Diary - Buying a non-performing note NPN from start to finish

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For the past few months, years perhaps, I've been trying to soak up knowledge in the area of note buying. It has been especially intriguing to me since my partner and I handle a large volume of foreclosures and I get to see all of the post-foreclosure steps, but never really see the pre-foreclosure steps. I've seen hundreds of title reports, and all of the issues that can come up post-foreclosure. I have a good amount of contacts in various areas that are needed such as law offices, contractors, etc. I have always learned better by doing, than by reading. I like to study a subject to get the basics down, and then jump in head first, which leads me here. I didn't do an extensive search, but I didn't find anything that broke down buying a NPN from day 1, until the day you hopefully profit from the purchase. I plan to document the steps here to help others.

I did find numerous posts regarding FCIExchange and how it wasn't really worth buying notes on a portal such as FCI. I have found numerous notes on there that do not look like they are any sort of a profitable purchase. Conversely, I have seen plenty that do look like they could be profitable. This experiment is focused only on non-performing. Performing notes are more straightforward and much easier to see profitable, steady returns. 

The hypothesis for this experiment: If I purchase a NPN then I will make a profit from the purchase. 

I casually browsed the exchange for a few weeks until I was able to find a property nearby that was selling at a significant discount to the unpaid balance (UPB). The UPB in this case is $74,160.32, and the asking price for the note was $4,999.89.

I sent someone to look at the property and take some photos. I didn't want to personally look, because if I would ever do this on a larger scale, I'd have to rely on other people inspecting the property. Here is the front:

The property appeared to be older, with a new roof. They knocked, and no one was home (obviously?) and saw some construction materials in the hall. Comps on the block are trading in the $50K-$80K range, some with commercial zoning even higher due to the county courthouse being within 1 block. There are a good amount of investor purchases here to be used as rentals as well. A retail flip, not very likely.

I concluded that even if the inside is terrible, this property could likely still fetch $25K in a quick sale to another investor. There were only 8 sales in the zip code in the last 180 days under $25K, out of 201 total sales. Furthermore, if I couldn't resell for that amount, I could certainly turn it into a rental. 

I decided to proceed, and pulled up the mortgage docs for this owner. Locally it's a program called Landex that you need a subscription for, that I already use. It was only one lien, and the mortgage had been assigned a few times. I pulled a title report from FCI, which is done with the click of a button. The title report came back quickly, and I reviewed it. Straightforward, with some municipal liens for sewer and garbage bills, totaling about $6K. I made an offer of $2,500, was countered at $3,500, and it was conditionally accepted based on a due diligence period of 48 hours for me, the buyer. Once you come to terms, all of the documents for due diligence are released inside of FCI to download and review.

I contacted my attorney to tell him the next crazy thing I was up to and asked him to look over the documents, and shed some light on what my plan was in case I was overlooking something. He told me I was not overlooking anything but he doesn't do foreclosures, and gave me a referral to someone else who was well versed in foreclosing. 

I contacted the new attorney, and told him I had 48 hours to review the documents. We made an appointment, and I went in to meet him and look over everything. He does local foreclosures for some local banks. He assured me I wasn't crazy for doing this given my background. He said he wanted a little more time to review and the following day I hadn't heard from him. FCI was asking me to conclude due diligence and I felt confident so I clicked end due diligence even without hearing from the attorney. He ended up emailing me a short time later and said everything looked clean, phew. This new attorney is charging $250/hour, and took a $1000 retainer to begin work. His rates seemed fair, and given that he does this often, I'm OK paying top dollar to make sure it's done right and he holds my hand on this first one. If I continue buying, I would expect to renegotiate the fee.

The next step was to sign the note purchase agreement, provided by FCI. I signed and uploaded it. FCI asks if you want to record the note yourself when received, or pay them $200. The fees to record in this county are $66 so I will walk it in to the courthouse and record it. 

Next step will be to receive the signed purchase agreement from the seller, pay $3500 + $500 FCI fee, and receive all the mortgage documents. 

Total out of pocket to date: $1000 - legal retainer

I look forward to you following along. If I've missed adding details, shout it out and I'll be happy to provide. If I do something "wrong" you can feel free to point that out too, but as I said this is first and foremost a learning exercise so don't snicker behind my back ;) 

Stay tuned!

Hey Mark,

Great idea.  I look forward to your future posts.  You didn't mention checking the taxes.  That's important as many NPNs have several years of taxes due which are, in effect, a first lien on title ahead of your mortgage note.  If the taxes are delinquent, its a good idea to call the county and determine if a tax deed sale is imminent.

Here's a blog post which covers evaluation of NPN exit strategies.  Foreclosure isn't the only exit you should be thinking of here.  The others are usually better if feasible.   Also, here's another covering Tax and Title due diligence.  Seems your background puts you in good position to quickly grasp the fundamentals, but you may be able to pull some useful tidbits from these.  I have posted a few others which you can find with search.

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@Mike Hartzog

Thanks Mike.. It's been nonperforming for a few years and it was an investment property. Owner lives about 75 miles away. Get it performing is all but out, but a deed in lieu is not. The last lien that was filed had an updated address for the owner, so DIL is definitely in the cards to be worked on as soon as I have possession of the note. I'm assuming contacting before owning the note would violate some law, right or wrong? If you could legally contact that owner before buying the note, that would be a serious advantage. 

I'm away from my desk but the taxes are current through 2013 I believe. Attorney advised first stop after note possession is to call and make sure tax sale isn't looming. If it is, pay it current, but leave municipal liens open. What is your opinion on that? 

Yes, contacting the borrower prior to owning the note would violate most any seller's NDA, as well as a number of regulations which protect borrower privacy.  This is a "bright line" kind of thing which we just don't cross.

Regarding paying taxes and municipal liens, there's no hard and fast rule here.  One thing to keep in mind is that delinquent taxes have significant penalties attached, so if you believe you will end up with the deed, it's generally best to pay them now rather than later to avoid additional accumulation of penalties.  That said, I have left taxes unpaid in foreclosure situations where the property is desirable and in a relatively active RE market, i.e., when I have good reason to believe that a bidder at the foreclosure sale will pick up the property and take on the tax bill.  You might ask your attorney about the foreclosure rules related to taxes are in the county.  You may or may not have to pay them prior to the sale.

@mark Gallagher, thank you for starting this post. I have been looking at NPN investing for quite some time; only so much reading can be done until you are at the point where you need hands on experience.

I look forward to future posts from you. 

Seller signed the purchase agreement. Funds were requested, $3500 plus $500 which is the FCI fee. $4000 wired to FCI. 

Next step: await transaction to close and receive file. 

Total out of pocket to date: 

$1000 - legal retainer; $3500 - purchase price; $500 - FCI transaction fee; $25 - outgoing wire fee

Mark, I've purchased 3 NPLs via FCIExchange over the past 2 years and they have all been good deals, so I'm glad you are using them to do this test. The nice thing about this site is that you can negotiate with the seller, have the opportunity to preview the collateral and FCI provides the escrow service to hold your funds until the collateral files are verified by FCI. Its a relatively "safe" transaction using their platform. 

I even had a transaction that went all the way to signing a contract to purchase and the day before I was scheduled to wire my funds I discovered that the note was invalidated due to a state statute in Oklahoma. I contacted the admin at FCIExchange and they essentially cancelled the purchase and relieved my obligation to consummate the deal. Very good folks with whom to do business IMHO.


@Bob Malecki

Thanks for the input, glad someone much more experienced than me doesn't think I'm crazy! 

Their platform has been on point so far, no complaints at all. Very high marks on their software so far. 

The platform is very well done.  The risk here is that you are buying from a semi-anonymous seller, so there is no trust and no relationship to fall back on if problems arise after the purchase.  This being the case, complete and proper due diligence is extra important when buying this way.

I had purchased one performing asset through the platform quite a while back.  I found the process to be very well implemented.  That said, the quality of sellers varies greatly and had found that it takes a lot of digging to find descent deals. I think that's the root cause of the negative remarks. Once you are in the game for a while you will develop more and better sources of assets.

@Mark Gallagher   FCI as  note portal is fine... its as @Mike Hartzog states its the note sellers.  there is a ton of fraud in the paper business.. so you have a lot of seller carry back type of stuff with fluffed numbers etc etc... those less intuned to values and how things work can buy some pigs in a poke on FCI... your not going to be taken with your knowledge of your immediate area and the values. 

Its some investor setting in CA.. that is fairly new that buys some note in the mid west and believe the ARV values and has not a clue.

I think the other issues with the NPN at least that were to owner occ's is were they done correctly to begin with.

Will be interested to follow your journey on this one... but once you perfect the process and you know all the in's and outs of the transactions you will do just fine.

Is this a mortgage state or a trusted state were you bought the note?  that does make a big difference if you actually have to foreclose.

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@Jay Hinrichs

You mean people can't just click buttons, wire some money, and make millions?! They actually have to have a basic knowledge of what they're doing - say it ain't so!! Ha. 

It's in PA, a mortgage state. 

@Mark Gallagher

I would love to know a little bit more about why you chose the property you chose other than it being close to home. Could you shed some light on that for me? How exactly did you analyze this property and determine that you believed it to be profitable? 

@Lance Wakefield

Proximity and low risk of capital would be the first two reasons.

After seeing the photos, I decided that I've basically already seen the inside given my experience. I can expect to find the majority or the house to most likely be a mix of new and old given that this was an investment property. The burn on the side of the house tells me there were some careless tenants so there's probably more broken stuff inside, but probably not torn apart. The roof is very new, so someone at some point had some good concern for the property. The building materials tell me the owner was probably renovating when some tenants left and then ran out of money or some other life event came up and he gave up. He had another property in the same city that was taken back by the lender in 2013. All of that generally tells me I can at the very least get bottom-of-the-zip-code pricing, which puts me around $25K. If it's in better shape than I think, I can probably fetch $30-$35K. I am expecting my outlays to be in the $15K range when all is said and done. 

I think when the process eventually ends, I will be left saying "that's it?" and I will come to realize it's nothing but a moderately complicated paper shuffle (knock on wood). But then I'll have to worry if I can make some money once I possess the deed and see the inside. 

Originally posted by @Jay Hinrichs :

@Mark Gallagher   how long do foreclosures take in PA ?

Although Mark gave a good answer for the minimum - 6 months - I have seen some take multiple years; borrowers can exercise all sorts of stall tactics ...

Mark, if you are a DIG member, PM me and I will tell you about a DIG subgroup with a focus on just what you are doing here (but the advice there was avoid states like NY and PA due to long foreclosure times, unless foreclosure is already underway).

@Steve Babiak

I should have mentioned that another reason I picked this one was that it was an investment property and was already vacant. I believe this will drastically reduce the chances of any stalling and even increase my chances at a DIL. If I can contact the owner, I can't think of any reason he would turn down money to sign a DIL for some place he's abandoned and doesn't live in. Am I missing something on that point?