How to Make a Bundle with Bad Paper

What if I told you there was real estate paper out there that you could buy all day long for fifty cents on the dollar? It’s good, secured paper, and nobody else is targeting it.

What’s so good about it? Well….it’s BAD paper.What is “bad paper?” It’s a broken promise to pay, evidenced by a promissory note that’s been secured with real estate. In my area, that means a non-performing note and deed of trust or a note and mortgage. The payor is in default on the note.

I’d discovered something interesting during my foreclosure research at the recorder’s office. It’s a document called a “mechanic’s lien,” and it’s filed whenever a contractor does work on a home and then doesn’t get paid. Sometimes it’s a supplier who’s delivered materials to the property who didn’t get paid.

Wait a minute. No payments? A lien on the real estate? Fully due and payable today? That sounds like “bad paper” to me!

Turns out it is bad paper, and there’s a ton of it. Better yet, nobody else has figured it out. There’s so much of it in fact, that you’ll run out of money before you run out of deals.

Every day two to ten (usually about six) mechanic’s liens are recorded with our county auditor. I view each document and enter the important information about the liens into my laptop, then head back to the office and print out (one click) my marketing letter to the contractors.

May I send you this check?

I send a letter to every unpaid contractor and supplier and offer fifty cents on the dollar for the obligation, and nearly one in ten says “yes.” That’s something like ten times the rate of success I got trying to buy paper from sellers who’d carried back financing. Ten times!

Ever get one of those window envelope letters where you can see what appears to be a check inside, and you open it up to find out that it’s only more junk mail? I hate them. I actually believe there might be a real check in there, and I don’t like getting fooled.

Well, now I send that very letter and get a completely different reaction. Why? Because mine displays an actual check along with the exact amount I’m willing to pay for the lien, printed right there on the check.And of course, below the check is my question: “Can I send you this check?”

Now, the contractor doesn’t have to think too hard to visualize my offer. In his hand he’s holding a copy of my check, payable to him, with the exact amount I’m prepared to pay (the amount, you probably already figured, is precisely half of what he is owed).

Seven deals the first month

Do they take it? You bet they do. The first month I set this up, I put together seven transactions right off the bat. My typical investment per deal was less than $500, and in most cases, I got all of that right back.

I’ll buy a $1,000 lien for $500. The law allows me to add another $1,500 on top of that in collection costs, and I’ll send the delinquent homeowner a bill for $2,500.Yikes! Now lets be serious. You don’t want to spend your time foreclosing on little mechanic’s liens. If they’d like to settle the thing today, I’ll take $1,500 and call it even.

If that won’t work, I try to set the homeowners up on a easy repayment plan. I’m looking for about a hundred dollars a month, with at least two or three payments up front, and then the balance at eighteen percent. That way, I get my entire investment back in only a couple months and collect payments for the next couple years.

And then I just do it over and over again

Of course, there are some pitfalls. (What if the homeowner disputes that the work was even done, or says he’s withholding payment because he is unsatisfied with the quality of the work? You need to have that part of the equation figured out well before you put your cash into the deal).

Now, when you’re down at your recorder’s office tracking mechanic’s liens, please don’t let the other paper players know what you’re doing! Let’s keep a good thing to ourselves…

By CREOnline Contributor

A content contributor to the original