Once you start investing in distressed second mortgages, you’ll notice a couple things begin to happen. Firstly, you’ll notice things will become second nature for you. The way you proceed with your due diligence, the conversations you have with your borrowers, and the methods in which you’re able to create workouts.
The second thing you’ll begin to notice is like spinning the roulette wheel. You’ll win some, lose some, and, occasionally, you’ll win big. The idea being the more seasoned you become in investing and in learning all of the different aspects of it, the more the odds will be in your favor.
Yes, you’ll definitely lose out on some of your loans due to the first mortgage foreclosing on the property and having no surplus funds for you. You’ll also surely have loans where the borrower refuses to pay you and you realize it’s not worth starting legal action. That’s just part of the game.
On the flip side, you’ll be amazed at the number of borrowers that you speak with who know they owe the money and have just been waiting for your call. There’ll be others who will be glad to accept a short sale offer from you and then there’ll be those very special loans I like to call “Happy Birthday” loans.
They’re the loans that come along where the borrower has sold his house and you get full value of your loan. Oryou get the call from a mortgage broker stating the borrower is refinancing in a month and wants to pay you off. These types of loans may not come around as often as we all would like them to, but they do happen!
The following is a list of my “Happy Birthday” loans:
I remember I bought a loan and it was the most I paid for a loan at that time. I think it was around $15,000 on a $75,000 loan. It was in New Mexico and I remember thinking maybe I could buy the house and make it my “vacation home”. I called the borrower at least twice a week for 12 months straight, but I only actually spoke to him once during that time and he hung up on me.
I was fairly new at investing and didn’t really understand the foreclosure option, so I just kept calling. After about a year and a half, I decided to stop calling. I figured I had lost this one and I could just strike it up to experience and bad luck.
About six months later (almost two years since I bought the note), I received a phone call from a real estate broker, telling me the borrower was selling his home. The broker wanted to know if I would offer a discount off of the $75,000. I politely informed the broker 1) the amount wasn’t $75,000, but with late fees and interest, it was more like $85,000 and 2) the answer was NO DISCOUNT! I made $70,000 on this loan within two years.
The Takeaway: Pick the number of months you want to wait before calling a borrower. After that period of time, decide whether you want to foreclose, put it in the “wait and see” file, sell it, or keep calling.
Last year, I purchased a pool of 10 loans from a fellow investor. I paid $.15 on the dollar, paying a total of $100,000 for the pool. Most of the loans were not current with their first mortgages and had very little to no equity. The thing I liked most about these loans is all of the borrowers lived in their homes for over 7 years. My thinking was these types of borrowers will do whatever it takes to stay in their homes. This is called, “emotional equity”.
As it turned out, when I did speak with them, 5 out of the 10 borrowers started paying their monthly mortgages right away. Additionally, I modified two of the borrowers’ loans and out of the remaining three loans, I did a short sale with one and the other two have not paid me yet.
The Takeaway: After you’ve done all of your due diligence and have run your formulas and crunched your numbers, don’t underestimate the power of emotional equity!
I bought a loan in Chicago, IL. I didn’t actually buy the loan in Chicago, but that’s where the property was located (a little humor). Anyway, after speaking with the owner for over 30 minutes, the end result was she knew she owed the money, felt terrible about it, and as much as she’d like to stay in the house, her only option was to try and sell her house. I empathized with her and told her I’d be calling her every now and then to check in on the status.
I spoke to this woman about every other week for the better part of nine months. The calls only lasted about 2-3 minutes, but I wanted her to know we were still there and were genuinely interested in her situation.
In the tenth month, she called me up excitedly and told me she found a buyer for her house and the closing was in 30 days. She thanked me over and over again for my kindness and professionalism. Thirty days later, I received a check for $135,000 on a loan I paid only $6,000 for!!
The Takeaway: Consistency and kindness go a long way.
Not every loan has a silver lining. I bought a loan in Arizona for $7,500. The home was way out off of a highway in the middle of nowhere. About three months after I purchased it, I got a call from the DEA. Yes, that’s correct, the Drug Enforcement Agency. It seems the current owners had purchased the home from the original owners with DRUG MONEY!!! The case got tied up in court and I had to hire an attorney. The end result was the government took away the home and I was out $7,500.
The Takeaway: Don’t do drugs! Sometimes you can do all the research in the world, but it still may come back and bite you in the ass.
This is the story I like to tell around the campfire. It’s one of those happenings that occur every once in a blue moon.
I purchased a loan from a fellow investor in 2012. I paid $22,000 for the loan that had a UPB of $235,000. This was the highest UPB second mortgage I had ever purchased. In fact I had to double check to make sure it was actually a second mortgage.
Within 45 days, I received a phone call from a real estate broker informing me the owner was selling the home and the closing would be in two months. Usually, in cases like this, the broker and/or bank tries to insist that I accept anywhere from $6,000 to $8,000 for these types of sales. There are rules for Fannie Mae and Freddy Mac loans, which dictate how much they’ll pay for a junior lien.
However, in this case, the loan wasn’t a Fannie Mae or Freddy Mac. I was going to get $235,000!!!
The part that makes this story even sweeter is the investor I purchased the loan from had this loan for over a year and a half.
The Takeaway: Yes, there is a Santa Claus. Regardless of what they tell you, there is a lot of luck in this type of industry.
They’re not all going to be grand slams, though. You’ll get some doubles, triples, and an occasional home run,but the name of the game is to try to minimize the strikeouts as much as possible. You’ll never completely avoid them, but just like in baseball, it’s all about averages and playing the long game.
Please feel free to email me your stories, both good and bad. I’ll post them on our website for others to see and learn.