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
    9y

    @Varinder Kumar 

    I sold the house to the existing borrower for $26k. He originally bought for 40. He's done improvements and it may be worth $35k now. 

    I bought through someone who had purchased a Harbour pool of 20 assets. He gave me free choice. I chose this one because I knew someone on the ground in Greenville and had been there myself. 

    I don't have my notes in an LLC. I run an existing California lending business, which is a C Corp. Since I have a secure office already housing loan documents, I keep the mortgage files myself.

    After the travails of the 1st note I felt I needed more mentoring than Richmond Monroe or others offered. I found @Dion DePaoli here on BP. He does an outstanding job in underwriting, due diligence and transaction management. Together, we've bought 26 notes. All firsts, mostly performing. Cashflow is about 1%/month or better with foreclosures adding profit as they occur. 

    Thanks for the feedback on the post. 

    5Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    8y
    update... Mr X continues to pay on time. wants me to report to credit but I had bad experience with eRentPayment.com. Thinking about selling on FCI exchange.
    1Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    Learn the ropes.  Your tuition and investment is manageable. 

    There has been several notes sold from a CA broker and people who paid off note found out someone put their name as new owner and sold the property to another investor after first recorded.  To track your legal position on tax record  is important.

    1Reply
  • Varinder KumarPro Member
    Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
    8y

    Just now seeing this post. I purchased my NPN from Harbour also, luckily it was already REO. I simply received title and recorded, had no need to board loan since there is no borrower so i saved money on that. I got lenders insurance on it-enough to cover the amount i paid for the note. Purchased note for $17,500 ARV north of 100K, wholesaling it around $50K.

    The $2500 you paid seems reasonable for what attorneys charge, how ever some places they are more expensive eg, Florida. How ever it depends on how much work needs to be done also. 

    Question: The $60K value for the property is that the ARV or AIV?

    1Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    6y

    Just a quick update on my first note. Borrower paying 11/12 on time. Paying extra as best he can. Behind on property taxes. I paid and added to the account at FCI, so getting 8.75% interest on the tax bill too. Property is pretty shabby but what do you expect for $23k in South Carolina. It's a CFD. FCI wouldn't let me sell it since not a mortgage. Just put it on the back shelf and money comes in almost every month. Return? Since I'm advancing taxes, yield is reduced to 12% after servicing cost

    3Reply
  • Jamie Bateman
    Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes
    6y

    @Steve Hodgdon, you could still sell the note if you wanted to. Sites like paperstac now allow you to sell CFDs. That said, a solid performer like you have is never a bad thing to hang on to for cash flow. 

    2Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6y
    Originally posted by @Steve Hodgdon:

    Just a quick update on my first note. Borrower paying 11/12 on time. Paying extra as best he can. Behind on property taxes. I paid and added to the account at FCI, so getting 8.75% interest on the tax bill too. Property is pretty shabby but what do you expect for $23k in South Carolina. It's a CFD. FCI wouldn't let me sell it since not a mortgage. Just put it on the back shelf and money comes in almost every month. Return? Since I'm advancing taxes, yield is reduced to 12% after servicing cost

     Glad to hear this is working out.

    1Reply
  • Anthony Dadlani
    Investor · New York City, NY · Member since 2013 · 1k+ posts · 269 votes
    6y

    @Steve Hodgdon was great reading your journey on the first NPN. Could you kindly provide contact information for Harbour or any other sources/sellers of NPNs. We too would like to slowly build our portfolio.

    Best Regards,  

    1Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    @Steve Hodgdon Glad it's working out for you. Just curious, how are you getting 8.75% on advancing the taxes?

    0Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    6y
    Originally posted by @Andy Mirza:

    @Steve Hodgdon Glad it's working out for you. Just curious, how are you getting 8.75% on advancing the taxes?

    When we wrote new CFD it included clause allowing interest on property taxes and other advances

    1Reply
  • Steve HodgdonPro Member
    OP
    Investor · Novato, CA · Member since 2015 · 433 posts · 321 votes
    6y
    Originally posted by @Anthony Dadlani:

    @Steve Hodgdon was great reading your journey on the first NPN. Could you kindly provide contact information for Harbour or any other sources/sellers of NPNs. We too would like to slowly build our portfolio.

    Best Regards,  

    I'm not a big buyer and have found caveat emptor applies. Counter party risk and real valuations are keys. I trust @Dion DePaoli to guide me in purchasing.  

    We occassionally sell performers but don't have a reliable direct connection to NPNs.

    I have no contact at Harbour. 

    0Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    @Steve Hodgdon Smart!I wish that were standard on all the notes we buy and it makes sense when you think about it. We've advanced so much on behalf of borrowers, it's crazy....

    1Reply
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