Note Foreclosed, Next Steps?

38 Replies

So my brother @Eli Garcia and I are working together on increasing note holdings between the 2 of us.  2 heads are better than 1 kind of thing.  Any who, he bought one that's in Detroit, MI that was in foreclosure and as his purchase went through foreclosure process went from "in foreclosure" to "foreclosed".  So now, as I understand it, he has the title for the property.

I recommended he sell it - either to a fix & flipper, buy & hold investor or just sell to someone wanting to live there period. I'm also a big fan of Google, so upon a quick Google search of the address he found out that there had been a foreclosure auction?  He tried to get ahold of the foreclosure attorney to see exactly what had happened and has had a few back-and-forth e-mails with the company he purchased the note from but I keep telling him that he should ask the expertise of BiggerPockets what his next move should be :) (I've been lurking for months and hardly post but I've been reading and learning a LOT).

More pointedly, at this point are there any specific questions he needs to make sure to ask? and/or anything he shouldn't be doing? 

If he owned the note during the foreclosure process, he should have had an assignment recorded of course, but the foreclosing attorney would be Working For Him at that point.  Don't know if there would need to be a substitution of plaintiff during the process or not, in that jurisdiction.  He seems to be quite uninformed of important things if he actually owns the note.  Can't he check the court/foreclosure case docket/outcome without waiting for some attorneys?

@Vanessa Garcia

 sounds like you guys need a MI real estate attorney who has experience with notes and foreclosures.  DM me and I can give you a referral.

@Wayne Brooks

  this whole new genre of folks buying bad paper is just so perplexing to me.. who talks them into doing this.. these are the most complicated transactions one can do.. and you get post like these form people who have no clue.. they should never ever have done this in the first place.. and I will bet dollars to donuts the house in Detorit is destroyed and is one of those 500 to 1k houses you see being marketed and they probably owe 5k to 10k in back tax's and a 3k water bill LOL... Am I wrong here.. what is going on with uneducated investors buying into the most complicated RE transactions and then posting on BP HEY HELP me what have I done and I Don't understand... whoa !!

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Vanessa Garcia

  No offense here. not sure who talked you guys into this .

but I will be the house is not worth what you paid for the note.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Jay Hinrichs 

I was afraid that there would be some people that started on that specific train of posting which is why I am not the only person afraid to ask questions about notes.  I am not a stupid or silly person, I am trying to learn.  Some people learn by reading, some by taking classes and others by doing.  I will not even attempt to box myself into any one of these categories but certainly I do NOT learn by being told not to do something because it is too complicated. 

He did find out that there are a few back taxes and he is willing to deal with that - they are back taxes but NOT labeled as delinquent.  I did tell him I was uneasy about the Detroit, MI market but according to the information we found it is NOT 100% run down and certainly worth more than we bought the note for. 

I am not sure what anyone gains from saying the same things over and over again.  I have read post after post berating people for asking questions that are not so simple. Every note is different and tells a different story so I'm not sure how anyone can be an expert when they buy their 1st or 2nd note. 

Hindsight is 20/20 so it's easy to point fingers at other people just starting out. I would appreciate it if we'd keep the conversation centered around what to do now instead of anything else. 

@Wayne Brooks 

The timeline of purchase and foreclosure is a little fuzzy which is what leads to this particular situation. I think there are a lot of pieces of the life of a note that can be described as "in foreclosure" - but I'm not sure which ones actually qualify under that title. 

For example, would you describe a note as "in foreclosure" if you had only had the paperwork started, just got your court date, already went to court and were waiting for the title paperwork? When are you "in foreclosure" versus actually foreclosed?  I'm asking a serious question here.

In this case, the note seller hadn't updated their information with a court date or anything so he put in the bid, got accepted and later THAT day or the day after they found out that the foreclosure went through.  So at the time the case went to court the lawyer wouldn't have been working for him. Either I will or I'll ask him to check into the assignment of record and court outcomes although I know he's said for certain he will end up with a title.  Not sure how long it will take for the title to get into his hands.  

Not sure if we should just be patient or already trying to find a buyer.  We'd like to move quickly IF we can. 

As a general comment, I'd like to say that I was really hesitant to post anything but I had some faith that I could find answers.  I have been very cautious in this entire thing and for these 2 notes that he does currently have there are HUNDREDS of other ones that we threw out of consideration for one reason or another.  

Neither I nor my brother have done anything that I would consider foolish (he did a BPO, got tax information, etc.) and we're just asking for a little bit of help. I'm not asking for anyone to hold my hand through the process or be my "mentor" for nothing in return (I read a lot of different forums here on BP).  I really have been following the posts, threads, articles - every spare moment I have I have used to educate myself.  I just think it's a really big shame that there is a group of people who have so much to offer and yet discourage some other people just on the basis of them being "new".  

For all of the huff and puff against guru programs, etc., and pointing people towards trying to educate themselves there's a lot of people who don't like for others to ask any questions. It's human to make mistakes, but I refuse to continue to live in fear of making them because of all of the information I read on forums. If I never buy a note I will continue to be labeled as a newbie and be paralyzed by all of the potential consequences. 

I think the best option is to sell the house to someone who want to buy it. Otherwise there where no use of this property.

Vanessa,

I do not want to spend time on the idea behind when you posted or the fear.  To any newbie.  Post and stop being scared.  The issue is we (at least I do) get frustrated on your behalf because often times we see it as someone taking advantage (the seller) of your lack of experience and knowledge.  I don't like it when good people are taken advantage of.

So let's recap here because details matter. You entered into a contract to purchase Mortgage and Note located in Michigan. During said purchase the foreclosure process was coming to a conclusion. Foreclosure is a specifically defined period. It is not ambiguous. It starts when the first legal filing occurs, which in a mortgage state is usually the complaint being sent to the court and it ends when the asset is sold or reverts at auction. Obviously there are other ways for that process to end but those are the two most distant points of time. Therefore "in foreclosure" is a time between those two points and "foreclosed" is after the final point of time. Also if the mortgagee retains title to the property the mortgage is "foreclosed" (read as extinguished) and the asset is referred to as REO which is Real Estate Owned.

What we have here is an asset that went to auction that you purchased but did not control the reserve bid.  You could have ended up on the wrong side of that bid.  Next time be careful or get some to help you.  

So the court has processed the sale and it sounds like there were no bidders. So the title is going to revert back to the Mortgagee that delivered the bid instructions (the Seller).  There will be a Sheriff's Deed issued as a result of that sale.  Since there was no bid or one that did not cover the reserve bid, then the Sheriff's Deed will automatically list the Mortgagee as the new deed owner.  In general, you have to notify them a week (maybe two, can't remember) prior to sale in order to substitute any names on the new deed.  They do not like to do corrections nor do they do them quickly.

So the Seller's company sold you a mortgage and note but that mortgage and note are now gone.  The mortgage is extinguished as function of the auction process.  What you need is title to the real property now.  The caution here is make sure your trade and any assignments pre-date the auction.  If they do not pre-date the sale at auction you likely need to redo everything.  After the auction there are no longer any rights or interest held by the mortgage since the mortgage is gone.  So those rights and interests can not be assigned to you.  In addition, they county can come after you for not paying the proper real estate transfer tax amounts.  

Chances are the Seller will simply try and Quit Claim them to you which works only as long as your Assignment of Mortgage is executed and recorded prior to the auction.  If it is not, then you need to do a full blown real estate sale to be safe.  The Seller can issue you a Special Warranty Deed or  a Quit Claim Deed.

Good Luck.

@Dion DePaoli just gave a pretty good rundown, assuming you held first position and were foreclosing. Of course, I will point out what other's may have missed: you might have been a second (or even more junior) position lien holder with the first position lien holder foreclosing. And that is another situation, and requires much more explanation; so before going there, can you establish with certainty the lien position you held?

Originally posted by @Steve Babiak :

@Dion DePaolijust gave a pretty good rundown, assuming you held first position and were foreclosing. Of course, I will point out what other's may have missed: you might have been a second (or even more junior) position lien holder with the first position lien holder foreclosing. And that is another situation, and requires much more explanation; so before going there, can you establish with certainty the lien position you held?

 Good point.  

@Vanessa Garcia So, has your brother actually bought the note yet?  You said "entered a bid".

An after thought, along the lines of@Steve Babiak . The conclusion of the foreclosure, taking title and selling the asset......is the obvious course for collecting/cashing out profits after buying an NPN. So, why would an NPN holder get the proceedings to this point, and then sell the note? I'm guessing the seller decided he'd net more from selling the note, rather than taking title to the property. There may be some other issues at play here, as to other liens, value, etc.

@Steve Babiak

yes very good point hopefully they bought a first but you know with all the NPN 2nd's being hawked around the country ya never know... If its a second then its a moot point as they are wiped out... so hopefully it was a first.. and as Dion states it reverted to lender and now the lender that sold the note is in title.. and will need to then deed it over to the successor interest that these folks have....

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Originally posted by @Charles Colucci :

I think the best option is to sell the house to someone who want to buy it. Otherwise there where no use of this property.

 That's what I said. No greater pleasure than that of the little sister being right lol. 

Originally posted by @Dion DePaoli :

Vanessa,

I do not want to spend time on the idea behind when you posted or the fear.  To any newbie.  Post and stop being scared.  The issue is we (at least I do) get frustrated on your behalf because often times we see it as someone taking advantage (the seller) of your lack of experience and knowledge.  I don't like it when good people are taken advantage of.

So let's recap here because details matter. You entered into a contract to purchase Mortgage and Note located in Michigan. During said purchase the foreclosure process was coming to a conclusion. Foreclosure is a specifically defined period. It is not ambiguous. It starts when the first legal filing occurs, which in a mortgage state is usually the complaint being sent to the court and it ends when the asset is sold or reverts at auction. Obviously there are other ways for that process to end but those are the two most distant points of time. Therefore "in foreclosure" is a time between those two points and "foreclosed" is after the final point of time. Also if the mortgagee retains title to the property the mortgage is "foreclosed" (read as extinguished) and the asset is referred to as REO which is Real Estate Owned.

What we have here is an asset that went to auction that you purchased but did not control the reserve bid.  You could have ended up on the wrong side of that bid.  Next time be careful or get some to help you.  

So the court has processed the sale and it sounds like there were no bidders. So the title is going to revert back to the Mortgagee that delivered the bid instructions (the Seller).  There will be a Sheriff's Deed issued as a result of that sale.  Since there was no bid or one that did not cover the reserve bid, then the Sheriff's Deed will automatically list the Mortgagee as the new deed owner.  In general, you have to notify them a week (maybe two, can't remember) prior to sale in order to substitute any names on the new deed.  They do not like to do corrections nor do they do them quickly.

So the Seller's company sold you a mortgage and note but that mortgage and note are now gone.  The mortgage is extinguished as function of the auction process.  What you need is title to the real property now.  The caution here is make sure your trade and any assignments pre-date the auction.  If they do not pre-date the sale at auction you likely need to redo everything.  After the auction there are no longer any rights or interest held by the mortgage since the mortgage is gone.  So those rights and interests can not be assigned to you.  In addition, they county can come after you for not paying the proper real estate transfer tax amounts.  

Chances are the Seller will simply try and Quit Claim them to you which works only as long as your Assignment of Mortgage is executed and recorded prior to the auction.  If it is not, then you need to do a full blown real estate sale to be safe.  The Seller can issue you a Special Warranty Deed or  a Quit Claim Deed.

Good Luck.

 Very clear - as always :). Thanks Dion. 

The property did go up for auction - but it did not sell. 

He says papers were drafted on the 18th. 

The auction was on the 19th. 

He got VERY lucky there. 

Question: On all of the notes we've researched, run numbers on (I created my own excel spreadsheet to compare variables and included servicing costs, determine number of payment periods left, etc. - I am a math teacher btw) - I did create a column to flag bankruptcies and foreclosures. Not saying it was a positive flag but I wanted to make sure in my analysis that we knew when a property had those traits to seriously consider that before purchasing. If there's a foreclosure auction coming up is it common to keep the note posted for the day up to the auction or is that an oversight? I'd imagine based on the process described above that it would be less trouble to take the note out of a "for sale" list for a few days in case your exit strategy came through. 

So far we've only been on the buying end of deals since our actual strategy is long-term so we try to vet notes that we can be patient on. This one just happened to unravel rather quickly.  

Originally posted by @Steve Babiak :

@Dion DePaoli just gave a pretty good rundown, assuming you held first position and were foreclosing. Of course, I will point out what other's may have missed: you might have been a second (or even more junior) position lien holder with the first position lien holder foreclosing. And that is another situation, and requires much more explanation; so before going there, can you establish with certainty the lien position you held?

1st position with 1st lien foreclosing. 

I do understand some of the pitfalls (not assuming I know everything here) of being in 2nd with a 1st lien foreclosing. 

I tend to be a details guy and "drafted" is not the same as "executed".  To that extent "fully executed" by both parties.  Usually the PSA is passed around for a day or two while everyone reads it and executes it.  Intent is not execution.  

It is not uncommon for an NPN to be out in the market through auction. No Seller loan investor will rely solely on the secondary as an exit strategy. Nor should they.

Foreclosure 'seasoning' (if you will) should increase the price since the asset is closer to disposition.  It is a metric of time.  Most of the sites that sell loans and many of the less than instutional sellers in the market place tend to have fairly simplistic data sets.  You should always be on the look out for foreclosure and bankruptcy data just like you need to look for modification and forbearance.  The filing date for foreclosure would be when the 'clock' starts and you can use time estimates from any legit source as to how long to expect to foreclose.  BK can extend time but that generally means payments so it tends to be a good thing.  Outside of that we tend to use BK flags as further insight and do a little custom configuring to produce our bids based on simple ideas of if BK is filed and if Proof of Claim is filed, then payment streams and discharge and dismissal.  

That is a good way to learn.  Start with one set of ideas, like foreclosure and start modeling out what happens.  Time and expenses.  That will get you better bids.  Background knowledge like some of the more seasoned folks have just comes with experience.  The best step toward that direction is starting with good numbers so you can stay invested and buy more than one asset.  

Good luck.

Originally posted by @Wayne Brooks :

@Vanessa Garcia So, has your brother actually bought the note yet?  You said "entered a bid".

An after thought, along the lines of@Steve Babiak . The conclusion of the foreclosure, taking title and selling the asset......is the obvious course for collecting/cashing out profits after buying an NPN. So, why would an NPN holder get the proceedings to this point, and then sell the note? I'm guessing the seller decided he'd net more from selling the note, rather than taking title to the property. There may be some other issues at play here, as to other liens, value, etc.

 I say "bid" because there was 1 note from a website (let's call them note seller A) with a stated price that he thought he was buying and it ended up that the seller came back with a counter offer. That experience really frustrated him and made him not want to buy from note seller A's website anymore. So I have been teaching & getting ready for midterms and spring break so I didn't want to say purchased if it was a bid. I have since talked to him and it appears the process is smoother for note seller B. 

We considered the idea of this note originally being in 2nd position then moving to 1st after the 1st was paid off or something because we thought it was weird too. Note seller B actually called him and asked if he wanted to sell the note back. Not sure if it's a clever ploy in reverse psychology or if there's more there. He's banking on there being more than meets the eye with this note turned title. 

Originally posted by @Dion DePaoli :

I tend to be a details guy and "drafted" is not the same as "executed".  To that extent "fully executed" by both parties.  Usually the PSA is passed around for a day or two while everyone reads it and executes it.  Intent is not execution.  

It is not uncommon for an NPN to be out in the market through auction. No Seller loan investor will rely solely on the secondary as an exit strategy. Nor should they.

Foreclosure 'seasoning' (if you will) should increase the price since the asset is closer to disposition.  It is a metric of time.  Most of the sites that sell loans and many of the less than instutional sellers in the market place tend to have fairly simplistic data sets.  You should always be on the look out for foreclosure and bankruptcy data just like you need to look for modification and forbearance.  The filing date for foreclosure would be when the 'clock' starts and you can use time estimates from any legit source as to how long to expect to foreclose.  BK can extend time but that generally means payments so it tends to be a good thing.  Outside of that we tend to use BK flags as further insight and do a little custom configuring to produce our bids based on simple ideas of if BK is filed and if Proof of Claim is filed, then payment streams and discharge and dismissal.  

That is a good way to learn.  Start with one set of ideas, like foreclosure and start modeling out what happens.  Time and expenses.  That will get you better bids.  Background knowledge like some of the more seasoned folks have just comes with experience.  The best step toward that direction is starting with good numbers so you can stay invested and buy more than one asset.  

Good luck.

Honestly I wanted my models to start without foreclosures and bankruptcies initially. I wanted to start with simplistic modeling. But as I've gone through I've found with serving costs a lot of "deals" just aren't deals. I continue to enter data from multiple sources and see if I can find situations where I'm comfortable with the risk. But he's willing to take more risk and has more time to research lol. Hence why he currently has more assets than I do. I'm gaining more confidence with the idea but waiting to take the plunge. 

So what I'm hearing so far - seller must quit claim deed to him. No issues because his timeline worked out for him. 

IF it didn't and he tried to purchase after the auction THEN he would have had to try to purchase or could they null the contract since it would have no longer been valid since he wouldn't have been purchasing a note but a title and thus not buying the finances but actual property (hence real estate sale taxes, etc.) but he would have gotten his original bid/purchase amount back - right? just checking to make sure I'm keeping all of these ideas straight. 

@Vanessa Garcia We still have no clue what has actually happened here.

Did your brother actually fund the purchase of the note, yes or no.

Did your brother receive an assignment of the note and mortgage, yes or no.

If yes, was it prior to the auction?

Was an assignment recorded?

Do you Know of this was first or a second?

Seconds don't "become a first " due to a foreclosure.

We're there two notes on this property?

Which note filed the foreclosure?

Originally posted by @Wayne Brooks :

@Vanessa Garcia We still have no clue what has actually happened here.

Did your brother actually fund the purchase of the note, yes or no.

Did your brother receive an assignment of the note and mortgage, yes or no.

If yes, was it prior to the auction?

Was an assignment recorded?

Do you Know of this was first or a second?

Seconds don't "become a first " due to a foreclosure.

We're there two notes on this property?

Which note filed the foreclosure?

He did purchase the note prior to auction. 

Not sure if the assignment is recorded - I'll ask him to check on that. 

It was a 1st. I didn't say it was a 2nd and "became" a 1st. Hypothetically, we thought it *may* have been older and the original 1st may have been paid off and there was still a 2nd but it doesn't even matter whether this note was an original 1st or a 2nd and the senior lien paid off because it's a 1st now. That was more a trip down a fantasy "maybe" land than reality. 

This note that he purchased, which is in 1st position, filed the foreclosure. 

One additional thing to keep in mind is that in Michigan there is generally a 6 month right of redemption.

Tom N.

  and in Detroit  Water bills that don't get wiped out....

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Vanessa Garcia Well then I hope all is as it appears. It's just that it takes time, and money, to get a NPN to an actual foreclosure auction and that note holder will be in a better position to known the issues with the note better than an outsider. Albeit from perhaps a skeptical viewpoint, a note holder selling on the eve of the auction is likely someone selling a problem, rather than an opportunity.

Next step:  Full title search, including unrecorded liens.  Your own BPO.