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

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

Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes

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!

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Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
11y

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

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Mike Hartzog  for me on these super low value notes I would contact the owner I would not worry about a NDA  .. I mean they are offering the note at 3k or 4k.. even if they found out what are the damages.... no one is going to litigate over this stuff.

    Just like when I buy foreclosures if the house is empty I find a way in.. LOL

    I guess I may be a little more of a risk taker than... some but I am also a realist and understand the value of litigation and or when someone is not going to spend a bunch of money litigating something that is worth very little.

    So in this instance I would find out who owned the property and offer cash for keys if that was my angle and once I had that I would then buy the note knowing I had that handled.

    Again not advocating it ... just saying .....

    we live in this worry about sueing society when in reality you have to do something pretty bad to instigate real litigation and there has to be some worth litigating about.. a 4k note not going to ever happen would be my guess...

    Although maybe you piss off a seller of the note and they won't sell you anymore so got to pick your battles.

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Steve Babiak

    The upset price at sheriff sale will probably end up being slightly below my target price. I would be happy with a sale at sheriff sale, but the reality is the really savvy buyers are at the sheriff sale and I could likely fetch more putting it on the MLS for everyone to see.

    @Jay Hinrichs

    I have photos of the inside (from outside) but didn't want to post them on a public forum since taking interior photos of someone's private property is illegal I presume. If this weren't an experiment and there were more capital at risk, I would have went there myself and certainly would have "found the back door open" and made my way inside. 

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    Update

    Seller uploaded collateral file (all mortgage docs, assignments, etc.) and FCI reviewed it. They found a break in the chain of assignments. However, my own review shows these were unrecorded assignments and the chain of assignments goes from originator > 1st assignment > 2nd assignment > me. 

    Next step: wait for FCI and my attorney to review.

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    Update

    Attorney agreed, everything was fine. Transaction has closed. The mortgage assignment will be walked in to the recorder of deeds tomorrow with $66 recording fee. 

    Next steps: Set up servicing with FCI; Begin foreclosure process; Find/contact owner

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    Update

    The servicing set up with FCI was very easy. The loan was already being serviced from FCI so it was a matter of filling out some paperwork with my info and that was it. They asked me if I wanted them to send the TILA-404 letter for $45, and I agreed. I ASSumed it would be some fancy document, but it's not. Next time, I'll just copy and past and save $44 - I'll just be out a stamp and an envelope. 

    A quick search of the borrower's address revealed their home is currently for sale. It's quite beautiful. I'm guessing they will want to close out this property that's haunting them and their credit history, especially if they're going to sell. I couldn't have done this before purchasing, only during the due diligence period. If anything, my offer would have went up, so it's negligible that it's done now after I own the note. I emailed the listing agent of the property with vague details saying I was trying to get in touch with the borrower. Hopefully they'll respond. 

    I have FCI set up to pursue collection efforts. This is an added expense of $65 per month, but they'll hunt the borrower down for me with collection calls, etc. If I become more savvy, in the future I'll probably skip the collection efforts. 

    At this point, I'm somewhat hopeful I can get a deed in lieu set up quickly and this process will be expedited tremendously. 

    Total spent to date - $5136.00:

    $1000 - legal retainer; $3500 - purchase price; $500 - FCI transaction fee; $25 - outgoing wire fee; $66 - recording fee; $45 - TILA-404 Letter

  • Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
    11y
    Originally posted by @Mark Gallagher:

    Update

    I have FCI set up to pursue collection efforts. This is an added expense of $65 per month, but they'll hunt the borrower down for me with collection calls, etc. If I become more savvy, in the future I'll probably skip the collection efforts. 

     Good luck with that. Most servicers are horrible at collections. They couldn't care less about your loan.

    For example, I used a well known and well recommended servicer recently for a first mortgage. After getting all these positive testimonials we wanted to try outsourcing it as maybe it would free up our time to look for more deals.

    They spent 30 days auto-dialing the wrong number. I had to ask the rep "she called from this number on day 1, why aren't you calling her back at that number?". Then of course they reached her instantly, but got nothing done.

    Same servicer told me they sent the demand letter on X date.. 3 weeks later we're hounding them about starting the FC on expiration date.. just for them to tell us oops, it wasn't sent. I wanted to beat someone up with a club.

  • Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    11y

    @Patrick Desjardins  I agree 100% with your comments about servicer outreach efforts.  That is one reason we use a low cost servicer ($18.50 a month) and do our own outreach in parallel.  

  • Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
    11y
    Originally posted by @Bob E.:

    @Patrick Desjardins  I agree 100% with your comments about servicer outreach efforts.  That is one reason we use a low cost servicer ($18.50 a month) and do our own outreach in parallel.  

     Yeah, the funny thing is I / we used to do our own collections but figured perhaps a professional company would get the same results quicker and being arms length would give us more protection against FDCPA complaints.

    I was actually very surprised at how inefficient they are. They literally can't do the most basic tasks without constant monitoring.

    My advice to the OP is don't expect FCI or another servicer to do much aside from sending statements. You need to be very proactive on the collections side - managing your attorney and reaching out to the borrower (FDCPA compliant).

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Bob E.

    Can you mention or PM me the name of that servicer? 

    @Patrick Desjardins

    Thanks for the great tips. 

    I assume you guys send your own TILA 404, correct?

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    Update

    I pulled tax certifications on everything. The 2013 school taxes were outstanding, and scheduled for tax sale on 9/22. I paid them today. $2277.77, plus $8 bank fee since it had to be certified funds. I'm left wondering what happens if you would take possession of the note a few days before tax sale and then it were sold? I guess you'd be out of luck? There must be something done to avoid this predicament. Perhaps avoiding purchasing in that county when you know the tax sale is looming? Or pulling a full tax cert before purchase? I could understand pulling a full tax certification before purchasing, but in this area it takes a few weeks to get a completed tax cert.

    The attorney sent Act 91 and Act 6 notices. We can file the foreclosure after 30 days, which will be 10/14. They took a little too long to get those notices out in my opinion. 

    The borrower has been non-responsive to this point which is certainly frustrating. Hopefully once he sees that he's definitely going through foreclosure this time, he will want to do the DIL, but I'm certainly not counting on it.

    The property has been secured. It is currently set up as a 2-unit which is great news, provided the city zoning allows it. This is a block from the county courthouse and is in a business zoned area. I'm waiting to hear back from the city. It looks like it's been a 2 unit for a long time. Copper is cut, there are some broken windows, but other than that, it's in OK condition. Will certainly need rehab, but it's not overly extensive. A listed comp on the block that was in the process of being rehabbed and was left unfinished is listed for $64,900. Can't really comp the subject until I know if it can stay a 2-unit or needs to be turned back into a single family, which wouldn't be complicated.

    Next step: file foreclosure complaint around 10/14.

    Total spent to date - $7421.77:

    $1000 - legal retainer; $3500 - purchase price; $500 - FCI transaction fee; $25 - outgoing wire fee; $66 - recording fee; $45 - TILA-404 Letter; $2277.77 - 2013 school tax; $8 - certified funds fee

  • Rockwall, TX · Member since 2014 · 380 posts · 211 votes
    11y

    In Texas, the mortgage holder generally has a right of redemption if the property is sold at a tax sale.  Some states do not have redemption rights so you are right to be concerned.  One more thing for the checklist!

    Please keep the updates coming.

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Roy Oliphant

    I guess that might have been a little misleading at least in PA. This was for judicial tax sale. In PA there are judicial sales, and upset sales. Judicial sales are sold free of liens, provided lien holders are served proper notice. I'm not sure what would happen if a mortgage were assigned the day before a tax sale. Lien holder notice would be impossible.

    If it were going to Upset sale, I would WANT someone to purchase the property because then the note I purchased for $3500 would be due and payable by the new owner, and the balance owed is ~$73,000. 

  • Rockwall, TX · Member since 2014 · 380 posts · 211 votes
    11y

    In the Texas sale, the mortgage (as with most other liens) does not survive the sale except the holder may redeem in place of the previous owner.  I assume this is like your judicial sale?

  • Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
    11y

    The deal is pretty slim but great updates. Even if you end up breaking even or making a small profit, the amazing thing is that you're learning a ton. Some people spend 10, 25, 50k on Gurus.. you took action and you're learning while doing.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Patrick Desjardins  shoot all he had to do is buy me a beer and I would have taught him everything I know about PA tax sales which is about as valuable as  well as one beer !

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Patrick Desjardins

    Slim would be expected with a purchase price of $3,500, no?!

    If I'm out of pocket under $35,000-$40,000 including rehab, and can rent for $1400 a month, that's a more than acceptable return in my books. 

    Or skip the rehab and I'm in at $22-$25K, I could sell quick for $30-$35K. Still good ROI if it's 12 month start to finish.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Mark Gallagher  plus the education factor.. as stated.. I think PA is semi complicated as is most of the north east in regards to tax sales and foreclosures and such.

    its not like other states like GA were you can do a foreclosure start to finish in 65 days.. although the new 120 rule will hurt that time line.

    However bottom line is the smart folks will win the battles and take the plunder.. the more you know the better you become at this game... somehow I think Mark will be just fine here !

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Jay Hinrichs

    Yes this is absolutely first and foremost a learning experiment. 

    I'm hopeful to be finished by spring.

    There's also leverage (?) at play here in this low purchase price note. If I don't have to pay all the liens off and am able to resell it, the end buyer effectively pays all the liens. So I could be out of pocket ~$10K, and make ~$10K. Obviously a fantastic ROI!

    Just another reason why real estate is so much fun. A lot of different ways to do a deal. 

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Mark Gallagher  OK if you get a deed in Lui the leins remain

    if you prosecute the foreclosure the liens go away or are you talking about super liens like property tax's and I was surprised to see this big school tax on the huds there.. I don't suppose that gets wiped out does it... After all we need to edumicate our kids.

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Jay Hinrichs

    The liens are from city sewer/trash. They would remain DIL or not. The DIL would only speed up the time to get the deed. City/School/County taxes are open from 2014 and would be on the September 2016 tax sale. So if I can sell it before then, I wouldn't have to pay unless I wanted to save a couple hundred in interest and penalties. Common thought among note purchasers, I believe, is you don't pay anything unless you have to. 

    The city sewer/trash liens will just keep piling up in this city. A few municipalities around here stop charging you for sewer/trash when they find the property is vacant, but most cash strapped ones do not. 

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    11y
    Originally posted by @Jay Hinrichs:

    @Mark Gallagher  ...

    if you prosecute the foreclosure the liens go away or are you talking about super liens like property tax's and I was surprised to see this big school tax on the huds there.. I don't suppose that gets wiped out does it... After all we need to edumicate our kids.

    Jay, the tax bill labelled school tax is nonetheless a property tax, so it would not be wiped in a mortgage foreclosure.  But PA has a means of collecting property tax liens and municipal liens via sheriff sale (although property tax liens often are handled by county Tax Claim Bureau, not all municipalities elect to go through the Tax Claim Bureau so those end up hiring a law firm and pursuing sheriff sale), and even certain super liens can be wiped by a court order if the sheriff is unable to sell the property for enough to pay all liens. It's convoluted stuff ... and explaining it so that it can be understood is quite a challenge. 

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Mark Gallagher@Steve Babiak in our neck of the woods.. the school tax is in your ad varlorum tax bill they are not separate so they would survive or be satisfied at tax sale.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    11y

    @Jay Hinrichs - Philadelphia has just one property tax bill that comes early in the cslendar year. But the surrounding counties will typically have three property tax payments  - school, county and municipality / locality (although in some municipalities one bill is sent combining municipal taxes and county taxes).  The county and municipality tax bills come early in the calendar year, and cover the period from Janusry 1 to December 31; the school tax bill comes in the middle of the calendar year, and that bill covers the period from August 1 to July 31 IIRC (or is that from July 1 to June 30 - oh well).

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Steve Babiak  now that is wild.. we get one bill   due nov first installment second installment in april.. all tax's that are government are on that bill...   along with municipal bonds  county levi's say for parks etc etc.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    11y

    @Jay Hinrichs - it can also be confusing to homeowners who have their taxes escrowed by the mortgage company with the tax bills getting sent directly to the mortgage company. Once the loan is paid off, those homeowners (in confusion) think they are getting hit with extra tax bills after having paid a tax bill, and let some taxes go unpaid to the point of property being offered in a tax sale. It's not a big number, but that does lead to opportunity ...

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