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.

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

    hello all - thanks for following the thread. Quick update - Mr X made his 3rd payment on time. 

    Because the property is uninhabitable at the moment, he had trouble getting insurance. He agreed to pay the force placed insurance and it's been billed through FCI. 

    I've found it difficult to communicate direct to FCI through their website. I find I have to call and then wait for a return call. Can't get answers to questions with just one call. But I do get good service once connected to the person handling the account.

    I have another foreclosure started @ FCI and also just purchased and boarded 24 loans with another servicer.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Steve Hodgdon are those 24 loans all NPN ? that's a lot of work holly molly... :) if they are all non performing that is...

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  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    10y
    Originally posted by @Jay Hinrichs:

    @Steve Hodgdon are those 24 loans all NPN ? that's a lot of work holly molly... :) if they are all non performing that is...

     Jay - No, 16 performing, 8 non. Going to work toward building a balanced portfolio. Maybe trade out some. Not interested in brokering for others but I like the idea of buying a pool and building a small network of buyers to work with. Keep it simple (as can be), keep it sensible.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    Got it... I only trade in performing.. I have one associate that bought like 100 NPN.. at it almost sank him financially.. think about 100 notes in 5 states and over 75% of them needing to go through foreclosure.. the dollars just spend on attorneys doing the foreclosures were staggering he thought he could get them reperforming.. and some you can.. but my experience in the space over the last 30 years is that once people go down the default tube.. its very tough for them to break that habit.. they now know how to do it.. they will be good for a few months then bang right back at it.

    So anyone buying or selling a note that is REPERFORMING should be very cautious..  there are those that buy these get 6 months payments in and then sell them like they are great performing notes... LOL...

    good luck with it all. you have more energy than I do ...

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  • Patrick Desjardins
    Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
    10y
    Originally posted by @Jay Hinrichs:

    think about 100 notes in 5 states and over 75% of them needing to go through foreclosure.. the dollars just spend on attorneys doing the foreclosures were staggering he thought he could get them reperforming.. and some you can.. but my experience in the space over the last 30 years is that once people go down the default tube.. its very tough for them to break that habit..

     Having the right reserves for the legal fees has been one of the most challenging aspects of note investing for me. Especially in judicial states, which I now try to avoid as much as possible. For example one attorney's office has a terrible accounting system and didn't deliver invoices for months. Then all of a sudden they would send us 8 month's worth of invoices totalling thousands of dollars. It's not easy balancing reserves with deploying money to buy more notes. Some people use 3k as a rule of thumb but I have found the variance to be huge and 3k just isn't accurate enough.

    2Reply
  • Patrick L.
    Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
    10y
    Originally posted by @Steve Hodgdon:

     Jay - No, 16 performing, 8 non. Going to work toward building a balanced portfolio. Maybe trade out some. Not interested in brokering for others but I like the idea of buying a pool and building a small network of buyers to work with. Keep it simple (as can be), keep it sensible.

     Did you buy these through a broker?   Did you do BPO's this time?   

    Sounds like your first experience didn't scare you off. I've been looking for more notes lately as the market to buy rentals has gotten tighter. I bought one NPN last year to give it a shot. I bought something similarly priced to yours at $16k but it was in my local market so I knew the area well and did my own inspection on the asset. I ended up spending another $5k on attorney fees, servicing fees and property preservation and I let it go 3rd party at the foreclosure auction for $55k (all net, no expenses for a foreclosure sale). Pretty good return for me but I knew worst case I could just hold the property as a rental if I had to, when I bought it I thought the exit would be around $35k but the market really picked up during the time I had the note (plus the 3rd party bidder overpaid at the auction IMO)

    3Reply
  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Jay Hinrichs:

    Got it... I only trade in performing.. I have one associate that bought like 100 NPN.. at it almost sank him financially.. think about 100 notes in 5 states and over 75% of them needing to go through foreclosure.. the dollars just spend on attorneys doing the foreclosures were staggering he thought he could get them reperforming.. and some you can.. but my experience in the space over the last 30 years is that once people go down the default tube.. its very tough for them to break that habit.. they now know how to do it.. they will be good for a few months then bang right back at it.

    So anyone buying or selling a note that is REPERFORMING should be very cautious..  there are those that buy these get 6 months payments in and then sell them like they are great performing notes... LOL...

    good luck with it all. you have more energy than I do ...

     In our fund which has a target ratio of 60% NPL and 40% performers, we allocated 3% of our total capital raise for FC reserves with a min. $5k per NPL for legal fees. Also to address @Jay Hinrichs remarks on re-defaults, we require that the borrower pay in some or all of their arrearages before we grant a loan mod to keep them in their home. With them having some financial skin in the game, they are less likely to do a strategic default. Just a thought for those going this route. 

    Bob

    3Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    10y

    Reading through this thread again I realize how much NPNs and PNs differ from each other.

    One's an investment, the other's a business.

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

    I would classify note investing as a business if you intend to own more than just a few, just like any other asset class. 

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

     First, I really enjoy the BP forum. Being able to talk with others is a huge benefit. 

    @Don Konipol Agree. Somebody called me a "human doing" once. I have another business too. Hoping that this builds into a profitable enough endeavor to simplify my life. Not getting any younger!

     @Bob Malecki  We're kind of on the same track. Looking forward to breaking bread again. This time at IMN in Santa Monica. Glad fundraising is going well.

    @Patrick L.  Great 1st effort! Yes, BPO's every time. Along with other diligence. @Dion DePaoli has been guiding my decisions, structuring servicing, establishing expense reserves, and generally being a wealth of knowledge and support. 

     @Patrick Desjardins Agree with having to budget and then monitor attorneys. I have a foreclosure started with an FCI network attorney in Cleveland. Noted earlier in this thread 1st attorney billed $8k because I didn't control process. Points to Don's comment. This is a job, just not parking money in a REIT.

    0Reply
  • Jay Raught
    Investor · Newark, DE · Member since 2015 · 248 posts · 178 votes
    10y

    @Don Konipol @Steve Hodgdon that is so true. New note investors should realize the scope of what they are getting themselves into. Not to scare anyone away but there is so much more to it than looking at a tape and buying the note.....That is just the beginning... Now on to the fun stuff!!!!!! 

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

    Quick update... Borrower continues to pay. 4 payments so far. Due right now for 11/1. He's starting to work with SCHelps for some TARP money to take me out. 

    3Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    thanks for keeping us posted!

    0Reply
  • Daniel H.
    Investor · San Jose, CA · Member since 2013 · 37 posts · 5 votes
    9y
    Originally posted by @Jay Hinrichs:

    Got it... I only trade in performing.. I have one associate that bought like 100 NPN.. at it almost sank him financially.. think about 100 notes in 5 states and over 75% of them needing to go through foreclosure.. the dollars just spend on attorneys doing the foreclosures were staggering he thought he could get them reperforming.. and some you can.. but my experience in the space over the last 30 years is that once people go down the default tube.. its very tough for them to break that habit.. they now know how to do it.. they will be good for a few months then bang right back at it.

    So anyone buying or selling a note that is REPERFORMING should be very cautious..  there are those that buy these get 6 months payments in and then sell them like they are great performing notes... LOL...

    good luck with it all. you have more energy than I do ...

     Hi Jay,  was your associate able to complete most of the foreclosures and sell the properties to make a profit on the investments?

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Daniel H.  nope took major loss's

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  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    9y

    Remember - Tennats (or borrowers) always look like the property.

    We've had an NSF, which was promptly fixed. Then insurance lapsed, I put FPI on and borrower paid it. Now taxes are due. Expecting borrower to struggle to get this paid. Responses have been vague.

    Pondering if he should use rentreporter.com or similar to get this on his TU as a paying tradeline. Anybody doing this?

    0Reply
  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Steve, who are you using for FP insurance?

    1Reply
  • William Grobman
    Savannah, GA · Member since 2015 · 2 posts · 1 vote
    9y

    Bump

    @Steve Hodgdon , fascinating story thus far.  Like a book you can't put down!  Any updates?

    1Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    9y

    Hello all who follow this thread and thanks.

    Mr X continues to be a character. payments on time, but then here comes the tax bill. I advanced the money. He's to make monthly payments to FCI and working on getting the house in shape for occupancy inspection. 

    Why advance when I didn't have to? Because penalties would add another 10-20% to a bill he already can't pay. Still high likelihood I take this puppy back, so avoid the late penalties. 

    He's difficult to reach. NEVER answers his phone but calls back in his own time. He is a seasoned debtor and knows its always a bill collector calling. Low income, disability, does his "best" but will never be out of the survival mindset. 

    The rest of my little portfolio of 25 loans clicks along. Security National isn't cheap folks! But work is done. Most are paying foreclosures move at a snail's pace. 

    I called 3 delinquent borrowers and left very cordial, unthreatening messages. No return calls. I have a gift for each of them, but the ostrich syndrome is in effect. Ignore my problems (pending foreclosure among them) and they'll go away. If they'd talk to me they would get a bargain on a short sale and walk away with enough money to start over. But, instead, the fees keep mounting up. 

    Today's thought is to think like a debtor in distress. What's the worst economic decision you can make? That's the likely outcome. 

    What's new with you? Heading to NIS this weekend, PaperSource next month. Anybody want to get a coffee?

    2Reply
  • Christopher Winkler
    Specialist · Dallas, TX · Member since 2014 · 900 posts · 392 votes
    9y
    Originally posted by @Steve Hodgdon:

    Mr. X returned my call! Left a message with a cousin stating that I was interested in buying the property. (Hint to those with less than 20 years of debt collection experience, DON'T TRY THIS)

    I had not viewed this thread in a while and its got more hair than a moldy peach in the back of the fridge! One thing I missed is that you attempted to call them, was this before or after you bought the note? As future note owners, we can not call or contact them until we own it.

    Also, we had a similar experience selling a low dollar home back to a former owner in MI. He just can't get his act together and in 6months can't come up with anything for a number of reasons and I'll be writing an article about it. Now we have to spend thousands to cancel the land contract in Michigan. Though a good rule of thumb is never, ever sell a low dollar property back to someone who was evicted and or lost it. They will do to you what was done to the former lender.

    Though we did just sell a McMansion in Atlanta back to the owner after we foreclosed as the 2nd, for full UPB. It will also be another great case study, and he thought we could not do it and he ignored us...

    0Reply
  • James Cheung
    Investor · South Pasadena, CA · Member since 2016 · 22 posts · 11 votes
    9y

    @Christopher Winkler.  As future note owners, we can not call or contact them until we own it.

    I suppose this applies when u want to talk to the borrower about the loan.  Can we contact them if we want to figure out a solution for the borrower?  e.g. as buying the house from him as a short sales or other creative means.

    1Reply
  • Christopher Winkler
    Specialist · Dallas, TX · Member since 2014 · 900 posts · 392 votes
    9y

    Hi @James Cheung, as long as you own it, you can call them if not using a full service note servicer like we use, Land Home Financial Services. They do a decent job of working out if you don't wan to compared to other servicers, though no one will do as good a job as you.

    While I can't site a specific law that covers calling them as potential not buyers, its what I was told, and if anyone knows any specific law or statues under banking laws that prevent you from calling the mortgage holder before you buy their mortgage, please do enlighten us. 

    If you are calling for any other reason besides a defaulted mortgage/deed & note, short sale, weeds, probate, pre-foreclosure, etc, you can most definatly call them. 

    1Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    9y

    @Christopher Winkler Thanks for following the thread. It has made for a good exchange. 

    No, I owned the note before contact. I do NOT advocate investors contacting borrowers. You cause confusion since borrower is talking to servicer, break collection laws, can be too soft or optimistic. If you're not licensed in certain locales (Ohio for example) the borrower has protections beyond the national rules. Don't invalidate your mortgage or get fined. 

    That said, how to you stay on the right side of this? Don't ask for money. Give disclosure called the mini Miranda. Ask questions, clarification, listen. What do they want or need? What do they think is fair.  Tell them the servicer or attorney will get back to them. Tell them you'll take the information back to the owner, committee, accountant, somebody in higher authority. 

    Unless you're a lawyer, or an experienced bill collector. 

    We all get frustrated paying for servicing and seeing that they only leave a message once a month. Better to give guidance to the servicer and follow up that way. 

    But, do I contact borrowers ? You bet. I owned collection agencies for 20 years, bought and sold thousands of loans, sued thousands of people. And most importantly negotiated WIN/WIN solutions for anyone who wanted it. 

    Remember, you're talking to someone whose back is up against the wall. You're threatening to take his home away. He has every right to fight back. Wouldn't you? Be on his side. You can let the FC attorney be the bad guy. 

    2Reply
  • Mark F.
    Investor · Orange County, CA · Member since 2009 · 230 posts · 138 votes
    9y
    Originally posted by @Steve Hodgdon:

    Remember - Tennats (or borrowers) always look like the property.

    So true. I've been doing mortgage financing for 11 years and this a great rule of thumb. Borrowers that have low income and bad credit often live in homes that reflect that as well. It makes sense; they have limited income to live on, let alone maintain the home. It doesn't hurt in such scenarios to look a little closer at the condition of the property. 

    1Reply
  • Varinder KumarPro Member
    Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
    9y

    @Steve Hodgdon 

    Thanks for sharing. What is the as is value? is that the assessed value? as a part of the due diligence process i try to run comps and get a as is value with no rehab in case i need to exit via foreclosure and fast sale i know how much profit there is to be made. also what state did you open your LLC in? and how much did Harbour charge you for the note eg. desk fee? just curious. also for boarding the loan you might want to look into Richmond-Monroe for custodial serives, doc prep for AOMs and Allonges, file audits, and missing docs in collateral file, Richmond is better and FCI. There really is no other way to learn it until you do it and go through it. Notes give you alot of exit strategies which makes it a safer investment in my opinion never the less you should still do your due diligence and have a balanced budget sheet. Feel free to contact me if you have any questions. Good luck

    2Reply
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