Buying an NPN with equity at the property level

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Buying an NPN with equity at the property level

Chris Kinder
Real Estate Investor · New York City, NY · Member since 2011 · 3 posts · 0 votes

Hello everyone,
I am going under contract to buy a non-performing note on an apartment bldg in New York City. The outstanding note balance is $235k and the accepted price with the note holder is $200k (84 cents on the dollar). You may initially think the price were paying is high, but the original loan was only 55% LTV and the collateral itself has not lost much if any value as NYC multifamily market has remained strong. Our conservative estimate is a stabilized fee simple value of $450-500k.

The borrower ceased payment in sept '10 and a foreclosure commenced April '11. Its not clear yet why they couldn't make payments (will investigate during DD).

My question for you legal minds out there is what rights does the borrower have to sell the property during a foreclosure where equity (I think) clearly exists? They have not made any attempts to do so yet. And if they do not and it goes to an foreclosure auction what do you as the possible outcomes for me as a note holder? Is there any likelihood that I can get to this asset, which is of course what we want?

Thanks!
Chris

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Until you complete the foreclosure and the "sheriff's sale" (or whatever its called there) is done, the borrower is still the owner and can do whatever they want with the property. If they sell it, they owe you the outstanding balance on the note, plus missed payments and any fees. That's it. You cannot stop such a sale.

    If you do take it to foreclosure, you, as the lender, would typically set a starting bid. You should spend some time and money with a knowledgeable lawyer to be sure you understand how this process works in NY, it varies a lot from state to state. You can typically set a starting bid up to the amount you're owed, which would now include attorney fees associated with the foreclosure. If nobody bids, you now own the property. If others do bid, and auction ensues and the high bidder wins. You get the proceeds, up to the amount you're owed. The excess goes to the borrower. You may or may not be able to participate in the auction, if there are bidders. Here in CO, the lender sets an opening bid and any bid, even $1 over the opening bid, will take the property. I sometimes see lenders setting the starting bid low to encourage bidding. I don't think they can set the bid higher than the total they're owed. Again, you really must have a good, knowledgeable lawyer.

    If its a good deal at the opening bid, there may well be bidders. You would still get back the amount owed, based on the outstanding balance of the note.

    Why not approach the seller directly? You've already negotiated the equivalent of a short sale with the current lender. Find out what the borrower wants to just sell it straight to you. Maybe you could agree to a price of, say, $225K plus you pay all closing costs. $200K (your agreed upon note price) goes to the lender, $25K goes to the borrower, and you get the property.

    Also realize there are ways to stall a foreclosure, and they take a long time under the best of circumstances. You could be stuck with $200K invested in a non-performing note for years.

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  • Chris Kinder
    OP
    Real Estate Investor · New York City, NY · Member since 2011 · 3 posts · 0 votes
    14y

    Jon:

    Great repsonse, I appreciate it. We have tried contacting the borrower - with no luck yet - but working out a deal for the property would definitely be the best route, as you suggest.

    Many thanks, and good luck.

    Chris

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    14y

    Chris,

    Jon's response is spot on. New York is judicial foreclosure. Your total legal balance will be submitted to a court and ran through the court referee to ensure the court agrees. All of what he said about your rights are correct but you may have one other strategy, that I truly love to pull out.

    The commercial loan should consist of a Mortgage and Assignment of Leases and Rents. Tell your current foreclosure attorney you want to enforce the Assignment and ask the court to insert a receiver. In New York this is "Ex parte" which essentially means you can request the court and the borrower can not defend against it.

    The court will assign a receiver, court appointed. The receiver will enter the property with the purpose of taking property preservation and payment of property expenses and creditors. Once this is done, the receiver has full court power of the property, he can eject the borrower, amend rents, pay bills, etc. The receiver acts as an independent third party and reports only to the court.

    This will get the borrower's attention. If the borrower gets lippy with the receiver, they have the power to sell the asset at a price, the receiver determines is fair and just.

    If you don't have this specific security instrument, look at the language in the body of your mortgage, even residential mortgages have language to the same effect.

    Good luck!

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  • Chris Kinder
    OP
    Real Estate Investor · New York City, NY · Member since 2011 · 3 posts · 0 votes
    14y

    Dion, thanks for the feedback. Indeed, if we cannot work out a deal directly with the borrower, we will motion for a reciever based on the ALR provision and proceed with the foreclosure.
    Thanks again, Chris

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