NPN Foreclosure & Remaining Equity in Property

[Mark Scarola]

I've seen a couple of conversations here on BP about what happens to any remaining equity in the event that a NPN holder forecloses on a property. The assumption for many seems to be that the investor would get all remaining equity, though others have corrected them explaining that you're only able to collect on the equity up to the value of the note.

Until this came up here on BP this is something that I haven't come across or honestly even wondered about. But now it has me thinking and I was hoping I could get a little clarification.

Let's use an example with simple numbers. A first-position note with a face value of $60K is purchased for $35K. For simplicity sake there are no other liens of any kind. The FMV is $200K. The note investor forecloses and recoups the $60K owed them. At what point is the remaining equity addressed? If as an investor I sold the property below FMV (let's say $150K) to get a quick sale, when does the former homeowner receive the equity and how much?

In this example would he/she be entitled to the full fair-market equity of $140K or the remaining equity post-sale of $90K? What incentive do I have then to sell the property for anything reasonable?

Or what if I decided to rent out the property (particularly during the redemption period)... when would the former homeowner be due their equity?

[Brian Burke]

If you buy a note with an unpaid balance of $60K as in your example, the most you can receive is $60K, or title to the property. If you foreclose, and no one bids at the foreclosure sale, you now own the property and all of the equity is yours. If the property is worth $200K, it is highly unlikely that no one will bid higher than $60K at the foreclosure sale. More likely is that competitive bidding brings a bid in the low to mid $100s. If that happens, you get your $60K unpaid balance, junior lien holders get whatever is left up to their unpaid balances (if any), and the former homeowner gets the rest.