Question about Notes

6 Replies

Question is this:

Lets say that a homeowner bought his house in 1990 for $200,000 and he kept paying on it until his principal was cut in half, right at $100,000 by January 2015. Since then, the homeowner couldn't afford to make payments anymore. Now, here comes Steve and purchases the note from the bank at $ .30/ $1.00 at the end of January 2015. Steve placed his NPN note on FCI Exchange and is selling it for 50% or $50,000 off the principal balance left on the loan.

My question is as follows: Since the homeowner already paid $100,000 off the original $200,000 loan and Steve bought the $100,000 balance leftover with $30,000 and is hoping to sell it for $50,000, I assume that `Steve will get to make a profit of $20,000, but, I as a potential investor looking to buy the NPN off Steve for $50,000, what equity do I have in the house? Is it:

a) $150,000 ($ 100,000 + $ 50,000 off Steve) 

b) $ 50,000 off Steve selling me the $100,000 balance owed for $50,000 ( .50/$1.00) or

c) Just $ 100,000 paid off by the homeowner between 1990-2015?

I would really appreciate anyone's input and I hope my question isn't confusing..

Thanks a lot,

Alin  

It would be "b". 

Just to clarify though YOUR equity in the property is $0, the OWNER's equity is the value of the property minus any money owed. You are entitled to the terms of the note you purchased regardless of what the actual cash outlay you had was.

If you exit the note through the property (foreclose) it will be auctioned at the courthouse. You'll receive 100K+costs to foreclose, any remaining money would be an overage and go to the previous owner. If you got refinanced out, or the owner sold you'd receive 100K again plus any fees incurred for the foreclosure process to that point, the owner again receives the balance. 

Hope this helps clarify the process. 

As the others mentioned, you have zero "equity in the house", but your note has a ton of equity (basically the FMV minus your Unpaid Principal Balance).

Your question doesn't make a ton of sense because it's not clear what you really want to know. Are you trying to figure out how much you'd gain if you foreclose, or how much equity protects your note?

You're entitled to the full UPB plus advances plus costs, so in that example if the house is worth 200k+ and your UPB is 100k then you're pretty much guaranteed to recoup the full amount.

WOW, thanks a lot guys!!!!! You really helped me a lot with these responses. Yes, I was looking to see how much I'd gain if i'd have to foreclose. I signed up at FCI Exchange.com and I've seen quite a bit of properties that are worth buying the notes for. Also, the site mentions "lieu of deed". Is this particular deed a sort of legal contract naming you a prime investor to the property and giving you the right to foreclose in case I have to go that route? Sorry to bring so many issues but I've only began researching these real estate jargon and topics in depth for only 1 week. Looks like I've got a lot of catching up to do to you guys....

Thanks a lot

@Alin Toncz yes they are all correct, you have no equity in the property. If you do foreclose on the property you will get all past due payments, late fees, loan charges, attorneys fees, and any forced placed insurance that you may have to put on there. One thing to keep in mind is once you have your final judgment you're not allowed to bid much over the final judgment.

What they are referring to is called a Deed in Lieu of foreclosure. The idea is, to get the borrower to sign the house over to you and set of going to the foreclosure process. This really only works if there's clean title behind your lien. If there's a second mortgage you could try to negotiate with them, or you will have to foreclose them out. If there is another lien on the property, I would recommend getting a deed in Lieu of foreclosure and a consent judgment. By getting both of those documents signed, it will allow you to negotiate with the second and if they won't play ball, you can go ahead and foreclose them out. The consent judgment speeds up the process, especially in judicial states.