Buying notes just to foreclosure on them

12 Replies

Would it be a smart strategy to buy NPN or defaulted mortgages just to foreclose on them for profit . Is this a good strategy.

Originally posted by @Will Barnard :

It is a good strategy if you know what you are doing and the property has equity in the deal. Without the equity piece, tough to turn a profit.

Can you teach me how something like this would work? I got a some money saved up and I am looking at notes to buy.  How does the foreclosure process work? 

Foreclosing on an NPN, in my opinion, is not a primary strategy. It is generally the longest time and higher costs, but it does provide an opportunity for a lump sum payment at liquidation, provided you buy right. My model is to purchase NPNs where the borrower is in the house, and attempt to find a workout where they can begin making payments, often providing some incentive for them to stay on track. This method provides a monthly cash flow, and once the borrower has made 12 - 18 timely payments, the note can be resold as a re-performing note at a higher price. This strategy provides for a much better overall return than foreclosure. Yet, I will admit, this happens only about 30% of the time. I have 3 REOs on the market and will be accepting 2 DILs in February.

For me it all depends. I get a mix. I like to get notes performing for that steady cash flow. But I also like rentals. So I do buy notes with deceased borrowers, which means I'm going to foreclose. If the property is underwater and I see value in the property, then I'll go after the property. If it has equity, then I look at the payoff. 

Stating that though, I think a lot of sellers these days are looking at you thinking they can make $50k at auction if they go all the way through foreclosure, or they can sell to you for $50k right now. So when you buy it, you won't make any money with foreclosure. So if you are not getting the right discount, you're going to lose.

@Cameron Johnson The foreclosure rules are different in each state.  I would suggest only doing it in states where it is easy.

Originally posted by @Cameron Johnson :
Originally posted by @Will Barnard:

It is a good strategy if you know what you are doing and the property has equity in the deal. Without the equity piece, tough to turn a profit.

Can you teach me how something like this would work? I got a some money saved up and I am looking at notes to buy.  How does the foreclosure process work? 

 Unfortunately, me or anyone else can not teach you all of this in one post. Secondly, every state has its own laws and procedures/time tables for the foreclosure process. Lastly, the foreclosure process should be your last resort strategy and not the original intention (in most cases). Most people who invest in non performing notes buy them at huge discounts and then attempt to get them performing again. That is where the money is typically.

@Cameron Johnson
It depends on your overall strategy. If your buying vacant properties to foreclose and take over you have no idea what the inside looks like. If you buy with occupancy to foreclose the borrower could file bankruptcy.

With notes you have to understand every exit strategy and bid based on worst case as sometimes foreclosure is not the worst case - if borrowers payment is only $200 a month then reinstatement could be lower returns. I have seen some hedge funds take $20k balances and run them out 360-480 months and have payments of $125 which after servicing gives you no return.

Chris Seveney

    Well, well, buying NPLs just to foreclose is a bit predatory unless the house is vacant. Even then, you have to deal with the borrower or his / her attorney which can be time-consuming and expensive . So don't think that just because you can foreclose on a home to take it as a rental or Fix and Flip you're getting a great deal. If you plan to do this with occupied properties as a business model you may want to check your moral compass!

    My advice as a new note investor (6 months total): I'm currently in foreclosure with two notes and it is a very long and expensive process. Foreclosing through a servicing company helps but the time element is uncontrollable by you. No matter how quick you are with submitting documents and replying to inquiries you still have to wait for things to play out. If you have the money to buy a NPN and sit on it for 12 - 18 months that's great but you could have bought a cheaper PN and been collecting payments for that amount of time instead.

    A blue chip stock will return 7% annualized.

    I also agree that foreclosing on homeowners who occupy the property is not right. There are other ways to make money without hurting borrowers.

    With the last few year's retail home prices climbing in most areas, the usual fix/flip investor is getting priced out and they are migrating to buying NPLs as a strategy to get to the property. This has disrupted our niche a bit and contributed to the increase in NPL pricing due to these investors offering prices based on foreclose and flip/rent exits rather than cash flow from reperforming loans. 

    Originally posted by @Micah A. :

    My advice as a new note investor (6 months total): I'm currently in foreclosure with two notes and it is a very long and expensive process. Foreclosing through a servicing company helps but the time element is uncontrollable by you. No matter how quick you are with submitting documents and replying to inquiries you still have to wait for things to play out. If you have the money to buy a NPN and sit on it for 12 - 18 months that's great but you could have bought a cheaper PN and been collecting payments for that amount of time instead.

    A blue chip stock will return 7% annualized.

    I also agree that foreclosing on homeowners who occupy the property is not right. There are other ways to make money without hurting borrowers.

     yeah I wouldn't put anybody out of their property. my main intentions in the note business is to really focus on wholesaling notes. i was wondering could you help me out. 

    I understand you desire to buy notes to foreclose and take back the property.  When I first started buying NPLs in 2012, it was for the purpose of getting houses at a deep discount.  I came from a wholesaling background and had just sold off my wholesale company when I started in the debt space.  I know the desire to get the real estate is strong becasue that is what most people coming into this space are comfortable with, but what I have found after purchasing around 200 NPLs is that there is a great profit to be made from turning assets in RPLs and then reselling them.  The cash burn that you will face during a Foreclosure can be staggering and derail you from the get go.  IF you are dead set on buying an asset to foreclose, I would buy one that is close to judgement, or one that already has judgement.  You will most likely limit the amount of time that you are in litigation, and may give you your end result of getting the asset back.  As @Bob Malecki stated, the days of taking assets to foreclosure and having them sell at auction for a massive profit are few and far between,  That being said, we have one that is going to auction on 2/22/18 (16 days) in Tampa that the borrower signed a consent judgment on and the house is worth around 220k fixed up.  We have been trying to sell the $185K judgement for 135-140k with no luck, so we will see what it sells for at auction. 

    If you do find yourself with an NPL and want to try and get the property back, I would explore deed in lieu or consent judgments as an alternative to fighting the borrower in foreclosure.  

    The thing that stands out most to me when it comes to turning an NPL in to a RPL is that you have the ability to change the life of someone and give them a second chance at keeping their home.  A majority of the borrowers that we deal with have had legitimate hardships and have been mistreated by the larger institutions.  There is no better feeling than helping a family save their home, getting them off the foreclosure merry go round and providing some stability in their life.... oh and there is the high double digit returns that seem to go with it.  

    Rick Allen

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