I'm wondering if anyone has use the strategy of buying a note after the Lis Pendens has been filed? There's a couple of properties in the area that have enough equity and I'd love to try to rectify the loan, but if not I wouldn't mind them as rentals. They are likely dated with one owner for a long period of time. I'm wondering what usually you should expect to pay of UPB in situations where they already filed the lis pendens, and there's a bunch of equity?
I generally use a 35-50% of market value as my rule of thumb for NPN. With that said, having a Lis Pendens filed may cause me to relax the range a bit but generally would frown on greater than 50% of market value.
@Ray Trounday when you say if the market value. Of the house or of the note? This is a case where the market value of the house is probably $250-275k. However the original not was for $49k a long time ago and now it’s down to $22k.
I suspect in that scenario the lender would want full price and all interest and expenses to sell that note.
@Chris Seveney do you think this is a scenario were this note would actually trade for a premium above UPB ?
@Peter Halliday When I originally mentioned market value, I was referring to market value of the home but it could equally be applicable to unpaid balance.
@Jay Hinrichs It sounds like a situation where someone might pay above UPB. I would not do it unless I really knew what was going. They would probably pay me off at UPB the day after I over paid.
@Account Closed now I am very curious.. I know in my lending days when I put something into foreclosure my opening bid could not be for more than what I was owed. including default interest cost and fee's insurance taxs.... anything I got above that has to go to the trustor or mortgagor.. or second lien if any.
since I don't buy bad paper.. I am unclear on who this would work if its sold above UPB..
would the owner of the home simply get a check out of the blue for the overage at the time the note is sold.. then the owner like you said refi's and pays off what is owed.. and the buyer of the note is out this over payment ??? does this sound right to you ?
If the home sold at auction, the lender receives the TAD, or total amount due which is the UPB plus arrearages, corp. payments to any taxes, insurance as well as legal fees (in most states). When I evaluate a distressed note I use the TAD as my basis for value, assuming it is lower than the value of the home. Else I use the home value as my basis.
Also, just because FC has been started doesn't mean that it will go that way, the borrower may want to have a mod/forbearance to stay & pay. We buy distressed debt with the goal of keeping the borrower in the home and restructure their debt to accommodate their budget while providing us a good return on the investment. We generally will file FC so the borrower knows that they have a deadline to deal with and as a tactic to bring them to the table to start a dialogue for loss mitigation.
Yes @Jay Hinrichs , if the property is sold at the FC auction, the home owner/borrower would get the net equity after the lender and any other senior liens are satisfied like IRS or state/local income tax arrearages.
@Bob Malecki I meant to tag you there but I could not get it to work.
specifically and I have never done this .. so that's why I wanted to ask you guys that play in the NPN sand box... if you pay MORE than all the arrears fee's etc.. or pay a premium on a NPN.. does the overage above all expenses and amount owed go to the mortgagor or Trustor ? or second lien or what have you .. but if not second lien .. then is it just like the note was sold at sherrifs sale or trustee sale were overage goes to the owner of the house.. owner of NOTE cannot keep any money over what is due based on terms of the note.. Is this correct ??? although I could see in private note sales and collections this getting violated if the trustor did not know better or was unaware of the behind the scenes sale of their debt obligation. ?? do you know ?? there was another BP post about paying premiums above UPB in another thread I did not really delve into it.
While this seems like a good idea, at a glance, I can’t see it as viable.
If a small note investor type happened to own the note, they’ve already gone through the process for 4-12 mo.s to get it to this point, they know there’s a bunch of equity, and they are looking to get the full pay off, or hopefully end up with the property.
If the note is still owned by an institution, it simply is Not Going To Happen....for the same reasons above, plus they can’t really sell to individuals.
@Jay Hinrichs , I see people talk about paying above UPB, occasionally, but I have to assume they mean just the Principle Balance, without the other 20-40% in accruing interest, fees, costs, insurance, taxes, etc.
Otherwise, as you stated, it would make absolutely no sense.
yes if you follow this out to its logical solution.
1. buy the note foreclose and 50 people show up to bid on it.. overage goes to owner of home.
2. re work it get a nice return on uber safe first position note ( not a bad thing)
3. and about the only way I guess you would capture all this equity is to get a deed in Lui but who is going to sign over a home with 200k plus equity in it.. would they not just fire sell it first ? again just paying off what your owed on the note. but then again some people are not the sharpest tools in the shed and who knows.. although me personally I would not feel morally right taking that much equity from a home owner personally .. I would bid it at the steps no problem as I have been doing that for decades.. but talking them into signing it over with that massive of equity.. I just could not do that.
@Jay Hinrichs Some of the people that pay those premiums make some money on the "costs". Meaning related companies get the $800 a month in lawn care, $500 a month in inspections, $1500 in appraisals, $2000 on the winterizing, thousands if the building has to be secured. This is one reason why people with equity should never vacate the property until the day of the sale in Texas.
Otherwise... a person might be able to do deed in lieu of foreclosure.
I would only pay a premium if I was doing an assemblage and wanted any "in" I could get on the properties.
Your basic understanding is correct. The overage should go to the homeowner in most cases in most states.
@Peter Halliday - We see notes with foreclosure already filed for sale frequently. IMO, that does not impact the pricing, but it could be an indication that borrower outreach has already been done and has failed, making a foreclosure exit more likely. If you were to buy a note like this you would work with the attorney to move you into the plaintiff position.
As Bob mentions, notes with significant equity are valued based on total debt (UPB + accrued interest + advances). Because there is significant equity, the property is likely to sell at the foreclosure auction, so you can bid based on the profit you need out of the deal (total debt - bid = margin). In this case, the current lender is looking at a full payoff, so their motivation to sell will be based on saving some time and receiving a smaller payoff now vs. waiting for a full payoff. Typically the discount they are willing to accept will be relatively small.
The other thing to look at in determining your bid is a possible reinstatement, especially if the arrearage is small. For example, what if the loan is a 4.5% loan and the borrower is only 6 months behind on payments. They have significant equity and therefor significant motivation to pay the arrearage and cure the foreclosure. If they do this, what is your yield on your 4.5% interest rate note which you have just purchased at a small discount?
Hi @Jay Hinrichs the lender/mortgagor can only collect the TAD and fees as I stated previously. The lender cannot keep any additional monies, those go to other lien holders or to the borrower if no other obligations filed by lienholders.
I would not pay more than TAD or even UPB unless there was a very good potential/reason to do so.
@Peter Halliday - To answer your initial question, yes I buy notes after a lis penden has been filed. First and foremost, if the note is not currently for sale, trying to chase down a bank is nearly impossible as they will not sell a one off most of the time. Its like going to Honda and asking them to pull a car off of a factory line for you.
Lets use two examples for people to understand as just because a FC was filed does not mean that is how it will turn out:
Situation 1: Property worth $100k, UPB of $50k and arrearages of $25k. The most likely scenario in this case is the borrower files for Bankruptcy since there is equity in the house (and to own is cheaper than renting). If they file for BK, then the arrearages get spread out over 5 years while they still make regular payments. IF the property were to go to FC, the most the note holder can get back is the $75k. They can bid ABOVE what they owe, but would then have to come out of pocket. Whatever is left above all oustanding liens (1st note and any other liens) goes back to the borrower. So if this house sold at 90k and no other liens on the property, the 1st note holder gets $75k and borrower gets $15k back and whoever bid $90k gets the house.
Situation 2: Property worth $100k, UPB of $75k and arreages of $50k. In this instance the property is upside down (owe more than what it is worth). The borrower can still file for bankruptcy. If it goes down the FC route, the note holder will have legal costs which are ultimately not recoverable. Why I say that is the note holder can bid up to $125k at auction (but house is worth $100k), so whatever you spend out of pocket is that. Now when you buy the note, I would pay in the range of $55k for this note knowing I will have to spend 5-10k in expenses. I would be all in for $60-65k and I could bid $75k at auction and if it goes for that or more all the monies come to me and I make a quick buck (delta between sell price and the $65k I am in it for). BUT what newer note investors do not realize is a property worth $100k probably will only sell for around .70-.80 at auction unless it is in very good condition.
In some instances a UPB may be $50k and arrearages of $80k and property worth $100k. Some investors may bid above the $50k because of the total amount due (as Bob noted). I typically do not bid above UPB, but in some cases it may justify to bid above UPB. The reality is the # of notes that would make you think to bid above UPB is very seldom.
Thanks @Chris Seveney , excellent overview!
@Mike Hartzog back in the day here in PDX I had a sweet heart deal with one of the thrifts the area manager a Mrs. Pickle ( real name) would call me when they wanted to sell a note .. as they did not want the property coming in on their books and they would have to show an OREO.
it was way cool we would get an assignment of trustee and I would buy the note about 2 to 3 weeks before the sale... most of the time someone bid it at the sale and we made a pretty nice little hit.. Or we ended up in possession and would just cycle in the rehab division.. But then she moved on.. the new guy would not play and that relationship ended. I suspect you guys have pipelines like this as well. once you get them that is what separates the in the business folks from the casual investor trying to buy a note or two.
As well as these were PDX assets so 200 to 500k was the number to buy these.. I know a lot of folks deal in the low value mid west assets.. so not as much powder needed / risk if you take a loss.
@Jay Hinrichs - That sounds like a sweet deal. It's always fun to run into these easy high-yield scenarios. It's all about relationships and 5th grade math. Happy New Year!