months. You can use $120,000 to work with borrowers to get them reperforming on loan by forgiving some debt to get them performing. It makes sense because you were never going to see that money anyway.
You might give the borrower a $20,000 discount:
You make money by:
Or, when they become performing notes, you can sell them to a performing note investor.
As with all deals, buying real estate notes requires you to perform due diligence.
The fundamentals of buying real estate notes include the following:
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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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