How much should I purchase this note for?

Question

I'm new to note purchasing, so any help with this situation would be much appreciated.

I'm wanting to purchase a note from a man who owner-financed a property he sold. The selling price was $165k with $15k down, and the $150k was financed at 7%. The woman who purchased the property from him is way behind on her payments, but he doesn't want to go through the foreclosure process. She still owes about $7k in back pay, but he just wants someone to purchase the note. She still owes $135k on it. The ARV of the home is around $250k.

What would be a good range of offers to accept? What sources can back up and inform both me and the financed-owner? He is an elderly gentleman who thinks he should be able to sell the note at face value. I know that is not the case, but I don't know what to base my offer on, or how to explain to him why my offer is reasonable.

Thanks in advance for the help!

Patrick Desjardins · Answer

Don't hold your breath trying to buy a note for 80k if the ARV is 250k. People make mistakes, but rarely mistakes of that magnitude. All he has to do is shop it around to get better offers and then you'll sound like a scammer to him.

"how to explain to him why my offer is reasonable"

You can foreclose and make your 135k+arrears back most likely within a year, and you wanted face value but here take this 80k offer and sell me the note because someone may have "abandoned the property with pets left locked inside".. Call me a naysayer but I don't see it happening.

Instead of telling him I'm offering 80k, I'd tell him I can't pay face value because if she restarts paying then I'm stuck with a 7% investment which is way less than other investments I've been making. You can buy an already performing note at 12%, and this one is a NPN and he knows it's probably going to foreclosure. I need to account for legal fees, a likely bankruptcy, repairs, closing costs of selling it as a Reo etc.

So how much does he actually need for it, considering the risks involved? If he still says he wants face value then you know he probably won't negotiate.

Adam Adams · Answer

@Justin B.

Everyone is different, but this is what I go with.

I'm bidding around 55%-65% of the UPB or the As-Is value of the property, whichever is lower. The going rate seems to be higher lately, but that doesn't mean it is a good rate. Once you have that number, you subtract out any delinquent taxes. Depending on the state utilities, I might subtract out the water as well. In some states the utilities stick to the property, not the borrower. So if she owes 150k and taxes and utilities are current, I'd start my bidding at $82,500, which is 55%.

Bill S. · Answer

@Justin B. so I am not a note specialist but I can offer some pointers as a person who purchases property. Remind the seller of a few items after affirming the cost of foreclosure. Say "sure it 'only' costs $2k to foreclose but..."

1) What is the time value of my money while I go through that process. If this lady declares bankruptcy it can drag out for quite some time.

2) What is the condition of the property now? If she hasn't been making the loan payment she is not doing property maintenance. Was the heat turned off and all the pipes froze? I talk to a guy wanting to sell his property who was basically camping in one room of his mansion where the heat had been turned off. He kept that room semi warm with his cooking and body heat. The rest of the house froze solid, broken traps and water lines. As soon as it warmed up, all the pipes drained and there was water damage and mold in some places.

3) What if this person gets angry and trashes the property before you can have her evicted. I saw a foreclosure where the previous owner had removed all the electrical fixtures by cutting the wires where they entered the boxes. They poured concrete down the drain lines and removed every plumbing fixture similarly by cutting the lines at the walls. The sold all the appliances etc.

4) Sometimes people abandon the property with pets left locked inside.

5) The list goes on.

6) In reality, the chances are not large that it will go badly but the possibility remains and you must consider that in your offer.

These points should help do two things, 1) the seller get some fear and 2) give some value to your offer.

Let us know how things go.

Wayne Snell · Answer

The answer to how much the foreclosure costs depends on the state and whether it is a judicial or non-judicial state. I assume you are referring to a property in Colorado so if that's the case, then you can proceed with a non-judicial foreclosure assuming that the mortgage has a "power of sale" clause. So definitely check for that. All non-contested foreclosure costs should follow the FNMA foreclosure cost guidelines which is approximately $2000-2500 in CO. But definitely beware because many owner-financed notes were not written by a RMLO and so this one may be missing that important statement and others!

Justin B. · Answer

Thank you guys so much. Great information and is definitely giving me leverage for our next meeting.

Justin B. · Answer

This is all very helpful info. Thank you all for the responses!

Seller said he met with a lawyer and it would only cost $2k to do a foreclosure. Is this incorrect information?

Linda Hastings · Answer

As for educating the seller on why no one will pay him full price for the note, here are some thoughts. Since the borrower is behind on payments, foreclosure is a very real possibility. The time and effort (and cost) you will have to put into either working something out with the borrower or foreclosing is reason enough to get a discount on the note. At some level, the seller already knows this since he doesn't want to do the foreclosure himself. Also, even notes that are performing or re-performing will typically only sell at 80-90% of value.

Gerry Cohen · Answer

Hey Justin

Adam is the man! I recommend following his strategy! The current note owner is probably hestitant to start foreclosure due to costs and borrower may start delay tactics to secure any equity above UPB and costs.

How much should I purchase this note for?

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