Non Performing note fair offer?

Tax Liens & Mortgage Notes
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Non Performing note fair offer?

Jodi GauthierBusiness Member
Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes

I am unfamiliar with nonperforming note acquisitions and would appreciate any advice or insight from seasoned note buyers on a current note I hold.  What would a fair offer be for a non performing note with the following criteria:

loan amount 195k

down payment: 25%

Interest rate: 10%

five year balloon

amortized over 30

originated 6/15/2018

no payments made by borrower (45 days late today)

licensed servicing company in place

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Edward B.
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
8y

@Jodi Gauthier, to somewhat answer your question, I think that you are better off foreclosing on the property because it is worth much more to you than an investor that comes in. NPN investors are looking for outsized returns and will demand a return on top of their purchase price and expenses. You on the other hand are not looking for a profit since you presumably already made it and just want to be made whole. You can generally roll your legal costs etc into the amount they owe you (location dependent) so you will come out unscathed in the end. Also, just filing the foreclosure is usually enough to get someone who just plopped down $65k to start paying again.

To sell it, I would figure at least a 20%-25% discount on the UPB minus whatever the buyer thinks their expenses would be. That's a pretty big bite. I assume that you were hoping that it would go for relatively close to UPB but that does not leave enough reward for an incoming investor who can go buy an already performing note that returns 10%-15% with none of the risk and effort associated with an NPN.

Of course, you could always throw it up on FCI at the UPB and see what happens. God knows I've seen crazier stuff than that offered there.

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  • Cody Cox
    Note Investor · Wilsonville, OR · Member since 2010 · 149 posts · 113 votes
    8y

    This appears to be headed for a first payment default. It also appears to be a seller-financed transaction. The sales price appears to be $260,000, so there is pretty good equity in this property. You should assume you would foreclose and then resell the property. I always assume a worst case scenario. Being in Texas, your foreclosure timeline is shorter. Anticipate a 12-month hold, but it would most likely be about 6 months. Calculate all your anticipated expenses in that 12-month period, including servicing fees, potential property taxes, attorney fees, etc, and then run the numbers for a decent return. 

    2Reply
  • Barry Collier
    Investor · Encino, CA · Member since 2017 · 9 posts · 3 votes
    8y

    Just to clarify - you currently hold this note and are looking to sell it and want to know what a fair asking price is, or are you looking to buy this note?

    0Reply
  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y

    @Barry Collier Yes, I hold the note and want to know what a fair asking price would be.

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  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y

    @Cody Cox Thanks for the response. I should have titled my post "fair asking price" instead of offer to be more clear.  I actually hold the note and just wanted to explore alternative exit strategies to foreclosing and weigh my options.  I've never sold a note so I didn't have a clue as what to expect in terms of discounting the balance paid on non performing notes. 

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  • Daniel E.
    Charlotte, NC · Member since 2018 · 55 posts · 4 votes
    8y

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    @Jodi Gauthier Owner occupied?

    If so, properly originated by a licensed RMLO?

    Would the property actually have appraised at the sale price?

    Odd for a default right out of the gate with that much down.

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  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y

    @Wayne Brooks, yes we used a rmlo, it’s owner occupied and we have a servicing company in place.  I find it very odd as well.

    Yes I’m confident it would have appraised. I’ve flipped several homes in the neighborhood and this one was about $5 a sq.ft lower than others. We had multiple offers within the first day on market. 

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  • Christopher Winkler
    Specialist · Dallas, TX · Member since 2014 · 900 posts · 392 votes
    8y
    Originally posted by @Jodi Gauthier:

    I am unfamiliar with nonperforming note acquisitions and would appreciate any advice or insight from seasoned note buyers on a current note I hold.  What would a fair offer be for a non performing note with the following criteria:

    loan amount 195k

    down payment: 25%

    Interest rate: 10%

    five year balloon

    amortized over 30

    originated 6/15/2018

    no payments made by borrower (45 days late today)

    licensed servicing company in place

    How well did you check out the buyers credit, debt to income ration, etc. If it went through a RMLO, they would have done that. I would drive by and see what the issue is and let them know this is not what he said he would do and he would be at risk losing his downpayment and the house. 

    You need to provide a little more data like address, credit score, etc. He is paying a highly reduced monthly amout to boot with the 30 year AM and balloon, have you been in touch with him at all?  

    0Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
    8y

    @Jodi Gauthier, to somewhat answer your question, I think that you are better off foreclosing on the property because it is worth much more to you than an investor that comes in. NPN investors are looking for outsized returns and will demand a return on top of their purchase price and expenses. You on the other hand are not looking for a profit since you presumably already made it and just want to be made whole. You can generally roll your legal costs etc into the amount they owe you (location dependent) so you will come out unscathed in the end. Also, just filing the foreclosure is usually enough to get someone who just plopped down $65k to start paying again.

    To sell it, I would figure at least a 20%-25% discount on the UPB minus whatever the buyer thinks their expenses would be. That's a pretty big bite. I assume that you were hoping that it would go for relatively close to UPB but that does not leave enough reward for an incoming investor who can go buy an already performing note that returns 10%-15% with none of the risk and effort associated with an NPN.

    Of course, you could always throw it up on FCI at the UPB and see what happens. God knows I've seen crazier stuff than that offered there.

    4Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    An observation; You say he is 45 days with first payment and closing was 60 days ago. That is odd a payment is due in 15 days from closing: mtg payments are paid in arrears, accumulating a month’s worth of interest. Typically the first payment is 30-60 days out. 

    0Reply
  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Jodi Gauthier:

    I am unfamiliar with nonperforming note acquisitions and would appreciate any advice or insight from seasoned note buyers on a current note I hold.  What would a fair offer be for a non performing note with the following criteria:

    loan amount 195k

    down payment: 25%

    Interest rate: 10%

    five year balloon

    amortized over 30

    originated 6/15/2018

    no payments made by borrower (45 days late today)

    licensed servicing company in place

     At a 95% quick sale price on the property, 7% for commission/closing would leave Net $230K. Assuming a quick foreclosure and writ of possession within 6 months, would give total expenses and holding of say $5K. Work backwards from here, and say if the investor wanted to make 20% ROI (or 40% annualized), then they would pay approx $187K. (230K/1.2 - $5K).  However  I wouldn't pay that as the yield is only 10.9% if they start paying again, plus run the risk he may declare BK.  But some may be ok with that yield and BK risk. 

    0Reply
  • Dennis Weber
    Real Estate Investor · Indianapolis, IN · Member since 2014 · 316 posts · 165 votes
    8y

    You should reach out to borrower and see what the problem is. Could be he sent payment to wrong address, servicerscrewed up or something. 

    0Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
    8y

    @Chad U., you are assuming that you get the property back at foreclosure, but that is not guaranteed. In fact, depending on the market, I'd say it may be unlikely. You are only entitled to what you are owed plus expenses and arrears and there are none with this property. Based on your own expense estimate, you would only be able to ask for $200k at auction and someone may think that a $260k property with only $200k reserve is a pretty good deal. If you paid $187k for the note then you may only make $8k...in 6-12 months.

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  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y
    @Christopher Winkler His agent actually recommended the RMLO that we used in the transaction. I’ve driven by the property several times and they are definitely living there. I’m a little apprehensive to stop and talk to them as I don’t want to put myself in a situation where I am violating any laws or protocols if and when I have to follow through with a foreclosure. The loan servicing company I’m using has attempted to call several times. My husband has tried to call as well and he hung up on him after he told him who he was and now won’t answer.
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  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y
    @Wayne Brooks We actually closed 6/1. No interest was collected at closing and first payment was due 7/1. I may have been unclear about dates on my original post.
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  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y
    @Dennis Weber Both servicer and my husband have tried to reach out. He isn’t taking servicer calls and he answered when my husband called but then hung up as soon as he introduced himself. I’ve heard mixed advice as to how many times, to what extent we personally try to reach out to him. Do you think I should keep trying or pay them a visit? Of course I’d like to work things out with them and receive payments as intended. It just puts a really bad taste in my mouth they didn’t even attempt to make one payment or communicate what the problem is.
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  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y
    @Edward B. If it does go to auction is the bank (myself) allowed to bid over another bidder to insure we still the property back?
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  • Christopher Winkler
    Specialist · Dallas, TX · Member since 2014 · 900 posts · 392 votes
    8y
    Originally posted by @Jodi Gauthier:
    @Christopher Winkler His agent actually recommended the RMLO that we used in the transaction. I’ve driven by the property several times and they are definitely living there. I’m a little apprehensive to stop and talk to them as I don’t want to put myself in a situation where I am violating any laws or protocols if and when I have to follow through with a foreclosure. The loan servicing company I’m using has attempted to call several times. My husband has tried to call as well and he hung up on him after he told him who he was and now won’t answer.

    I would not put up with any of that BS. Though I am confused, if you used a RMLO, did they not pay you off? Did you own it free & clear or ? Why would you need an RMLO if you did own it free & clear as you are not loaning money. Am I missing something?

    Otherwise now they are hostile and I would start the foreclosure process tomorrow and not bother. Do not take this, its your property until the last payment. We have attorneys in many states, and you can go to http://legalleague100.com, go to members, and choose the state and find competent attorneys.

    Please clarify if you own it free & clear or why an RMLO is involved, thank you!

    0Reply
  • Ralph Galdorisi
    Investor · Northport, NY · Member since 2016 · 27 posts · 8 votes
    8y
    @Jodi G. What is the note secures with? Details on asset...
    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    You can bid over what you are owed, but you’d have to pay the amount over your debt in cash of course...any surplus goes to the borrower though, assuming there are no add’l liens.

    Your servicer needs to be handling this, state/fed laws dictate when you can actually file foreclosure, your servicer will know this.

    1Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    8y

    @Jodi Gauthier

    Absolutely you can bid over the price and retain the property 

    Obviously, this is a hassle but look at the positive. They put 25% down and you are in a great position if you have to take the property back. Many seller financed property get 10% down or less. The foreclosure process is very simple and straightforward. I would begin the process ASAP as at a minimum it will get their attention 

    I would in no way consider severely discounting the note at this point

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  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y

    @Christopher Winkler Yes I owned it free and clear. Obviously I am new to the lending game and I did a lot of research both on bigger pockets and in my local network and came to the conclusion using a RMLO just seemed to be a safer bet of which I'd pass the cost along to buyer. From my understanding it wasn't required considering I didn't loan on more than 5 properties this year but I didn't see any reason not to allow a professional to handle that aspect with my lack of experience. My servicer is handling it to my satisfaction and I understand there is a very strict sequence of events that must be followed. I posted this simply because I want to make sure I am aware of all exit strategies.  I really appreciate the input from everyone on this site.  

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  • Debbie W.Pro Member
    Lindenhurst, NY · Member since 2017 · 75 posts · 35 votes
    8y

    Following. What is RLMO?

    0Reply
  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y

    @Ralph Galdorisi It's secured with a deed of trust.

    @Greg H. That was my thought exactly but just wanted to make sure I'm on the right track and have explored all exit strategies available to me.  Bigger Pockets is such a valuable tool and again, I am sincerely grateful for all of the input and advice from you all!

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  • Jodi GauthierBusiness Member
    OP
    Real Estate Broker · Houston, TX · Member since 2016 · 87 posts · 47 votes
    8y

    @Debbie W.  RMLO Residential Mortgage Loan Originator

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