BiggerPockets

I have searched the forums and google but am not able to find good information on buying non-performing notes with the intention of foreclosing on them. Has anyone on this site done it or do you know someone who does it?

I was wondering how it compares to buying at a trustee sale in terms of ROI. I am told that NPNs sell for less than the average price at a trustee sale but once we add the cost of foreclosing and the time it takes to do it, I wonder if there is still an advantage to doing it. (I suppose one could try to do a very generous cash for deed in lieu deal with the debtor to get him out of there.)

Also, are NPNs available easily on an individual basis based on zip codes, etc. or do you have to buy a portfolio of them?

Good Topic..I am actively looking for these as well in Cincinnati and KY..I have done a couple recently but they are hard to find at the right price!

Vikram..I really kind of fell into both of them. The 1st was from a vacant building mailer. It ended up being a seller financed note..I bought it for 25% of FMV..gave the owner $500 to sign the deed to me and sold it quickly for 65% of FMV. The second came from 1 of by bird dogs..he was complaining that he had a deeply discounted short sale approved..10% of FMV and 4% of value of the note..but there were personal judgements that were deeper than the leins and they wouldn't release..I asked for the bank contact..talked him into selling me the note instead of waiting on the short sale...I was fully prepared to foreclose..but in my pre-marketing for the property I got an offer for the note for 5x what I paid for it..still 50% of what I could have sold the property for..but I decided to take the bird in the hand...hope this helps.

the note holder was a widow..her husband was the investor and it was her last note..she was well off and just didn't had the energy for it..just developed a rapport and she told me "you remind me of my husband when he was young"..funny story..she had me call her accountant to work out the details and that guy has referred me 2 short sales!

I have tried the local banks..they will listen..but they tend to value their notes a little to high..a lot of them are waiting for the new accounting regulations to dump some.

I actually know somebody who invests in non-performing notes that are in SECOND position, and WITHOUT the intent of foreclosing! He buys at very steep discounts from face value / unpaid principle balance. But that is a bit of a different play than what Vikram has requested.

Vikram C.
Steve B. is right. I have a co. that buys 100's of institutional notes, primarily delinquent 2nd's, on a regular basis nationwide. We're not overly concerned with geography because we're in & out in a matter of months on average. We normally purchase non-perf. in bulk from banks & loan servicing companies.(There is a high barrier to entry) We also sell notes that are performing & non-performing to individual investors/note students on a loan level or one off basis.
As for FC, we initiate FC on @ 39% of the delinquent loans we purchase, but we actually FC on well under 8%. Everyone seems to be afraid of the "F" word, foreclosure. But the average uncontested FC is $2-3K throughout the US. Our business model is to not take the property if possible. You can exit a deal either through the Borrower or the property. We generally do better by exiting through the homeowner, & everyone wins!

Dave VH

Hi, notes! You know I love them...
Valkrim, I think you are on to a good business, what concerns me is that you said "with the intention to foreclose".

Next month, I will be in court on behalf of a borrower who was the victim of a wrongful foreclosure in Missouri. going into a note purchase with the intent to foreclose can cause you problems. As Dave pointed out (and I appaluded his statement with a vote) clearly showed by his foreclosure rtae that the loans are not purchased with that intent.

When you buy a note (and have failed to pre-arrange an agreement with the owner) you are a mortgagee. While a bank may justify having 5K in fees in the foreclosure process as they pad their books on the deal with fees, an individual or small company may have a difficult time doing the same thing.
Another point, if a property is sold at sale for more than the principal and accrued interest (to the date of demand, since after that date most states require it be placed in a non-accrual status) attorney or trustee fees, publications and direct expenses, the mortgagor is entitled to every dime above those costs. Some may disagree, simply because they have kept funds in the past and were not sued as is usually the case. But, if your mortgagor happens to be related to an attorney or knows someone who knows better and goes crying to them (and you never know) you better write a check for the excess funds or you can get hammered. If, as an idividual you think that you can charge foreclosure fees and expenses that are really unrealized and can not be justified (since you are expecting that to be a profit), think again. I have been to this rodeo before.
So if someone does deals with the intent to foreclose they need to do some more due diligence. Good luck, Bill

It's great to have some note experts contributing to this thread. Dave and Bill, would you mind giving us some sample numbers on how to make money while buying 1sts and seconds?

When you buy a second, I suppose you buy it only when the first is significantly less than FMV of the property. That way, the second has some intrinsic value to it. I have heard that seconds go for pennies on the dollar but I suspect those would be seconds that are underwater.

What's the strategy on first position notes? Just buy at a discount, season it, and sell at a profit? I understand that is a viable business strategy for note traders but how about us regular real estate investors who may not have the connections to buy and sell in volume?

Sam,
Since I know Dave and referred him to join BP and jump in on this thread, I can tell you what I know. I can tell you he buys pools of second-position NPN; the pools are from houses located wherever - in various states. I do know that he avoids specific states; he can tell you which those are.

Dave's business model does not target a specific loan on a specific house; he has told me that the pools are being offered for sale by the lenders, so the pools contain whatever they contain. Sometimes it's a take 'em all or forget it, sometimes it's pick out the ones you don't like and buy the rest. Dave's team perform due diligence to arrive at their acquisition offer, and they take down what fits.

Vikram,
Dave has told me that sometimes even the underwater seconds can bring profits! Think short sales, where the first has agreed to allow the second to get some small amount of the note value - and when the acquisition price of that note is low enough ...

Steve,
I get the model. I would be interested in buying some but would like to stick to my area till I get the hang of processing notes. (Especially 2nd's) I am familiar with values in the area and can access the situation and exit strategies effectively. I might be barking up the wrong tree as I know to do this effectively one must be willing to buy in all geological locations to get the volume necessary to do this business. It also gives you leverage with the sellers as it is one less qualification they need to meet in order to sell to you as an investor.

Thanks