EP 191 – Short Sales and Reverse Engineering

NCS 191 | Reverse Engineering

NCS 191 | Reverse Engineering

On this episode of the Note Closer’s Show, Scott discusses how and if you can reverse engineer a note deal in your market along with using short sales to find deals.

Listen to the podcast here:

Short Sales and Reverse Engineering

Today’s topic is going to be something a little bit different but there have been some questions asked online. We thought it would be a good subject to dive into reverse engineering notes. Somebody asked on one of the Facebook groups, “Can you reverse engineer a note deal?” She was asking, “There’s a vacant house on my street. Can I reach out to the bank and eventually buy that note?” We get a lot of people that have asked that. Overwhelmingly, it’s a big question because most people are used to it in their neighborhoods, “There’s an ugly house down the street. It’s vacant. It’s been vacant for a year or two years. I want to try to buy the note on that one.” The question always comes down to one thing and one thing only, who’s the lender on it? If it’s Chase, if it’s Bank of America, if it’s Citi, if it’s Wells, no, you’re not going to be able to buy that note. One of the biggest things you’ve got to look at is going to the county records or live MLS will have the availability that can be pulled up and you click on it and hit the realist report, it will pull up who the most recent lender is and that’s where you look at. You always want to see who the most recent lender is on that thing. That will tell you yes or no whether you can reverse engineer it. 

NCS 191 | Reverse Engineering

I wanted to go through how effective if you use short sale listings as a way of reverse engineering note deals.

If it’s a smaller bank, if it’s a regional bank, you may have the opportunity to do this. Reverse engineering is going to be more successful in longer foreclosure states than short states like Texas. I actually got started doing notes off of doing some short sale deals in Austin. I had to get outside of Austin, especially outside of Texas, to do a lot more note deals. Otherwise I would have starved trying to do it. I wanted to go through how effective if you use short sale listings as a way to reverse engineer note deals. Once again, it all comes down to that one thing: Who is the underlying lender? If it’s the Bank of America, Chase, Citibank, the really top five, top ten, they’re not going to sell you the note. You’re likely not even going to get hold of the right person in a secondary marketing side of things. If you do, they’re going to want to sell it as a large tranche or large pool of $10 million, $25 million, $50 million. They’re not going to sell a one-off note. That’s not saying there aren’t smaller regional banks or smaller lenders that will allow one-off sales. It all comes down to finding out who the lender is. Oftentimes, you want to use that house, that ugly piece of property or whatever, as your foot in the door to the asset manager, the secondary marketing manager, maybe not for that specific asset but for their list of assets all across the country. That’s the big nugget a lot of people miss. They get so focused on that one house at 123 Main Street. They fail to realize there is a lot more upstream, a lot more deals they can tap into if they just do something smart. 

Let me give you a couple of examples on a couple of things we do. I’ve been buying notes for years. I’ve been buying notes direct from banks. One of our earlier clients I was buying notes from was from a company called Wells Fargo Financial. That’s not the main Wells Fargo Mortgage company. Wells Fargo Financial was originally the local neighborhood subprime lender. They did a lot of signature loans. I actually almost went to work for them out of college. I was buying one-off notes from Wells Fargo Financial. I had my asset manager there, Steve Smith. Wells Fargo Financial’s no longer around, they’ve been absorbed. Steve was my asset manager and he would send me literally the lists of deals that they were looking to get rid of, subprime stuff, 70, 80, 100 assets that I could pick up for literally nickels on the dollar. The biggest regret is I didn’t buy the whole tape. Looking back what I know now, I should have bought the whole thing. I was able to cut my teeth and started on it.

I was buying one-off notes from Wells Fargo Financial. My partner at that time was a real estate agent here in town. We jumped on the MLS and we looked for anything that was listed short sale with Wells Fargo Financial. If you don’t have a realtor, one of the easier things you can do is many times you can purchase a pre-foreclosure list, a notice of default list, in your county that they often will sell them once a month at anywhere from $35 to $55 a month to get that list of foreclosures or pending foreclosures. One of the great things that often these lists will show you if you’re buying it, especially in Texas we have the Foreclosure Listing Service is a good one that tracks the top fifteen counties in the state. It tells you the address, the borrower, the estimated unpaid balance, the fair market value, and who the lender is on it, and others things on it. It also will give you this one column with the previous listing. If it’s a previous listing, it’s probably a listed short sale. In Texas since we can foreclose so quickly, it will show up on the previous listing a lot of times. It will drag it out, list it on the MLS, realtors got offers pending on it, banks taking three, six, nine months to literally give an approval process. That’s not in today’s number. I’m just giving you an idea and background.

We pull this list and we start checking lenders on it. Then we see Wells Fargo Financial pops up on it. We see this listing, I pick up the phone. I called Steve at Wells Fargo Financial and say, “Steve, Scott Carson here. I just want to talk with you. We closed on a deal last month. I want to see if you will be willing to sell this one note here in Austin, Texas. Actually, there are three listings with Wells Fargo Financial that were on the foreclosure list here. It had been listed on the foreclosure list for about nine months, there’s one especially in 9016 Collinfield Drive.” He goes, “Of the three, that one in Collinfield Drive, I can sell that out to but I need a bid from you.” I’m like, “Okay. Give me a day.” Quickly, I jumped in the car, ran over since it was on the MLS. What does that give you access to? It gives you inside access. It gives you interior photos. It also tells you the borrower is willing to walk away from the property. They’re not going to fight your foreclosure.

In this situation, the borrower is deceased. It’s taken about nine months for it to go to probate. It was on a corner lot, nice looking house, red brick house, three-car garage, but it needed some work. It was outdated. It was fully furnished inside, brand new front-end loading washer and dryer that were new at that point versus a rather very old hat now. Stainless steel appliances but it was just outdated. You can tell that somebody had some money but they passed on. When we walked into the garage, there was this 2001 white Chevy suburban that was just full of boxes and stuff in the back, keys were literally on the ignition, it was unlocked. Second bay was stacked with boxes. I guess the person may have been into gem stones with all these display cases and other things. It was just packed full. The third bay, third garage, was full of old antiques just stacked top to bottom.

If I remember, the borrower owed about $250,000 on the asset. It was worth somewhere $200,000 to $220,000. My realtor called the listing agent and asked, “What kind of offer and how’s that working out for you? Do you have a strong offer?” I have somebody who is putting a cash offering. He was like, “No, we’ve got a very strong offering. They’ve hung around for a while. They’re ready to go on this.” My realtor said, “Are you sure you don’t want a backup just in case?” She’s like, “Okay, fine. Just in case.” We’ve got an offer basically at $150,000. I was like, “Okay.” $150,000 is the offering on it. It’s been around for a while. It needs some work obviously. We immediately run back and I reached out to Steve. You’ve got to realize, the bigger the banks are the short sale department doesn’t always talk to loss mitigation. They don’t communicate. Loss mitigation is where all the short sales and they’re trying to collect, collect, collect. They don’t often track what’s going on over on the portfolio side. They have often different banking system, different branches entirely sometimes different states.

We reached out to Steve and said, “Steve, would you be willing to sell that note? Looks like you haven’t got the payment in over two years. How about $75,000?” Actually, I first offered $50,000. He goes, “No, I can’t take $50,000 for it.” “How about $75.000?” He goes, “Hang on, let me get back to you.” He called me the next day and he says, “Yes, we’ll accept $75,000.” We’re going to pick this note up for about half of what really the asset’s worth before we put repairs into it, and getting it at a substantial discount. Sure enough, he comes back, “We’ll take $75,000.” I reached out to my funding partners and said, “I got a deal that’s got a cash buyer already lined up at around $150,000. We can buy the note for $75,000 and then turn around and just finish the short sale, finish the sale to a retail buyer.” My cash investor here, luckily, was like, “Let’s do it.” We buy the note the day after we final the note purchase, we got to sign the contract. I reached out to the listing agent and said, “I just want to give you a phone call. I see that the note has sold on this because we’re now in the bank.” The realtor was upset. The reason she was upset, she spent nine months working the short sale, keeping it together.

NCS 191 | Reverse Engineering

Reverse Engineering: When realtors put short sales together and the thing gets sold, they now have to start over at square one.

What happens when realtors put short sales together and the thing gets sold? They now have to start over at square one. I’m like, “You don’t have to start over at square one, relax. How soon can your cash buyers close?” “They were getting ready to close this deal in 30 days.” “Then send me the estimated HOD one so I can see exactly what the bank’s netting? I bet you I can get approval on this relatively quickly.” Sure enough, after she sent me the HOD I did a little dance because we’re going to net about $135,000. I said, “Let’s do it.” Documents and servicing gets transferred to us. We expedite this assignment of mortgage getting it recorded. We close about 45 days after we funded for $135,000 was our net. That’s a $60,000 profit over the $75,000.

The borrower on this one is deceased so don’t care. We basically still forgave a sizable chunk, almost $80,000 to $85,000 in unpaid balance in the late fees. We forgave on a short sale side, the short side of it was but we still made money. My funding partner and I split $60,000. I got $30,000 for a $75,000 investment for basically less than two months, pretty good ROI. I made my $30,000 and was pretty happy to dance a little jig for just being a deal engineer and putting it together. We’ve done that a few times. It all comes down to one critical piece of information, who’s the lender? 

You don’t see a lot of short sales these days anymore because the values have gone. You still see some occasion there. Our buddy Matt Merenoff out there is still knocking out some short sales. You can see short sales in an area where the value’s good and the property’s good. Short sales aren’t being that much of a short anymore. You’re seeing $0.90, $0.95 on the dollar. The smaller the bank, the less likelihood that you are to take a big short off because they’re not leveraged as broadly, just making deposits could make up their write off. The smaller real individual one-off paid per lending in banks. Your partner will probably be want to play ball with. You get the regional-size and mid-size stuff. We’ll see some stuff.

The beautiful thing is if it’s a truly listed short sale that’s been on MLS for a while in a state that has a longer foreclosure time than Texas, you’re going to probably have a little bit more success. Especially in these states like South Carolina, Florida, New Jersey, this would be a strategy that would work really well depending on who the lender is. I want to say in New York, it’s still a long time to get things done there but it’s got some possibilities. Ohio, it’s going to be anywhere where you start seeing six to nine months. There’s an opportunity there for you. It’s just that you’ve got to just figure out who the lender is. That’s the most important thing, seeing who the existing lender is, who the newest lender is, and then reaching out to them.

This is a great strategy that I talked about a couple of weeks ago about jumping on your county records and pulling a list of assignments of mortgage in the last twelve months to see what’s been buying, who’s been buying what mortgages in your area, whether it’s an instantaneous table-top sale which happens a lot of times in mortgage bankers foreclosing a note and sell that note immediately to a bigger bank. That happens quite a bit. You often will find funds thereby in selling mortgages, something that’s been around for a while, especially if it’s in the default side. 

That’s really the one way to reverse engineer, trying to find note deals in your backyard. Most of the time, they’re not going to say yes to even those local assets. They work really well to get your foot in the door, get your toe in the door, to get the conversation start with the asset managers to see about getting on their major list, the list that they send out on a quarterly, monthly basis. I got a couple of emails from a large regional lender, not top ten, who’s moving stuff on the residential side. I was already looking, Googling some of the addresses to see if some of the addresses are listed. That’s the beautiful thing about short sales is you often get interior photos, you got interior access. It’s a great thing if you’re coming over from the fix and flip side because oftentimes fix and flippers that’s their biggest, “What? I can’t get inside? I can’t see them? What if it needs repairs?” You have to look at what the asset looks like as is and going from where it’s at condition-wise. If the house has been vacant then you’ve got to be very careful that it hasn’t been trashed out. That’s nothing that a size 14 Boot Hammer can’t help. I have walked into so many houses, we’re doing a lot of short sales here in Austin, and most of them were Bank of America, Chase, Citibank, they’re not going to really move that much stuff when it comes to the paper side to small guys, medium guys. 

I’ll give you an example. I had a conversation with a head of Citibank’s Distressed Mortgage side, Adam Morgenfeld, a few years back. He was like, “Call us when you can buy $50 million and you better be expect to be paying somewhere in the $60,000 or $70,000 of value on the distressed asset sale side.” I’m not saying you can’t make money at that price point especially in that higher value assets, you have some opportunity there because you’ve got a large chunk of equity. When you start getting down below $150,000, you’re paying $0.70, $0.75 on the dollar, that’s almost too expensive. You don’t have an opportunity for profit there unless you can upgrade the property quite a bit, or you can expedite the exit strategy, Cash for Keys, deed in lieus to boost your ROI on annualized basis versus just a short term basis. One of the great things that is good to do is checking with the realtors. If the realtors can give you access to MLS then look for list of short sales. Oftentimes, the MLS will say third party approval required or bank approval required. If they have that category in your search criteria, not a bad thing to check out, and then just checking to see who the lenders are by hitting the lender report, as what we call in Texas rather as the realist report. 

Oftentimes, the foreclosure list that we’ve talked about have dwindled down dramatically compared to what they used to be three, four, five, six years ago. If you know this kind of strategy, it will prepare you for later on when a market does start to turn south. It’s doing that in some areas already, especially the high-dollar stuff. I personally believe and feel that the quarter million-dollar houses or less is where you’re going to see the most amount of listings. You’re going to see some high-dollar condos and things like that hit the market, looking for short sales. Those are harder to find buyers for, especially in a timely fashion because the banks are onto it for so much and not everybody has the half million dollars to write a check or cash or fund the deal relatively quickly. 

I’ve done some large short sale deals before. I closed on a condo. It was a very elaborate townhome in Naples before. The guy owed $1.6 million. We got the bank to approve $1 million note sale and we’ve sold it for $1.2 million. One of the first note deals I did back in 2007. 2008 was on three condos on the beach in San Diego, on Pacific Beach, gorgeous million-dollar. The developer did an amazing job. I was out there actually doing a two-week coaching to buy assets in San Diego years ago. The realtor put us in charge. The developer had these three condos and the last year he had not sold. He was motivated to get them sold as fast as possible because his bank was getting Nancy. It was the Bank of Arizona. We were able to negotiate, put them under contract. Then we reached out to the bank and negotiated a short sale at an even better price for what we had on our contract for.

We had a non-exclusive option on the property so that if the guy found a cash buyer for them, he could go ahead and move them. What was funny is the seller who’s the developer and the builder was a bit of a shady bastard. He’d go, “I got a cash offering.” “Great, let’s see the contract.” He could never provide a contract because he was just basically trying to push us to close. It took 30 days but we ended up closing on these three condos and it was very, very nice. We actually got the realtor to open it up. We had a beer tasting night in there. We had $100,000 worth of art in just one of the condos. It was compacted with two-story, telescoping doors. Literally if you stepped out the front door, you’re on the walkway in San Diego, almost got hit by the bikes. Three feet later, you’re stepping over the curb and you’re on the beach. Immaculate, just absolutely gorgeous places, and still look beautiful to this day. Last time I was in San Diego, I walked by them and was like, “Here the deals are.” 

Short sales are short sales. They’re going to make a comeback. If you understand how they work, a lot of times now, short sales have been streamlined. A lot of banks are going to software called Equator. It helps them streamline everything, get them up there and loaded. It’s not such a difficult process that it used to be, but that’s the bigger banks for you. The smaller banks or the regional banks are still looking at their bottom lines and figuring out what they are into it for, and done the write-offs and go from there. One thing to keep in mind if you’re using Distressed Pro as a service, you can often see and check out in the bank to see how much they’re putting away in reserves every quarter. Then that fourth quarter when the reserves add up, that’s when they’re looking to move most of their note sales. That would also be a good month or good timing to look at where their footprint is and trying to see if there is a list of short sales in the major metroplexes, and then being able to book in both those deals. The biggest thing is you’ve got to have cash on those things to be able to close the note deals like you would anything else. It’s a beautiful thing to have the end buyer ready to walk. It’s not going to be a modification. It’s not going to be a reinstatement. It’s going to be somebody that’s walking from the deal. 

If you are going to buy a note that’s still occupied and the borrower has expressed interest in selling the property in a short sale, a couple of things, two big rules. One, use your own realtor. Make it a requirement that you use your realtor to close. The last thing you want is the borrower who’s got their best friend Suzy or whoever it is who’s a realtor there dragging this out who has more allegiance to Suzy than they do to you as the bank. I have been good in the past of getting short sales extended while we’re doing some short sale negotiation for several years for people. I’ve seen short sales last three years, four years, just get dragged out with temporary restraining orders and then contracts, and just dragging it out, which is not fun if you’re the bank.

That’s why if you’re buying a note, the borrower wants the list for short sales to sell it off, which is not a bad thing, just make sure of two things. Use your own realtor. The second thing is make sure the realtor does not list the property at full value. That’s what will drag things on further than anything else. “We’ll list it at full value.” It’s a short sale. It’s a distressed sale. You should not be listing it at full value. You should be listing it at $0.80, $0.85, most case $0.90 of assets value. Why do you want to list it at a discount? You want to get foot traffic in. You want people to see the property and give them some incentive to hang around for three to six months or whatever it takes for a short sale to go through or approval and things like that.

NCS 191 | Reverse Engineering

Reverse Engineering: Most realtors avoid short sales because it does take nine months for something to close.

Most realtors avoid short sales because it does take nine months for something to close. This is why you want to list it at $0.85 or $0.90 and say pre-approval offer. You can come to this at $0.85 and approved to close that number. That will happen when you have buyers that walk in and they see that, “It’s a deal, it’s pre-approved. Let me make offers in.” Now, you’ve got two people fighting for the deals and it drives the price up. Maybe they start off at $0.85, “I need it higher especially goes to $0.80. I’ll go to $0.90. I’ll go to $0.92. I’ll go to $0.92 with no contingencies. I’ll buy it as is. You don’t need to fix anything.” That often works out really, really well because then you’re still closing it at $0.90, $0.92, which is faster versus trying to list it at 100% of value then have to drop the price down and then get incentives to get it to move. 

Question here is, “Is there an average time for short sales or is it all according to the situation?”

It’s all according to the situation. It’s all according to really how well you communicate with the bank. Sometimes it takes six months, sometimes it’s nine months. It depends on how many short sales that bank has. Some of the larger banks have stacks and stacks of files, so if you’re at the bottom and you’re working your way to the top and when the short sale negotiator gets to your file, if everything’s there, they can make a movement. If there’s not everything there, then they got to put it back at the bottom and you work right back down to it.

Honestly, how you do anything, you’ve got to try to avoid shiny object syndromes. 90% of what we cover is pretty much everything you need. There’s about 10% of stuff that we just don’t go through because I could spend forever here doing little segments or little niches of every little thing that go wrong but you would never get anywhere. You will be too busy watching videos and trying to learn everything before you pull the trigger. My biggest goal in life for you guys is to pull the trigger. You need to know 80% to 90%, you figure the other stuff out as we go through and walk you through it and then go from there. Sitting here preparing for every possible disaster doesn’t work. 

Brady Durr is known as The Mortgage Medic. It’s what he calls himself, out of Dallas, Fort Worth. You run the Fort Worth Note Closers Group, correct, Brady?

Yes, sir.

You have a question. Can you write it down in parts for me?

The contract aspect of investing, do you think this is something we need to have on our tool belt, how to assemble contracts, how to organize these deals from the paperwork side?

Are you talking about a short sale contract or just the long sale agreement?

I know you had an episode where you talked about option agreements. You just mentioned that deal in San Diego, you had option agreements coupled with some other creative documents.

There are not really any creative documents. When you’re in a note deal, you’re doing a loan sale agreement. If you’re doing a short sale deal like we just did, there’s already a contract in place, a right to purchase contract;. a traditional contract from an end buyer who wants to buy the property in a short sale. That’s an underlying, normal real estate contract. With me reaching out and getting and buying a note, it’s just buying on a traditional loan sale agreement. It’s two different things that’s booked in, the retail side and have me going behind the shadows talking to the different bank to buy the note on a loan sale agreement.

An option agreement is like a wholesaling fee or an option agreement. If you’re buying the note and put an option on it, that’s on the retail side with the guy in San Diego. It was just an option agreement. The loan sale contract, it was an option agreement. The minute we got the bank to agree to sell us the note, then we put it under contract. Or I didn’t need to put it under contract because now we had the note at a much cheaper price. Now we can just turn around and sell it and make sense. The beautiful thing is once we got the note under contract and took our option agreement, we cancel the option agreement and came back with a low rock-bottom price based on the loan sale. The seller in this case is the developer who is the borrower, he was just glad to be done with it. He was at the point where his bank was forcing him to get out. When somebody approached to buy the note, we’re now the bank. We then allow the developer to sell it on a short sale to another buyer that we actually brought to the table. Does that make sense? 

Yes, sir.

I don’t think you need to spend forever going through paperwork and contracts. I think honestly, if you spend an hour reading through a contract and ask you a few questions about all you need, it’s not anything difficult. Your most important thing is to be reaching out and marketing. Your most important thing is to be making offers. Loan sale agreements are not that difficult. I get a lot of people that come across, “I need to spend time going through the paperwork.” The paperwork is the least interesting part of it. It’s also the thing you need to spend a little bit of time on because most of the paperwork is pretty generic and pretty uniform across the board. Does that make sense?

Yes, sir. I know Quincy talks a lot about option agreements and structuring those deals can be cool or fascinating studies. I always wonder sometimes if you think those are more of shiny objects?

No, it’s not. It’s just that the paperwork is not a big deal. It’s a one page option agreement, “I agree to buy this note at this side.” What you do, how you structure it with your IRA or where you get the fund that $100, it’s a simple thing. You shouldn’t overthink it because you’re really only going to be funding an option agreement with $100 or $10 if you’re using your self-directed IRA. That $10 is basically the price on the contract or the option agreement to secure it at that price. Now you have a contract that you can wholesale just like you would anything else. Does that make sense?

Thank you so much for your time.

No problem. Great question, Brady.

It’s about what we’ve got for today. Reverse engineering, it’s the biggest thing you have to try to avoid. Avoid chasing that shiny object syndrome. Avoid trying to drive around and use all the ugly houses because oftentimes you’ll get burnt out. You’re spending money and your time, and you’re looking at ugly houses, then you’re going back and research it and most of them are really with the major banks who have them on offshore trusts or other things. Calling the banks directly, reaching out and finding out exactly what they need to get off their books, what their nightmare note deals are, could be the better way. You can show up, slay Freddie Krueger, Jason, and really make it happen by getting their list and helping them out. That’s my recommendation. Go out and make something happen. Make sure to leave us a review. Feel free to share this with any of your friends or parties that are interested. Make sure to check out our latest list of episodes on iTunes and Stitcher as well. Until we meet again, we’ll see you all at the top. 


Important Links

Love the show? Subscribe, rate, review, and share!
Join The Note Closers Show community today:

Leave a Reply

Your email address will not be published. Required fields are marked *