My 1st NPN

Tax Liens & Mortgage Notes
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My 1st NPN

Steve HodgdonPro Member
Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes

I'm new to note investing and decided to take a learn by doing approach. I own some commercial real estate, ran a property management business for a while (ugh!) and owned a collection agency for 17 years.  So distressed notes seem to fit my experience.

What I bought:

A 1st from Harbour Portfolio through a Southern California broker. He sold me one account from a pool.

It took a few weeks for the hard file to arrive from NAA, Harbour's servicing entitiy.

I boarded the loan at FCI and hired a local experienced attorney to start the foreclosure process. Paid a $2500 retainer. $500 over the Fed guideline. I had a trusted local reference.

Why jump straight to foreclosure? I think I will every time. Urgency will help bring borrowers to the table.

All contact #s for borrower are no good. TLO had 2 potential hits, both parties claim no contact with borrower. Borrower made a $1600 down payment on a $32,000 note. Never made a payment. So, no reason to attempt a workout.

Harbour had repossessed this home from prior borrower. In fact they sold this home 3x over 5 years. Pictures from 2014 show a house that is marginally inhabitable at best.

Taxes are owed for 2015. $1400.

Property is assessed @ $60k. UPB including taxes and interest is $38,000. I paid $14k.

I believe I'm paying for my education. Broker has been very forthcoming with advice and experience.

By the time I get possession in 6 months, I'll be about $20k into the property. A pipedream sale @ $30k, but likely $25k.

I'll update as events warrant. I'm hoping to share newbie mistakes with my fellow BP'ers and get back new connections in return. Please feel free to comment.

Best of luck to all.

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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
10y

Seems lot a lot of work for a rather small payoff, IF you are able to collect on the rest of the LC payments without more attorney fees.  If not a loss may be the ultimate result.  When time is figured in you already lost money.  I believe this is "the best" outcome with these toxic assets.  Other outcomes would involve taking 3 to 5 years getting ownership cleared, paying attorney, taxes, insurance in the mean time, and finally getting possession of a property so deteriorated that its declared a dangerous building and leveled by the city government, resulting in a near total loss of all invested.  When you average it all out, buying mortgages that have been picked over by hedge funds, investment partnerships, and bulk buyers, and are whats remaining, can not result in a profitable experience, on average, especially with adding a reasonable cost for your time.

I guess I somewhat understand the individual investors fascination with these NPLs.  The fascination appears to be based on the following misconceptions

1. I can buy NPNs at a low price

So what? A bad investment at $10,000 is still a bad investment.  If all you have is $10,000 why not use it for a good investment?

2. I'm acquiring the note for a fraction of the principal, so my downside is limited.

The real criteria is the price you pay in relation to its VALUE. The amount of the principal owed is not the notes value, and UPB can be a very misleading figure.

Further, the amount you lose can be far in excess of the amount paid for the note.  You can end up paying large amounts for attorney fees, property taxes, insurance, etc.  The amount you can lose can be double or triple the amount you paid for the note.

3. Buying NPNs are a way to acquire real estate for significantly less than its market value

Except that when you purchase a note you are not acquiring real estate, you are acquiring a promissory note secured by real property.  Your ability to turn that note into  clean ownership title depends on the laws of the state the property is located in, possibly the rulings of a bankruptcy judge, the quality of the paperwork associated with the note, how the note was serviced, existing liens and encumbrances on title, future liens and encumbrances on title, city code enforcement and violations, and about a dozen other things you won't know about until they happen.

While it is possible for an individual investor to make a profit on any individual NPN, a large enough portfolio of these NPNs purchased from institutional "left overs" will result in a guaranteed loss.

Private Mortgage Financing Partners, LLC
WebsiteView Page
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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    10y

    why not just start the foreclosure process? He pays or looses property for non payment.

    Just my thoughts.

    Why should he be rewarded for not paying in the first place?

    0Reply
  • Randi Del Gatto
    Investor · Pineville, NC · Member since 2016 · 12 posts · 4 votes
    10y

    I am a newbie here also, so I want to make sure I understand this correctly. Basically he is proposing the same thing he did prior  -  when he put $1600 on a $34,000 note and then made no further payments, all the while he lives in the property as it continues to deteriorate? If this is correct then why wouldn't you go straight to foreclosure as you said initially?

    0Reply
  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    10y

    Not to steal Steve's thunder on this matter but in general @Randi Del Gatto there are some defects in this asset which act as barriers to enforcing the instrument used which was a Contract For Deed not simply a Mortgage or Deed of Trust. The claim of miss applied payments and there are some title clouds. Those title clouds are specific to this being a CFD and not a Mortgage/DOT. Take away for newbies, don't assume Contract For Deeds and Land Contracts are the same as Mortgages and Deeds of Trust.

    I glanced back over the thread and see the Vendee/Renter is claiming payments were made which were not credited to the account properly.  I would simply ask for proof of payments and apply those amounts properly if proof can be acquired.  

    I would terminate the Contract For Deed and convert into a Mortgage or Deed of Trust if you can come to agreeable terms.  I presume counsel is paying attention to any title defects that need to be cleaned up by way of the current and previous (also defective) Contract for Deeds. 

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    We have some we would consider letting go.  PM me if you are interested.

    0Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    10y
    @John Underwood:
    Thanks again to John Underwood for help above and beyond. Here are some pics John took for me. 
    So this is the kind of asset you buy for $14,500. Plus $3k for attorney (had to fix Harbour's lack of filing docs). Also back taxes owed. So, I'm in for $20k.

    Gave the borrower what I thought was a very reasonable offer to purchase the house for $26k. He has been working on it, but stopped when lender refused to cooperate. So, no electric, leaky roof.

    Since no response from borrower, we continue marching down the eviction road.

    Once we get possession, I'll post in local REIA and see if there's a flipper who wants an acre in Greenville, SC.
    GET YOUR OWN BPO BEFORE BUYING A NOTE!
    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    New tarps, a true selling point!

    2Reply
  • Tony Velez
    Hvac · North Haven, CT · Member since 2015 · 298 posts · 79 votes
    10y
    This is a true learning experience.
    1Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    10y

    Update - Borrower went to my attorney yesterday. Made $1300 down payment and executed new land contract for $25k. He has 2 years to get the house to pass inspections. Exit strategy is for him to qualify for hardest hit funds after one year of payments. I will help him clean up his credit and qualify.

    Payments direct withdrawn from his bank where his Fed check is deposited. $220/month.

    Win/Win. Though small. We'll see how the payments go!

    All in cost about $20k. 14.5 for note, 1700 back taxes, 3000 for attorney. Lawyer bill was high because there was work to do on title. Harbour had not filed the last two transactions so records showed the prior, prior owner.

    3 more deals in the works....

    1Reply
  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    Thats good news Steve, congrats!

    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    10y

    That is fantastic Steve. Glad to hear you got him to start paying.

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    10y

    Seems lot a lot of work for a rather small payoff, IF you are able to collect on the rest of the LC payments without more attorney fees.  If not a loss may be the ultimate result.  When time is figured in you already lost money.  I believe this is "the best" outcome with these toxic assets.  Other outcomes would involve taking 3 to 5 years getting ownership cleared, paying attorney, taxes, insurance in the mean time, and finally getting possession of a property so deteriorated that its declared a dangerous building and leveled by the city government, resulting in a near total loss of all invested.  When you average it all out, buying mortgages that have been picked over by hedge funds, investment partnerships, and bulk buyers, and are whats remaining, can not result in a profitable experience, on average, especially with adding a reasonable cost for your time.

    I guess I somewhat understand the individual investors fascination with these NPLs.  The fascination appears to be based on the following misconceptions

    1. I can buy NPNs at a low price

    So what? A bad investment at $10,000 is still a bad investment.  If all you have is $10,000 why not use it for a good investment?

    2. I'm acquiring the note for a fraction of the principal, so my downside is limited.

    The real criteria is the price you pay in relation to its VALUE. The amount of the principal owed is not the notes value, and UPB can be a very misleading figure.

    Further, the amount you lose can be far in excess of the amount paid for the note.  You can end up paying large amounts for attorney fees, property taxes, insurance, etc.  The amount you can lose can be double or triple the amount you paid for the note.

    3. Buying NPNs are a way to acquire real estate for significantly less than its market value

    Except that when you purchase a note you are not acquiring real estate, you are acquiring a promissory note secured by real property.  Your ability to turn that note into  clean ownership title depends on the laws of the state the property is located in, possibly the rulings of a bankruptcy judge, the quality of the paperwork associated with the note, how the note was serviced, existing liens and encumbrances on title, future liens and encumbrances on title, city code enforcement and violations, and about a dozen other things you won't know about until they happen.

    While it is possible for an individual investor to make a profit on any individual NPN, a large enough portfolio of these NPNs purchased from institutional "left overs" will result in a guaranteed loss.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    5Reply
  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    @Don Konipol yes NPLs carry risk just like any other asset, which is why due diligence is critical and we have this forum to share and learn. It looks like @Steve Hodgdon did a good job for his first note and I'm sure he learned a lot in the process. I firmly believe that experience is the best teacher, tempered with good advice and research. I agree that there is a higher risk in buying tails and leftovers, but for many small balance investors they can find a workable asset and make a profit at the end of the day. 

    I don't think the leftovers will provide a guaranteed loss if the investor proceeds with caution and good DD. Staying positive in the approach with a win/win for all is my position and has provided me with positive outcomes on all of the NPLs we've acquired. 

    4Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    10y

    @Bob Malecki  Guess we will have to agree to disagree

    The OP is in the note for $20K, not including the value of his time.  He now has a land contract with a principal balance of $25,000.  Guessing at typical residential o/o interest rates (5-8%) and terms (15 years) the land contract has a maximum market value of $12,000.00  In fact, if the OP wanted to be in this position originally, he could have just purchased a similar note or LC for $12,000.

    So the OP has a market unrealized loss of $8,000.00, at best.  If he holds the note until maturity, AND the borrower continues making payments, he will receive back $25K principal plus a very low interest rate return considering the risk and effort of this deal.  If the more likely scenario of the borrower defaulting again occurs, the OP will have more legal fees, more taxes, and more time in the deal.  Meanwhile, in all probability the condition and hence value of the collateral will have declined, resulting in increasing losses.  

    Yes I agree that it is a learning experience.  The lesson learned should be not to invest in these type assets - if you are serious about your investment success.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    3Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    I calculate the return on this at just under 9%, IF the borrower performs.  Getting hardest hit funds, if the borrower qualifies, could boost that but depends on qualification.  @Steve Hodgdon  To my knowledge HHF does not depend on credit so I would pursue that now rather then latter.  Each state has it's own rules so check with your state and what their rules are.

    As @Don Konipol mentioned the OP could have bought a performing note with a 12% yield for 16k.  This would have the same entitlement but would have performed from day one without the continuing expenses.

    Our strategy has shifted to buying wholesale (closing with title insurance), renting for 6-12 months to verify ability to pay, and then selling with owner financing (after qualifying through an RMLO).  When we buy right and hold with owner financing we are able to net a 14%+ yield and we have title insurance, a lenders policy and know there are no issues with loan assignments in the title chain.   

    Right now our strategy is to hold our notes but that may change over time so we originate them in a way that will support a strong resale price if we decide to sell in the future.

    4Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    10y

    Thanks to all who have commented  and offered their knowledge and experience for FREE! -  @Dion DePaoli @Darren Eady @Bob Malecki

    @Bob Malecki@Bob E. @David Putz

    @Christopher Winkler @Patrick Desjardins

    And a special shout out to @John Underwood who took the time to meet with my borrower and give me his appraisal of the property. John! Let's JV on something!

    Mostly this has been a learning exercise. It was certainly a leap before I looked experience. Even with years of experience trading unsecured distressed debt, I am not savvy enough to go this alone. So, I've asked Dion DePaoli to mentor me. So far, so good. 3 assets in the works.

    The points about bottom end assets, BPO's, full title searches, unanticipated costs after acquisition, longer than expected holding time and expense are heard loud and clear.

    Feedback from the SC Helps program was that the borrower had to be current for a year, the house had to be habitable and his primary residence. All three of those are not true today. The borrower's desire to qualify, and get repair money, seem to be enough "skin in the game" to follow this to the end.

    The other option was to dump the property at a loss. Not willing to start out with a loser if I can be patient. It's a small transaction. I sat on a $4 million dollar project for a decade and came out ahead. I'm stubborn, which is a strength and weakness.

    I know that the majority of loan mods fail. Primarily because the borrower can't make even the new reduced amount. My Mr. X. has upside of $15k if he gets this property to pass inspection. He's a crafty guy. My lawyer says he drives a nicer car than I do. He has solid fixed government income and cash side gigs (selling cars and ???). Again, it's learning while doing.

    I am VERY interested in better properties. I'm looking for returns within norms and reasonable risk. I like the idea of seller financing. Let me know how we can work together. Anyone going to PaperSource? Look me up, let's break bread and see what we can do together.

    Currently I JV in flip deals here in So Cal. My "daytime" job is as a small balance lender ($50k and down) to sub prime businesses and consumers. Mostly high interest installment loans. I'd like to build a note portfolio to add to that platform. Already built, staffed, good software and 35 years of credit and collection experience.

    I'll update this in a couple of months as Mr. X either pays or doesn't. Place your bets! Thanks again.

    steve

    @Bob Malecki

    2Reply
  • Bryan C.
    Investor · Spokane, WA · Member since 2014 · 733 posts · 155 votes
    10y

    Good luck and looking forward to hearing updates.

    0Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    10y

    Hello  BP'ers. 

    Thanks to those who have commented on the post thus far. 

    We've covered the diligence issue before. But here's concrete warning to make sure that chain of title is covered in reps and warranties. 

    $8,100. That's the attorney bill.

    to clean up the filings that Harbour did not file.

    Serve borrower

    To prepare new loan agreement.

    Execute and file new agreement.

    Borrower made his first $219 payment on new note. $26k principal @ 8.75%, 20 year term. 

    Lessons are many. Despite 7 months of struggles with 1st note, have purchased a Cleveland asset and am working on a pool. With experienced guidance and my tail between my legs.

    4Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Steve Hodgdon:

    Hello  BP'ers. 

    Thanks to those who have commented on the post thus far. 

    We've covered the diligence issue before. But here's concrete warning to make sure that chain of title is covered in reps and warranties. 

    $8,100. That's the attorney bill.

    to clean up the filings that Harbour did not file.

    Serve borrower

    To prepare new loan agreement.

    Execute and file new agreement.

    Borrower made his first $219 payment on new note. $26k principal @ 8.75%, 20 year term. 

    Lessons are many. Despite 7 months of struggles with 1st note, have purchased a Cleveland asset and am working on a pool. With experienced guidance and my tail between my legs.

     At this point, what are your all in costs? Do you plan to keep this one in your portfolio or sell after a certain amount of seasoning?

    0Reply
  • AJ Irakoze
    Investor · Tempe, AZ · Member since 2016 · 3 posts · 0 votes
    10y

    Did you ultimate foreclose on the property?

    0Reply
  • AJ Irakoze
    Investor · Tempe, AZ · Member since 2016 · 3 posts · 0 votes
    10y

    Just read the ending, nice work!

    0Reply
  • Joe Ellis
    Fort Worth, TX · Member since 2015 · 121 posts · 28 votes
    10y

    Wow! That's an impressive list of things that you've gone through and lessons that you've learned. Thank you for letting us have a glance into your journey! Obviously your attorney's cost of over $8K is much better spent than having gone to a guru and spending even $5K because you now have one under your belt as well as the experience and pride that comes with that! My questions was going to be "do you think you'll continue with NPNs" but it seems like you've already bought more! Congratulations and I wish many more successes to you! I'll be following this thread to find out how things turn out over the course of this year. 

    1Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    10y

    A good sign... Borrower texts me (yes we're texting buddies now ;) . Wants to know if I report to credit bureaus. I'm taking that to mean he intends to pay on time. 1st payment received as promised. 

    Some of you asked if I'm holding this. Yes, holding is part of the education. Fees are murder though. Taking $200 payments through FCI is hardly worth it. Figuring 20% loss to processing fees. So when you rework your income at 80% this isn't quite the rosy profit proported by the gurus. 

    1Reply
  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    10y

    @Steve Hodgdon

    Great thread. Lots of naysayers here even with your disclaimer that you were investing in this first one as a learning exercise! 

    If this weren't your first one, you probably would have made a few phone calls and sent it directly to your attorney and did a little less leg work, saving on the time spent. The only thing I would say is YES I definitely would have gotten a BPO first, ha. 

    1Reply
  • Nathan Turner
    Investor · Saint Bruno De Montarville, Québec · Member since 2016 · 49 posts · 35 votes
    10y

    @Steve Hodgdon Good work Steve. I'm also a learn by doing kind of a guy and my experience has been that the first one is always the hardest but it gets much better after that. DD on the front end is a lifesaver and so important... lesson learned! BPO and O&E have become two of my favorite abbreviations in this business. Good luck on your future purchases!

    1Reply
  • Lisa Foreman
    Investor · Tirana, Albania · Member since 2015 · 39 posts · 8 votes
    10y

    I would love to hear the rest of the story. Do you have an update?

    0Reply
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