Investing in Non Performing Loans

Update 6/6/2013 on vetting process with Granite Loan Solutions

In my previous article I sent link to a website and mentioned investors must pay $2,000 to be vetted in order to purchase loans from Granite Loan Solutions.  I just talked to Granite Loan Solutions and they do not charge anything to be vetted with them directly.  I have added a link to Granite and I have added information on other companies that sell NPLs as well.  I apologize for the information that was previously published.

I was able to attend a very informative session at a conference two weeks ago about Non Performing Loans(NPLs) and how individual investors can purchase and profit from them.  NPLs are mortgages against homes where the borrower is either not making payments or very far behind on payments.  Since the notes are non performing the loans can usually be purchased at a large discount.  After an NPL is purchased there are many different avenues an investor can take to profit on the loan from loan modification to foreclosure.  I have never purchased NPLs myself, but I am considering it as a way to purchase more homes I can either flip or hold long-term.

History of NPLs

I am no expert on NPLs, but this is what I know so far.  In the past most non performing loans were serviced by the bank who owned the loan.  The bank would do their best to get the borrower to make payments and catch up.  The bank would offer loan modifications, may allow a short sale or in the worst case scenario they would foreclose and take over the property.  In today’s market many banks are no longer servicing their NPLs for a variety of reasons.  When the banks want to get rid of their NPLs they will package up a large pool of NPLs and sell them off to the highest bidder.  The companies that buy these pools are usually banks, servicers and hedge funds.  Many of the hedge funds, banks and servicers will then attempt loan mods, short sales or go through foreclosure.   For the most part it is very difficult for an individual investor to purchase NPL’s because they are sold as large pools of loans spread out across the country and cost hundreds of millions of dollars.  However, there have been a few opportunities arise recently that allow individual investors to purchase NPLs.

How can an individual investor purchase an NPL?

There are a few hedge funds who are purchasing large pools of notes and then selling the notes off individually to investors.  Granite Loan Solutions, gave the presentation at our conference and are one of the companies that will sell to individual investors.  I was very impressed with their system and how they do business.  I know there are other companies that sell notes to investors as well, but I have yet to do any research on them.  I know people who have bought notes from Granite and they are backed by the NRBA(National Association or REO Brokers) which is a stand up organization.  You may notice I use Granite Loan Solutions a lot in this article and that is because they are the only company I know of at this point and they gave me most of the information in this article.

What are you buying with an NPL?

Please note I am only using information from Granite Loan Solutions and other note selling companies may do things differently.  Granite guarantees the note you buy is in first position, they give you title insurance, a bpo(broker price opinion) value from a third-party, the original balance, taxes owed and their buy it now price.  They give everyone a pre-list of available notes coming up for purchase and then once they post them it is a first come first serve buying process from what I understand.  There is no bidding against other investors or waiting for your offer to be approved if you pay their asking price.  It is possible to offer less than their asking prices, but they may not take it depending on the demand for the note.  Once you agree to purchase the note they give you 48 hours to perform your own due diligence.  You can run your own title searches, determine value etc.

Why buy an NPL?

Most of us have seen REO inventory decrease and prices increase in our local markets.  It has been harder and harder to find good deals to invest in and NPLs offer a cheap alternative to what is on the market.  Granite says they price notes at about 50 cents on the dollar of market value.  This can go up or down depending on the property and circumstances, but there is money to be made on these deals.   It is not easy money, because the buyer of the note has to decide how to make the note performing or create an ownership right in the asset.  Granite Loan Solutions helps the investors with gaining ownership or creating a performing note.

Servicing an NPL

Once an investor purchases an NPL they have to decide how to make money on the note.  The borrower is not making payments and they may or may not be living in the home anymore.  There are many different options to pursue with these notes, all of which can be very profitable.  Since the investor owns the note they can be very flexible working with the homeowner to help them stay in the home or allow a short sale.  Most Real Estate investors have no idea how to complete a loan modification, allow a short sale or foreclose on a home.  Granite Loan Solutions has many partnerships with servicing companies who can help with short sales, foreclosures and loan mods.  They also make sure the investors have all of the proper paperwork and licensing when purchasing the notes.  As the owner of the note, the investor can pursue any course of action allowed in the Deed of Trust for the property.  According to Granite some investors will work diligently to keep a homeowner in the house and other investors will foreclosure right away.

What price range are the NPLs?

Granite Loan Servicing specializes in lower priced homes.  Most of their notes are priced under $50,000 and some are even priced under $10,000!  This allows an investor to get into the NPL game without risking a ton of money.  This also makes the margins a little tight if you are looking to make quick cash on these notes.  I would prefer purchasing a note on a $150,000 house for $75,000 over purchasing a note on a $50,000 house for $25,000, but you take what you can get.  According to Granite there is a lot less competition for the lower priced notes and that is why they can sell them so cheaply.

How to make money off an NPL?

Loan modification and refinance

Assuming you are able to purchase a note there are many ways to make money on that note.  Granite Loan Solutions detailed a great way to make money with a loan modification and refinance.  Lets assume you buy a note for $50,000 on a $100,000 house.  The people still live in the home and want to stay, but can’t afford the payments on the $150,000 loan they took out five years ago.  They know the house is worth $100,000 and are fine with a loan of $100,000 at 5% interest.  The investor who owns the note modifies the balance to be $100,000 (still $50,000 over what the note was purchased for) and lowers the payments to something the homeowners can afford.  Once the homeowners make three months worth of payments, they are now qualified to refinance under HAFA program for an even lower rate.  When they refinance the home, you just got your note paid off at $100,000 that you bought for $50,000 and you helped a family stay in their home.

Deed in Lieu

Granite claims they have already negotiated a Deed in Lieu on some of their notes.  A Deed in Lieu is when the borrower signs over their rights in the home to the note holder.  These can be tricky if there are other liens against the property and it is best to let the servicer work out all the details and make sure you get a clear title to the home.  Many banks try to get a Deed in Lieu because it is much cheaper and less involved than a foreclosure.

Long term hold

One strategy regarding NPLs is to make them a performing note with a loan modification as described above and then keep the note.  The investor who purchased the NPL now has a performing note and the borrowers will be making their payments to the investor as long as they own the home.  Once the note becomes performing it also becomes much more valuable and could be sold on the market to another investor who is looking for a performing note.

Short sale

If an investor buys a note and the borrower wants out of the house a short sale may be the best option.  If the NPL is the only loan on the house then the investor has complete control over the short sale process.  He can approve or deny any offer since he is essentially the bank now.  The investor should be able to make a nice profit even after paying Real Estate agents and closing costs due to the low cost of the note.  If there are other loans on the property then you would have to negotiate with those lien holders and it gets much more complicated, but is possible. 

Foreclosure

If an investor has tried a loan mod, tried a short sale and nothing is working than foreclosure might be the only option.  If anyone is thinking about buying NPLs I would always calculate profits based off the worst case scenario and that may be foreclosure.  Granite estimates costs of $5,000 to $7,500 to  complete the foreclosure process.  The nice thing about foreclosure is once the process is complete, the investor owns the home and has complete control over it.  The investor could rent the home, sell it as is, fix it up or even price it so low at the foreclosure auction that another investor buys it at the auction.  Granite’s servicers will help with the entire foreclosure process and their fees are included in the estimates above.  One very important thing to remember with a foreclosure is how the state laws where the property is located.  In some states you can foreclose in 45 days or less, in other states it can take over two years to foreclose.

Additional companies the sell NPLs

I have no experience with any of these loan selling companies, but I have heard good things about Gemini and PPR.

http://geminicapitaladvisors.com/

http://www.pprnoteco.com/

http://www.fciexchange.com/

http://www.loanmls.com/account/home

Conclusion

This is all very new to me, I learned most of this about two weeks ago at my conference and I am by no means an expert.  I am very intrigued by the possibilities of buying NPLs for flips and long-term rentals.   It appears most of Granite’s notes are priced much lower than where I like to have my rentals, but there may be possibilities to make money by using the other methods I mentioned.  I plan on doing more research on other companies and maybe I will venture into this field some day.

Investors can be vetted with Granite Loan Solutions on their website at http://www.granitels.com/contact.html.  The vetting process is free on Granite’s website and allows investors to see what loans are available.  I have never bought a note myself and I have no personal experience with Granite Loan Solutions, but I know investors who have bought notes from them and made money.

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