What am I missing?

Tax Liens & Mortgage Notes
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What am I missing?

Matthew W.
New City, NY · Member since 2016 · 47 posts · 7 votes

Please forgive me if this post is naive. 

I have a friend who has been investing in real estate for years. Specifically, he is involved in non-performing loans in the New York and New Jersey areas.  He always has told me how he buys mortgages from the banks at a significant discount, forecloses on the property, then takes the property to auction. He makes it seem so easy.

I've been given the opportunity, through him, to review a portfolio of mortgages being offered from a bank, and to make offers on anything I find interesting - there are hundreds.

The spreadsheet I looked at had the following info:

Property Address

Foreclosure Start Date

Original Balance

Current Balance

Corp Adj

Escrow Adv

Months Dlq

So for instance, here is an example (and the properties span the tri-state area):

55 Main Street, Newark, NJ

Foreclosure Start Date: 10/17/2013

Original Balance: $350,000

Current Balance: $322,000

Corporate Adj: -$5822

Escrow Adv: -$56,918

Months Dlq: 83

He tells me that the bank will probably accept an offer of 50-60% of the current balance (Again, he has done this dozens of times.) For the owner to become current they would have to come up with $322,000 + $5822 + $56,918.  The property is probably valued around $375k. When foreclosed and brought to auction, the loan value and interest and penalties are more than the estimated property value - so I would most likely wind up with the house.

I suppose I just don't get it...what am I missing from this picture?

Please tell me why this is a terrible idea to get involved with.

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Cody Begg
Investor · Bryan, TX · Member since 2015 · 31 posts · 6 votes
10y
Podcast #169 explains purchasing notes in some detail. I highly recommend listening to the experiences shared there. He talks about the pros and cons. Specific to your example above, I think that you need to determine your end game for the property. It is probably better to get the person in the property to start paying again, which would produce cash flow for you on new terms that you set that would be more manageable for the homeowner. At face value, if the house is really worth 375k still and you can purchase it for 175k cash by buying the note, I would say sounds like a deal worth investigating further. Otherwise the foreclosure process I am not too familiar with. Hope this helps.
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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    10y

    It is very important when purchasing an NPN to ensure that you, as the Mortgagee, have enough capital to make the advances needed to disposition the asset. To some extent newbies look at the discounted pricing and over look the advances and additional expenses.

    In addition, NPN investing is probably not the place to start as a newbie.  That said, you can figure it out.  There is no magic in mortgages.

    When a borrower defaults the Mortgagee responds with foreclosure, not eviction.  As a function of that foreclosure process a Mortgagee is require to make known to the Borrower certain alternatives to foreclosure such as selling the property, refinancing the loan, surrendering the deed, qualifying for relief on the loan through forbearance or modification.  

    Typically, most foreclosure actions will include a bundled eviction order.  Where they do not, you will have to run a separate eviction action just like you would if you purchased the real property at auction.  The horror story above is exaggerated on many fronts while having some truths.  

    I have seen properties damaged on the borrower's way out.  I have never seen anyone do $100k worth of damage "just because".  That is excessively exaggerated.  Alternatively, I have seen plenty of borrowers leave in peace.  That doesn't include those who surrender the property willingly.  

    Most Mortgagee are happy with a suitable bid at foreclosure auction so they do not receive the property back, as Rich mentioned above.  There are those times when a Mortgagee does end up with the property.  A Mortgagee is under no mandate to repair the property.  Those pitfalls and headaches are the same for any owner of real property not just Mortgagee turned property owner.

    In fact, most of the above horror story are issues related to real property ownership and not owning the mortgage.  Much of core errors in the horror story are rooted in ignorance.  Failing to get a proper repair quote.  Failing to manage the contractor.  It wasn't clear how we went from $150k which was the underestimated repair cost and the lousy contract to then $200k.  If you are experiencing these types of issues you shouldn't really be doing any type of investing.

    Further, the idea of not being able to finance the REO is misleading. You could finance the real property depending on the level of needed repair. Even if the repairs are excessive. Fix and flippers do that everyday.

    Like I said, NPN investing is not the ideal place to learn about loans.  There are plenty of folks who do though.  The newbie pitfalls, IMO, are different than what was suggested here.  Mostly due to underestimating time and capital.

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  • Matthew W.
    OP
    New City, NY · Member since 2016 · 47 posts · 7 votes
    10y

    @Dana Whicker, I couldn't agree more. The level of information available here is staggering. It would be very easy for people to see my question and think "Here we go again," and ignore me. However, the responses in this thread have been fantastic, and have given me much to think about.

    I just finished with a live webinar about an hour ago, now I'm considering a Plus or Pro subscription.

    @Dion DePaoli thank you for outlining all those details. Appreciated.

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I am not a note investor but to look at it another way, you may have a fairly unique opportunity here with your friend. How well do you know him? For how long? Do you trust your friend explicitly and have confidence that he can consistently make money in this market ... as in, would you cut him a check for $100k tomorrow to have him invest it in notes on your behalf any way he sees fit and trust him to return the principal plus a good return? Not saying you should literally do this, but asking if you trust him to this extent.

    If so, then you have direct access to a tape of bank notes, with no middle men marking them up, and an expert in the field who you trust and sounds like is willing to coach you through it step by step. This is the holy grail for most newbies. I'd personally take that opportunity in a heartbeat. On the other hand, if you don't know or trust him to that degree then I'd pass since in the beginning you'd be highly dependent on his guidance for success.

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