While investing in nonperforming real estate notes, or NPNs for short, can be a great way to earn guaranteed above-average returns compared to the roller-coaster stock market or 1% on a CD. Although like all investments, there is no guarantee that you will make any money. In fact, if you’re not careful, you can lose some or all of your investment.

We’ve put together a list of all the ways we can tell you can lose money in the Distressed Asset Arena.

Ten Ways to Lose Money on Real Estate Notes:

1. Pay too much

We believe the #1 reason you can lose money on NPN is paying too much for the note by not researching the real value of the property as-is compared to comparable move-in ready prices, or offsets, and adjusting your price accordingly. consequence. There’s a saying; There is no bad grade, just paying too much for a grade.

The property is usually not move-in ready so it will be priced lower and if you don’t keep that in mind you will be forced to make a lot of profit when you go to sell it. The solution would be to see if putting in $3-10,000 in light repairs would give you a raise of $10-20,000.

Other options are to lease it for cash flow while it hopefully appreciates. Then, in a few years, it can be sold at a higher price. Either sell it with owner financing to people with lower credit scores for a higher price, or sell that “rent loaded” with the tenant to an investor as a cash flow machine.

2. Wrong location

By buying an NPN in a rural, rundown, or crime-ridden location, even if it’s in excellent condition, you’ll have a harder time selling it when you need it, and may have to drop the price to get rid of it. No family wants to live in the middle of nowhere, in a war zone, or without basic necessities like supermarkets, gas stations, or general merchandise stores.

3. Not visiting the property

Imagine if you buy a ticket and discover that the house is no longer there! It could have caught fire, or the city could have condemned it. This will result in the loss of most of your money, and the only thing you can do is sell the land for a much lower price than you paid. At least it won’t be a total loss, the land does have value. It just depends on whether a builder will find the location good enough to invest in.

Or if the property is damaged, knowing the extent of the damage before you pay is priceless to save you a lot of money. Sometimes it’s better to get out of a bad deal than risk the investment if it doesn’t make sense.

4. Not confirming your link status

You’re told you’re buying a major or first lien on a home, then find out it’s actually a second or minor lien. This could be due to the seller’s incompetence or negligence to know what they were selling, or a lesser lien could have foreclosed on and, if unchallenged, you are now the primary lien holder and you are now a minor. You are still entitled to claim the debt, although you are not first in line now.

5. Not looking for lawsuits or links

One of the first things we do after narrowing down a list of NPNs or REOs (real estate ownership or owner has title) we’re considering buying, and before we pay for it, is run an O&E (occupancy and liens) report that shows how many liabilities are linked to this property.

The owner may have been sued in the past, or owed federal, state or county taxes, and a lien on the property. This would result in you now being responsible for paying that if you get them to sign a deed in lieu of foreclosure. Only a foreclosure on the property would possibly remove most or all of the liens or liens on it considering IRS liens have a 1 year redemption period where they can pay off the mortgage if they want even though they don’t really want the House. .

6. Not checking taxes

There are a myriad of taxes, penalties, and fines that can be imposed on a property at all levels of the government hierarchy. From city fines for not mowing lawns or leaving litter, there are a number of agencies that can fine you, from water, power, garbage, and schools. You also have county property taxes and the penalties you receive for not paying them. If you ignore them, the county can sell the tax lien to someone else and, after a redemption period of usually one year, you could lose the property.

The state can also put up a link for income taxes, child support, and any number of issues. Then there is the federal government that can put a lien on the property because you didn’t pay your income tax. We just purchased a promissory note that had a total of $67,000 in taxes, penalties, liens, and penalties. We intend to foreclose on them, and possibly sell the house back to the owner.

7. Failure to verify bankruptcy

Bankruptcy is not the end of the world for the note investor; they are often a good thing. A Chapter 7 will eliminate all unsecured debt such as credit cards, etc., leaving more funds each month to pay for your house that would have gone elsewhere.

A Chapter 13 is a payment plan, and the house payments are usually part of the payment plan. It takes 5 years to complete, and many people do not complete it, causing them to still owe the debt.

If you have a minor lien and no principal, you can generally lose your entire investment if the lien is removed in bankruptcy. They still owe the debt, even though it is not secured, and you can get a judgment against them that will be in your favor. If they tried to buy another house or because in the future, that debt would still be there, and they would have to work something out with you for the court to mark it as paid in full.

8. Land Leases

Failing to verify land leases means you could lose your entire investment when the lease expires, depending on the surrender clause. It is not your land, and if the owner wants to do something else with it, then there is nothing you can do. Condominiums and townhomes can be considered a form of land lease in that you do not own the land, only the building.

9. Buying from Joker Brokers with daisy chains

We have seen people offering to sell notes that are number 5 or 6 in a chain of what we call “Joker Brokers”, and our policy is not to avoid them for many reasons, #1, they do not own the note. , and not dealing with the owner is asking for trouble. #2 is that they usually get it from someone else. And then that person will most likely get it from somewhere else, and so on, and this can go on for a bit, with each link in the “daisy chain” adding a cost to the purchase price.

10. Buy from people who will rip you off.

Unfortunately, there are people who will rip you off in this business, and some still call the ticket business the “Wild West.” A dishonest employee may convince you that you are the owner of the note and to send your money. To avoid this, the use of escrow to keep funds safe, combined with a document clearance service from a document custodian, ensures that you “sign” that the collateral or document file identifies that the seller of the note/mortgage is really the owner, and they are not trying to rip you off. Then the security deposit can be released, that is the only way to prevent this fraud.

Here are ten different ways we’ve seen you can lose money in the Delinquent Real Estate Notes space.

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