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Introduction

By Robert Duplicki      July 31, 2025; Updated September 30, 2025

Can you tell which one of the properties in the photo above is in foreclosure? Could it be all of them? It could happen to each one at some point. If an owner was heading toward foreclosure, could you help them?

For the owners of foreclosures and other distressed properties they may simply need help moving on in the least damaging way. The common banking and real estate environment often lacks what the property owners need for a favorable exit strategy.

Part of the answer is for investors to be prepared to make money by acquiring such properties, when that is also the solution for the current owners. Learning more about real estate notes will give you some of this preparation.

In this article I will offer information and ideas to make money with the combination of real estate notes, foreclosures and other distressed property.

On the other hand you could be the note holder of a property where the payor is in default. So I will help you with those as well.

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What Is Distressed Property?

According to Rocket Mortgage, “A distressed property is a property facing some form of financial or legal difficulty, often leading to a sale at a reduced price. These properties are typically in foreclosure, short sale, or are bank owned.”

Commercial real estate (CRE) distress is also common. As reported in CRE Daily, commercial real estate distress hit $116B in March, the highest since the financial crisis.

For more insights from CRE Daily, here is a link for a free subscription.

Distressed properties come in all shapes and sizes and don’t need to be bank owned or facing bank foreclosure. For our purposes distressed properties are any property where circumstances lead to an owner who is willing to give you a great deal if you can solve their problem.

So our goal is to make a profit by buying below market while solving problems for others.

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Typical Foreclosure Progression

Since foreclosures are a common example of distressed properties, let’s look at the typical progression of events that takes place.

Foreclosure begins when a property owner stops paying taxes or their mortgage payment. I will address trust deeds below. With a mortgage foreclosure the bank will send a letter stating that the mortgagee, i.e., the payor of the mortgage, is 30 days late.

After a second missed payment the bank sends another letter advising that the payor is in default which technically begins after one missed payment. After a third missed payment the bank sends an acceleration letter which demands that the entire balance of the loan be paid in thirty days.

Even though there may be years of payments remaining on the mortgage, the acceleration letter speeds up that process. An acceleration clause in the security agreement states when and how the lender can accelerate the full payment of the loan.

While details will vary by state law and bank agendas, after more time and no payment, the bank attorney will file a lawsuit for repayment of the debt. The borrower is summoned and a court appearance is scheduled. The bank attorney will be seeking a default judgement.

At court unless the borrower is able to pay, a judgement will be awarded to the bank. Because the borrower has no money to pay the judgement, the bank will request that the property be sold and the judge will set a date to do so.

If the promissory note is secured by a trust deed instead of a mortgage, when the loan begins the deed to the property is given to a trustee. The trustee is usually an attorney or a company that specializes in acting as a trustee.

When payments stop being made in states where a trust deed is used, the bank also sends late notice letters. However the process is faster. There is no court involvement. The trustee has specific instructions to sell the property to pay the debt. The sale usually takes place at the trustee’s office at a date advertised in advance.

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Homestead Exemptions

Homestead exemptions provide some protection against unsecured creditors. They do not prevent a bank foreclosure if payments are missed on a mortgage. However if bankruptcy is pursued homestead exemptions may help protect the equity in the home. Homestead exemptions only apply to the primary residence, and the rules to qualify vary by state.

Here is a link to the Homestead Exemptions by State 2025 sourced from the World Population Review. There is a U.S. map that you can hover over and additional information by state is available by scrolling below the map.

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Down Payment Strategies

How does the small real estate investor today offer affordable housing? If you buy existing properties at today’s higher prices with elevated interest rates, plus insurance premiums and taxes, positive cash flow is difficult to achieve. So how will you reduce your monthly payments?

You could make a higher down payment on the properties you acquire. That will reduce your monthly payments. But unless you have good reasons to make higher down payments, doing so simply uses up more of the funds available for investment. So the down payment is sitting there not earning interest, and there is an opportunity cost as the down payment money is not available for use elsewhere.

The “nothing down” concept could be the answer. Nothing down means no money of your own down. It does not mean no money down. While these concepts are debateable, creative financing remains a viable approach that should be given serious consideration.

“Creative Down Payments: How To Use Almost Anything As A Down Payment” by Chuck Sutherland offers the following examples that could be used as a down payment:

• Real Property: houses, condos, apartments, commercial buildings, commercial land, residential land, recreational land, doc slips

• Building Supplies: lumber, carpet, plumbing, lighting

• Financial Instruments: stocks, bonds, promissory notes, mortgages

• Professional Services: legal fees, accounting fees, tax advice, plumbing services, home improvements, consulting fees

• Trade Credits: advertising credits, building supply credits, hotel credits, rent credits, travel credits

• Other Personal Property: boats, cars, recreational vehicles, artwork, jewelry, gemstones

• Anything else one person has that is seen as valuable and beneficial by the other party accepting the down payment

The last bullet point is the essence of this concept. You can use anything as a down payment that the party accepting the down payment is agreeable to.

Bank financing makes this approach less likely. And depending on all the other factors of the promissory note, it could be more challenging to sell the note.

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Split Notes

Distressed property can give the small investor the opportunity to acquire inventory, and convert this inventory to affordable housing. Split notes can help you acquire properties to improve and sell or to keep and provide as rentals.

What is a split note? A split note is a promissory note secured by a mortgage or trust deed, consisting of more than one note. For example, instead of creating one note for $80,000 secured by a mortgage, you create two notes for $40,000 each secured by the same mortgage.

What is the benefit of split notes? Split notes can be used in negotiations to acquire property. A split note can provide more flexibility for both the seller and the buyer of a property. This allows a deal to come together which otherwise wouldn’t work in a particular situation.

One $80,000 note might not work for the seller, because they may need to sell the note quickly, and the discount will be too large. The seller might not need much cash, but they need some cash.

So they could keep one note and sell the other. A partial sale of one note might also work. But having two notes could allow the seller to use one as a down payment on another property. Did you notice promissory notes in the list above of examples that could be used as a down payment?

One $80,000 note might not work for the property buyer because they can’t afford the payments. For example an $80,000 note for 30 years at 9% interest costs $643.70 for principal and interest.

An alternative is one note for $10,000 and the other note for $70,000. The $10,000 note is payable in 24 months at 0% interest and payments of $416.67. Payments on the $70,000 note begin after the $10,000 note pays off. The terms are 336 months at 9% interest and payments of $571.41 monthly.

As long as this option works for the seller, the payments are affordable for the buyer and the buyer also gets $10,000 equity in two years by paying off the $10,000 note.

This alternative or variations of it will work in some situations. It doesn’t need to be the first offer that the buyer makes, and it may not be the final offer agreed upon. So use your imagination to find ways to use split notes!

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How Does The Note Holder Avoid Foreclosing?

If you are the private lender on a note, what happens when the payor stops paying? You need to find out what’s going on. What has changed in their lives? When might things get better?

To help you avoid foreclosing here are some ideas offered by John D. Behle in The Paper Game along with my thoughts:

1. Help them find a loan. The payor might be able to resume payments, but they don’t have the money to get caught up on the back payments. Or with the right financing they could pay off your note. Could you offer a discount to pay off the note and increase your yield by getting paid sooner? Help them find a loan that solves your mutual problem.

2. Help them sell something. If the payor’s financial problem was temporary, they still might not have the money to get caught up on back payments. What do they have of value to raise the cash? If the payor’s financial problem is greater, help them sell the house.

3. Buy out their equity. At the right price and terms this could be a good deal for you. You could sell the property or keep it as a rental. Depending on the details, it might work to lease-option to the occupants who could buy the property back after their finances improve. If the property isn’t owner occupied you could buy it from the owner and sell it to the tenants.

4. Restructure the note. There are a lot of possibilities depending on your individual circumstances. As a private lender you have more flexibility than a bank. Adjusting the interest rate or the term could be done in segments. Easier terms for a while and more of an increase in payments later. If the payor’s circumstances allow, an increased monthly payment could first be used to catch up on the back payments, and then be maintained to pay off the loan sooner.

5. Subordinate or substitute collateral. To subordinate a note means to move it in position behind another, such as moving a first position note into second position behind a new first.

   So in this case the payor could get a new loan on the property in first position moving your note into second. Agreeing to do so could provide funds to pay you. In return you might request a partial payoff or negotiate higher monthly payments on your note.

   Substitution of collateral could work in this example if the payor has equity in another property which would give you greater collateral for your note.

   For more information about subordination and substitution of collateral take a look at The Pros And Cons Of Seller Financing - Part 2.

6. Have them deed it back. A deed in lieu of foreclosure allows the payor on the note to deed back the property to the note holder and avoid foreclosure. This will save both the payor and the note holder time and money. The note holder should learn more about this process before proceeding and do the related due diligence. Conduct a title search to find any liens or encumbrances and consider keeping your note in force in case you do need to foreclose.

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Frequently Asked Questions

Conclusion

Of course there is much more to learn about distresse property and real estate notes than covered in this article. Hopefully you picked up some ideas that you can put to use.

Part of the answer is taking the ideas presented in this article and using your imagination to find what works for you. Even the section "How Does The Note Holder Avoid Foreclosing?" could stimulate ideas how to acquire proerties.

If you have a note for sale, get started now. Please submit a worksheet, and I will work to provide the best solution for your needs.

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More Resources For You

Commercial Real Estate Notes Get The Job Done

Do You Have A Mortgage Note For Sale?

16 Ideas To Help You Utilize Seller Financing

Should You Use A Wraparound Mortgage?

Is Seller Financing A Bad Deal?

NoteSolutions Answers Your Questions About Promissory Notes