What is the advantage to a bank in selling a note vs. foreclosure?

Is there something about selling the note secured by the property that is more attractive to banks than short sales or foreclosure?

If there is some advantage, what does that translate to in terms of how much of a discount they might accept?

Is there a meaningful difference for the bank in considering selling the note vs. selling via short sale?

Your question is a bit unclear, but if I understand you correctly, you are asking why a bank would bother selling a note on a property in default directly to a third party instead of going through the foreclosure process? To clarify, in both of those instances, the bank will likely experience a short sale.

If that is the question, (depending a bit on state law) the general answer is that many institutions would prefer the sale of the note instead of going through the much more time consuming process of foreclosing on an individual. Foreclosing is extremely annoying, time-consuming and difficult- with selling the note, the foreclosure process is essentially transferred to the third party.

I do understand the advantage of a short sale over a foreclosure, I’m trying to find out what the advantage of a note sale is over a short sale. Someone told me that the bank will accept less for a note than for a short sale, but they couldn’t really explain why. Which is why I’m asking here.

I have been able to find out why an investor might find buying a note more appealing than buying a foreclosure or a short sale, not least reason being the lack of competition: go directly to the bank to make an offer on the note itself before any foreclosure takes place.

Also no need to have any (pre-sale) contact with the homeowners to convince them to short sell.

But again, that’s the benefits for the investor, I’m trying to suss out the advantage to the bank, if there is any. I’m guessing that it’s somehow the least expensive and time consuming option, but that’s just a guess that I can’t back up with details.

My answer was in regard to why a bank would rather deal with selling a note. The foreclosure process is time consuming and a waste of money for the bank. Every additional day that a default property is on their books is an additional day that they have an unknown loss. Selling a note is usually one simple known transaction vs. potentially many unknown transactions (eviction, repairs, additional liens, court costs, dealing with special government loans that the original purchaser may have secured ect.).

what do you mean by a “short sale”?

Selling the property for less than the amount outstanding on the loan.

I used to work for a mortgage bank so I might have an idea. I didn’t work in REO’s but I think this might be common sense if you look at it from the bank’s viewpoint.

Let’s say that I’m a bank and you have a mortgage with me with an outstanding balance of $500k. Let’s say the property is worth $300k based on an independent appraisal. Therefore, I know that $300k is probably the most I’m going to get, plus or minus some percentage of that.

If I foreclose, the property become an REO (real estate owned) of the bank. That means the bank has to pay property taxes, take care of maintenance and generally do all of the things the homeowner would have to do.

Even if I only hold on to the property for a few months, the carrying charges are not insignificant. In addition, I may not even be able to list the property any time soon since there is already such a glut of housing. So I could be eating those charges for years potentially - until the market has thinned out.

Now you may say, well, sell it for less than the appraisal. And for one particular house, that will work. But what if you have a couple of thousand REO’s in a particular market like say, Vegas. Pretty soon, you’re basically cutting your own throat.

But, if you sell the note, not only do you save the foreclosure expenses, and not only do you save months or years of carrying costs, but there is less of a chance that you will see the house on the open market and therefore it is less likely to contribute to declining property values.

I’m not sure, but I believe the reason for the last part of that statement is the fact that people who have cash to buy a note are most likely looking to use the property as a rental. Either that, or they already have a buyer lined up who may not have participated directly in the conventional real estate market. As a rental property, it does not compete with other REO’s and doesn’t help to depress prices.

I know next to nothing about finance. But one of us is getting confused by the terminology, and it might be me.

When the bank holds a note, it can sell the note either for full value or short. After a foreclosure, the bank owns the property, which it can sell either for full value or short. I don’t understand the distinction you’re making between “note sale” and “short sale.” It sounds like comparing apples and oranges to me.

and agreeing to cancel the balance owed by the seller rather than trying to get them to pay it.

As stated above, owning properties costs the bank money. They do’t want to hold onto them until property values rise again, which can take years. Every month the property sits there vacant, it is costing the bank.

Selling the note makes it somebody else’s problem. That means somebody else has to pay someone to handle the short sale of the property or eventual foreclosure.

Retaining the note and short selling the property or foreclosing mean that you have to pay someone to handle all that stuff.

From the bank’s point of view, the difference in the value of the note and the difference in the value of the property (or its recovery on a short sale) would be the difference in its cost.

That varies.

But if I’m understanding the terminology correctly, buying the note doesn’t transfer title to the property and doesn’t allow the new holder of the note to evict the current owners of the house - there’s just been a transfer of the mortgage to a new creditor. The new creditor/owner of the note would have to foreclose to be able to obtain possession and rent the property.

Correct. The new owner of the note has bought the same position as the old owner of the note: an obligation secured by the property. If the obligation goes unmet, they have to foreclose to take possession.

What I’ve been able to glean is that some investors buy the deeply discounted note which enables them to offer better terms to the owners, in effect giving them the loan modification that the bank wasn’t willing to. The person I was talking to was saying that in some cases the bank will accept as little as 50% of the note value. You buy it for half of the original loan amount, then offer the mortgagees a mortgage amount at 75% of what it was.

It’s actually a pretty brilliant investment. If you have 500,000 sitting around, what are your options? Stock market with all the risk that entails. Buy property directly, with all the competition and costs associated with that and do what, be a landlord, try to flip? Stick it in the bank for 1%? Or buy a note for substantially less than the property that secures it is worth and collect even 3-4% interest, and if the note doesn’t perform be brutal about the foreclosure and either sell or rent, either way there’s no real losses anywhere, just degrees of profit. Everything has some risk, but it seems to me that if you’re at all smart and careful about it the risk/reward ratio here is pretty appealing.

By selling the note, the bank can also minimize its losses should the market continue to decline.

On “60 Minutes” last Sunday, the city of Cleveland is actually bulldozing empty houses, claiming they are safety hazards. Once they do that, the value of the property drops to whatever a vacant lot is worth.

Yeah, I could really understand why a bank would happily sell a note at 50% or less than the original loan amount. ANYTHING is better than nothing!

In many, if not most cases, the property is abandoned. I don’t know this for a fact though. I know a lot of people have been squatting, for lack of a better word, in their own homes. They just stop paying and wait for something to happen. But I suspect you need some hairy brass ones to pull that move. I think most people grab what they can and boogie. In that case, getting a default judgement and taking possession should be fairly simple, but I don’t have any direct experience.

I like the idea of flipping a house in place with the “homeowners” still technically in possession. Vacant properties are a scourge. I think all single family homes have a suicidal streak and unless someone is there to constantly take care of them and tell them that they’re a good house, a pretty house, they tend to go downhill very quickly.

Once a house has been vacant for many months or even years, reconditioning it so that it’s habitable can be an expensive and time consuming proposition. Personally, I think that the bulldozer approach to dealing with the housing surplus is going to become a lot more common.

How do I buy notes from the bank as an investor?

My limited understanding is that you identify notes that aren’t performing, I assume via notices of default primarlly, then you approach the bank directly. There’s departments that handle it, and my guess is that a phone call to the bank would lead you to it pretty easily - you call and say you want to buy a note from the bank and they’ll give you some kind of information.

The more information you have about the status of the note the better position you are to make an offer, obviously, but exaclty what factors each bank looks hardest at… no idea.

The google will lead you on your way…if you learn anything interesting, please share.

True, but irrelevant to my question. What I asked was why the OP referred to a “note sale” and a “short sale” as if they’re two different things, since the bank can short sell either a note or a property? Plus, if I understand the process, the bank can’t sell the property, short or otherwise, without going through foreclosure first; so a “short sale” before foreclosure would have to be a “note sale.”

I think you misunderstand the process. A short sale is what the bank does to avoid the hassle of foreclosure.

No, that’s not how it works. Technically both are selling “short” meaning less than the bank is owed, but they are not the same.

A short sale means the owners are asking the bank to let them sell their property to a willing buyer for less than they owe on the note, forgiving the balance. This spares the owners the foreclosure on their record.

The note itself can be sold without the owners ever knowing about it. It’s the sale of the paper, the obligation secured by the property, not the property itself. Notes are sold all the time, actually, that’s what the banks did when they bundled them and sold them in lots. This is just a different way of doing it.

Anyone who owns the note has the right to foreclose on it if the borrowers do not pay.