Residential Back FlipTM deals are great because the homeowner actually gets to keep their property. Here are the four criteria we use when looking for potential Residential Back FlipTM deals.
1) The loan needs to be worth more than the house
2) The owner needs to be current on their payments
3) The loan needs to be a jumbo loan
4) The owner needs to be able to qualify for exit financing right away
Obviously we don’t want to ever buy a note without having a predetermined exit strategy in place. So what we do is we go in and we prequalify that owner for an exit loan. Typically we’ll do this at the same time we’re negotiating on the note buy because when we close on the note purchase from the lender, ideally we want to have that exit loan ready to go almost simultaneously.
Why Would A Lender Sell at a Discount?
You may be asking yourself “Why would a lender agree to sell the note or to discount if they know that you’re just turning around and bringing in new financing.”
Well for one reason the current lender we’re buying the note from doesn’t need to know what we’re doing after we buy the note. The existing lender knows that we’re coming in cash and we’re buying the note. At that point we own the note. Once we own the debt we can do whatever the heck we want with it. We can foreclose if we want, we can work a new deal, we can do whatever we want.
So at that point we buy the note, the current lender then is out of the picture they’re done, they’re gone, and then what we do is we rework a new term with the owner. Our goal is to help the owner to refinance us out of the loan we’ve just bought so we’re going to reduce the owners debt down to an amount where we know we can get the owner refinanced.
Ideally we have gotten the owner already preapproved with a new lender for the exit loan.
What Makes The Residential Back FlipTM Work
What makes the Residential Back FlipTM work is the fact that you’re taking an upside down property where the existing owner owes more than the property is worth and coming up with a solution. The owner can’t refinance the property, they can’t sell the property, and they’re kind of stuck.
The reason the owner can’t sell it is because they would have to bring a couple of hundred thousand dollars or more to closing to sell the property. So we buy the note at a huge discount then we turn around and allow the owner to refinance the property based upon 75% to 80% of current market value.
You look at some of these Residential Back FlipTM deals where there’s a huge loan amount owed and when you see what we’re buying it for you might say “My goodness why would the lender ever take that?” Well the reason is in today’s market where real estate values have dropped the lenders they know that they can only get so much for a house that they get back as a result of a loan that went bad.
If the lender has to foreclose, if they have to take the property back, especially with all the requirements and hurdles that lenders have to go through to foreclose on a property these days, they know that’s going to take them time and it’s going to have costs.
So if a lender can get all cash from someone like us, one of the key things that make this business work is that lenders are under Federal guidelines which require them to have certain amounts of cash on hand. The amount of cash that they need to have on hand is tied in directly to the number of defaulted loans or troubled assets that the lender has.
So if a lender is not meeting their numbers, that is the Federal guidelines they are supposed to meet, and they’ve got a reporting period coming up, the people working for the lender start to get pretty nervous. They know that unless they get some more cash in the bank and get rid of some of these troubled assets then they may end up out on the street looking for a job.
The Feds Come In And Shut The Bank Down
What happens is the feds come in to the bank usually arriving on a Friday night. They shut the bank down overnight and the next morning it opens up – you’ve probably seen this before where a bank opens up and it’s got a tarp over the sign with the name of a new bank. The old bank has just been put into another bank. A lot of times this is because the bank wasn’t meeting the Federal guidelines.
The bank was getting into a risky situation where they had too many loans going bad and not enough cash on hand. So when we go in saying “Hey we’ve got all cash and we’d like to buy this note.” It can be attractive to the lender.
In most cases with a Residential Back FlipTM the note is not in default yet but it’s most likely going to be and if the lender needs cash that’s very attractive to the lender. Does this mean that they’re going to accept every one of these you put in front of them? Absolutely not. But we have found that when you go in and you’ve got all cash to make these offers you can really make a killing on the ones that they do accept.