Finding Profits in the Cracks

Believe it or not, banks are giving away money.

Why? Because they have so many delinquent notes that some of them slip through the cracks. Thankfully, they don't seem to know it. Today we are going to tell you a story about how we are able to profit on the REO (Real Estates Owned) properties that the big boys have, but didn't know it. A couple of weeks ago we bought this note for a single family property in Indianapolis in a pool of four. It was a balloon note that was originated by Citi before the big crash. When the balloon came due, the house was underwater and the borrower was not able to get it refinanced. So he signed a Deed In Lieu of Foreclosure (DIL) with Citi. A Deed in Lieu is when the borrower surrenders his rights to the property. Citi then had an REO, but they didn't file it with the county or their own books. Instead they sold the defaulted note to a hedge fund. This note then passed through the hands of three hedge funds before it landed in our lap. Each one of these hedge funds could have easily converted this note to an REO for just a few hundred dollars if they simply contacted the borrower and filed the paperwork with the county. Instead they sent foreclosure notices and then sold off the note for a fraction of its value. After we funded the deal, we hired the borrower outreach that we work with, Polaris. We use them for most of our deals that have a delinquent note. Within a couple of days, the borrower was contacted and told us he had already signed a Deed In Lieu with CIti. Once we showed him that it was never filed with the county, he agreed to sign another one for us. The paperwork in this business is slow, but by the time we get it all together, we should have an REO free and clear and ready to sell or rent. Believe it or not, this is the second asset that we have bought that has the same story in as many months. The banks have so much paper out there that they just don't know what they have and they let those profits slip through the cracks. Thank you Mr Banker.


Type: Nonperforming 1st Mortgage
Property: SFR 3/1
Fair Market Value: $35,000
After Repair Value: 40,000
Unpaid Balance: $41,908
Monthly P&I payment: N/A
Investment: $21,028
Monthly Rent: $750

Summary of investment opportunity:

We are buying this asset from a hedge fund. This is a 1st position mortgage for a SFR home in Indianapolis. The property is a 3 Bedroom, 1 Bath, 1056 sq. ft. house built in 1956. It is located in a strong rental neighborhood. 

We have two exit strategies on this property. One is to sell it to another investor for $35,000. The other is to hold it as a rental for the cash flow. The borrower is willing to sign a deed in lieu of foreclosure, so there are very few legal costs. The ROI with a DIL and a quick sale is estimated at 63%. With a DIL and convert it to a rental is estimated at a 20% Cash on Cash return.