Real Estate Investing Facts

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Shortsale Investing – Does it Really Work?

I have recently put a few shortsale offers in due to the shortage of REO (real estate owned)/bank owned properties on the market. What I have found interesting is there is not nearly the competition from other investors. For instance, with all bank owned deals that are any good, they all seem to go to “highest and best”. Highest and best means each person has 1 time to come back and put their best offer in. Then the bank usually selects one of those highest and best offers. It becomes very competitive and hard to guess what to offer.

Recently I put have put in 4 shortsale offers. They all got accepted as is, and there were no other offers. Now I understand I might not get them all, but that is ok. If I get half of them, I will be happy. It is like putting a few deals in my pipeline for the future.

A few tips I would like to share when making a shortsale offer:

1) Try to make your inspection for AFTER the bank approves the shortsale, otherwise you could be spending money on a deal that doesn’t ever go through.

2) Try to make your earnest deposit either very low or not to be deposited until the bank approves the shortsale offer.

These two things have really helped make my shortsale offers easy and risk free. Now, I will say that a few agents won’t allow these, but because I am a real estate agent and know many agents in my area, this has really helped me get these through. It might be something you have to work through over time to create a proven track record, and you might want to consider getting a real estate license. What is my exit strategy? For the most part, I am using a lease option for 1-2 years and then converting to a land contract (seller financing) if they can’t get a mortgage. I could flip some of them or go straight to a land contract, however, I don’t want short term or “dealer” status with the IRS. I want to keep the majority of the profit in my pocket and not Uncle Sams.

I have spent some time recently talking to shortsale negotiators and they have shared that 80-90% of their deals are getting approved now. So is it worth it? I think so. Consider shortsale investing.

Wendy Patton is the nation’s leading author and trainer in ?lease options, rent-to-owns and subject-to deals.

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Buyers, brokers and investors in mortgages, trust deeds, contracts for deed and other cash flows — called the cash flow business — find them to be high-yielding investments. Cash flow notes, also named cash flows, income streams, seller financing, debt instruments, receivables or paper, are thought by many to be limited to bank notes or discounted seller carryback mortgages.

But that only scratches the surface. Not only are people investing in and brokering notes like seller carryback mortgages, trust deeds and contracts for deed, but they are buying and brokering almost any other debt that is paid over time.  Almost any installment payment, not necessarily secured by real estate, can be a vendible cashflow.

Virtual Short Sale investing

This includes annuities, leases, insurance benefits paid in installments (called structured settlements), retirement accounts, royalties, even lottery net income — and much more. Even such relatively unknown cashflows like tax lien certificates, contractor´s liens, medical receivables and commercial accounts receivable (factoring ) can provide you, or (if you broker them) investors, with multiple streams of income.

In other words, today the term cash-flows can mean any marketable I.O.U. that represents a promise to pay over time.

Notes provide cash flows. They are usually secured by real estate that can be foreclosed on or otherwise claimed by the note owner if the payments are not made. They are almost always discounted from their balance. For example, an investor may pay $22,680.00 for a note with a balance of $25,000.00 .

What is the reason for discounting?

Because of the time value of money: money to be paid sometime in the future is a promise — money in hand today is not.  Therefore money today is worth more than a promise of money tomorrow. Suppose you are offered your choice of a $10 bill and a $100 bill. You can have the $10 right now, but if you choose the $100 you´ll have to wait a month to get it. You probably will choose to wait for the $100. Suppose you can have the $10 now but have to wait a year for the $100? Or 5 years? Or 10 years? Sooner or later, you are going to say, “Give me the $10 right now.”

You´ve just discounted a $100 bill to $10!

In the same way, a note is discounted because the money is paid over time. 

How can someone profit from cash flow notes?

Innumerable ways. You can buy them for investment at yields above bank CDs and money market funds. Or, you can buy them at one price and sell them at another, higher amount. You can even contract to buy them, sell them for a profit to an investor, without spending any money of your own!

How does a note seller and a note buyer get together?

The kinds of notes that are the easiest to find and work with are privately created when someone sells a property or business and “holds” or “takes back” some or all of the financing. For example, someone may own a house on which they have paid off their bank mortgage. They sell their house for $200,000, receive a $40,000 down payment from the buyer and take back the $160,000 balance in the form of a “seller-held mortage.” In some parts of the land it´s called a “seller carryback mortgage” or “owner financing” or similar terminology.  It all means the same thing:   The buyer makes payments over time to the property seller. In other words, instead of the buyer going to a commercial lender, he or she asks the seller to take the place of the lender.

One day the seller decides he needs more cash than the monthly payments are giving him. Since you´ve advertised that you buy such notes, he contacts you for a quote on his mortgage. Maybe it has a $140,000.00 balance. You calculate the value and offer him, say, $131,266.00. He sells the note to you and now you collect the monthly payments. Your investment produces a nice double-digit yield on your money, and if the payor ever defaults, you will get the house and keep the payments that were made.

Of course, you could also broker that mortgage by selling it to an investor at a higher price than you paid for it (and you use the investor´s money to buy it in the first place!).  This is a great way to learn how to buy cash flow notes without using your own money.

There are many other ways to buy and broker cash flow notes. Real estate notes are only part of the story. Notes can be created with anything of value as the collateral.   However, real estate notes remain the backbone of the note brokerage business.

Who buys cash flows?

There are a handful of companies that buy notes across the country.  A few more buy them regionally.  There are many private investors that buy locally.  It is critical that you work only with TRUE INVESTORS — those that use their own funds or have sources of funds unavailable to others (such as their own lines of credit, their own private investors, etc.).

DON’T BE FOOLED:  99 PERCENT OF THE SO-CALLED “CASH FLOW NOTE INVESTORS” ON THE INTERNET ARE BROKERS. They are selling to the same true investors that you could be selling to, if you only knew who the investors are.

That’s where THE PAPER SOURCE comes in.  Since 1990 it has published THE PAPER SOURCE REGISTRY OF NOTE INVESTORS.  It is the most accurate list of TRUE investors available anywhere.  It tells you who they are, what types of notes they buy, and how to get directly in touch with the decision-makers.  They also have a free 7-part e-course on getting started in cash flow notes.

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For those of you who have never herd or have not fully understood what seller financing is, I’ve written a brief explanation below.

Owner Financing (Seller Financing) – A method in which a buyer borrows from and makes payments to the seller instead of a bank. Sometimes you take over the seller’s payments. Can be done when a buyer cannot qualify for a bank loan for the full amount. Also referred to as Seller’s Financing.

This is a great method to acquire property with other peoples money, and quite often for zero down.

Hans Anderson

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