Forget Flipping Houses – These Retail Investors Flip Notes
It’s 9:30 a.m. on a recent sunny Friday, and 60 people have crammed into an airport hotel conference room in Northern Virginia to hear Kevin Shortle, a veteran real estate professional with a million-watt smile, talk about “architecting a deal.”
Some have worked in real estate before, flipping houses or managing rentals. But the deals Shortle, lead national instructor for a company called Note School, is describing are different: He teaches people how to buy home notes, the building blocks of housing finance.
While titles and deeds establish property ownership, notes — the financial agreements between lenders and home buyers — set the terms by which a borrower will pay for the home. Financial institutions have long passed them back and forth as they rebalance their portfolios.
But the trade in delinquent notes has exploded in the post-financial-crisis world. As government entities like Fannie Mae and Freddie Mac have struggled with the legacies of the housing bust, they’ve sold billions of dollars’ of delinquent notes to big institutional investors, who resell them in turn.
And people like the ones in the Sheraton now pay good money to learn how to pursue what Note School calls “rich rewards.” The result: a marketplace where thousands of notes are bought and sold for a fraction of the value of the homes they secure.
A buyer can renegotiate with the homeowner, collecting steady cash. Or she might offer a “cash for keys” payout and seek a tenant or new owner. If all else fails, she can foreclose.
For some housing market observers, the churn in notes is a sign that the financial crisis hasn’t fully healed — and a fresh source of potential abuses. But the people listening to Shortle saw opportunity as he explained how they can “be the bank” for people with mortgage-payment problems.