Pricing expectations on assets in advanced foreclosure state ​

12 Replies

I have recently to looks into more and more deals which includes loans currently in advanced foreclosure status, for example , anything from a few hearings done to FC sale date set and it is 30-60 days.

How do you change your price offer in the bid stage to address that, given everything else equal? For example given a mortgage loan where the debt is 60% of the house value (so we are covered in equity 100%), borrower has not paid in years. in general I would have offered anywhere between 50-65c on the dollar on such a loan, depending on a few other factors, how should that change given the asset is very advanced in the fc process? (one would even say why they sell it if the the sale date is so close). Keep in mind this is before doing any due diligence, so we don't know exactly all the details.

@Michael Vaughn

I always base my bid on a specific targeted return

So for example In Ohio is the loan is 30-60 days from FC and it is uncontested then I would pay more as the seller has put out $5-$6k in FC costs that I don’t have to put out. That’s not to say I still don’t carry additional legal fees but I would not carry as much.

I dont have a ton of experience at this.. I did once have a pipeline into a thrift were they would sell me their notes within 30 days of he auction date..  I loved those.. first and foremost i wanted the asset to reposition.

and second if someone bid at it I made a killing .. borrower rarely ( well in my case NEVER) redeemed or sold 3p usually because of junior debt.  keep in mind i only dealt with first deeds of trust.. never junior.

Hi @Michael Vaughn .  I would say it depends on the asset class (<$25k, < $50k, etc) and market.  Asset class because FC costs are fixed and affect the classes differently.  Market because the going rate for REOs will be the cap on the premium you’d pay for these notes.  

We estimate roughly $5k to complete FC from start to finish and 6 to 12 months time depending on the state.  The farther down the road the seller is the less time and money you’ll need to spend to get it re-performing.

The question is more, what's it worth to you? Are you a performing note buyer looking to dip your toes into the NPN world or are you NPN buyer that's finding new pipeline source or partially worked assets. If you are the former finding notes closer to FC might be a good thing as it limits risk. If you're the latter then you're paying for part of your value add and your cutting into your returns.

For what it’s worth... in our limited experience, in every situation we purchased a note that already had legal proceedings in play, we tried keeping the seller’s attorney to avoid disruption... it never worked out. We ended up switching and it didn’t save us as much time as we expected.  (Maybe part of the reason the notes we’re being sold mid-process?)

@Michael Vaughn That's an interesting question and ultimately the market will dictate what the extra value as well as what the seller is willing to take. I venture to say that the value add is more than the $5k or so in actual FC costs just like $20k in rehab costs add more than $20k in value to a fix and flip. Not only do you not have to pay $5k (or whatever the true amount is) in legal costs, the seller has advanced the FC process numerous steps, some of which require a lot of time, effort, and headaches.

We bought a dozen loans at the beginning of the year and plan to put several out for bid next month. We feel that we were able to buy at a great price and then we added value by pushing the NPNs to judgment when they were stalled due to attorney incompetence or the previous seller's bureaucratic delays. An NPN in a judicial foreclosure that has judgment should be worth a lot more than one pre-judgment where you still have to jump through hoops and take the risks of additional delays. Once you have judgment, your risks are reduced to a borrower actually redeeming (not necessarily a bad thing) or filing BK 13, which is more and more common these days. But the hard work is mostly done.....

Originally posted by @Chris Seveney :

@Michael Vaughn

I always base my bid on a specific targeted return

So for example In Ohio is the loan is 30-60 days from FC and it is uncontested then I would pay more as the seller has put out $5-$6k in FC costs that I don’t have to put out. That’s not to say I still don’t carry additional legal fees but I would not carry as much. 

Chris, How do you know the FC is uncontested during the bidding phase?

Originally posted by @Bryan Hartlen:

Hi @Michael Vaughn. I would say it depends on the asset class (<$25k, < $50k, etc) and market. Asset class because FC costs are fixed and affect the classes differently. Market because the going rate for REOs will be the cap on the premium you’d pay for these notes.

We estimate roughly $5k to complete FC from start to finish and 6 to 12 months time depending on the state. The farther down the road the seller is the less time and money you’ll need to spend to get it re-performing.

The question is more, what's it worth to you? Are you a performing note buyer looking to dip your toes into the NPN world or are you NPN buyer that's finding new pipeline source or partially worked assets. If you are the former finding notes closer to FC might be a good thing as it limits risk. If you're the latter then you're paying for part of your value add and your cutting into your returns.

For what it’s worth... in our limited experience, in every situation we purchased a note that already had legal proceedings in play, we tried keeping the seller’s attorney to avoid disruption... it never worked out. We ended up switching and it didn’t save us as much time as we expected. (Maybe part of the reason the notes we’re being sold mid-process?)

Thanks for the response Bryan. I'm a non performing note buyer. The question is how much of a cut are we talking about. That is what I'm trying to understand..

Originally posted by @Andy Mirza:

@Michael Vaughn That's an interesting question and ultimately the market will dictate what the extra value as well as what the seller is willing to take. I venture to say that the value add is more than the $5k or so in actual FC costs just like $20k in rehab costs add more than $20k in value to a fix and flip. Not only do you not have to pay $5k (or whatever the true amount is) in legal costs, the seller has advanced the FC process numerous steps, some of which require a lot of time, effort, and headaches.

We bought a dozen loans at the beginning of the year and plan to put several out for bid next month. We feel that we were able to buy at a great price and then we added value by pushing the NPNs to judgment when they were stalled due to attorney incompetence or the previous seller's bureaucratic delays. An NPN in a judicial foreclosure that has judgment should be worth a lot more than one pre-judgment where you still have to jump through hoops and take the risks of additional delays. Once you have judgment, your risks are reduced to a borrower actually redeeming (not necessarily a bad thing) or filing BK 13, which is more and more common these days. But the hard work is mostly done.....

Interesting Andy, I think your analogy makes sense to me. Your say you plan on putting a few to bid next month. Are they still non performing? Might I ask why would you want to sell those notes when you are so close to FC? You do not want to deal with the REO's?

@Michael Vaughn

The collateral file and servicing comments should be a tell-tale sign as well as getting the FC docket history. 

If the lender has attempted to FC on numerous occassions and it has been settled, the borrower is holding an advantage in some form or another. You can also see if the borrower filed a response to the FC.  If the lender filed the FC complaint and the borrower failed to even send a response then it is not contested. 

Be weary of those that appear to have attempted to FC many times, I learned the lesson the hard way on this

Originally posted by @Chris Seveney :

@Michael Vaughn

The collateral file and servicing comments should be a tell-tale sign as well as getting the FC docket history. 

If the lender has attempted to FC on numerous occassions and it has been settled, the borrower is holding an advantage in some form or another. You can also see if the borrower filed a response to the FC.  If the lender filed the FC complaint and the borrower failed to even send a response then it is not contested. 

Be weary of those that appear to have attempted to FC many times, I learned the lesson the hard way on this

 Correct me if I am wrong, but these are all things you get once the price has been agreed no? at the point where you bid on assets you only have a few bits of data on the fc, not the whole picture. Of course, if something meaningful is discovered in the due diligence step that will impact the price but in the beginning you don't have much..

Typically yes, but how do you know FC is 30-60 days out? NEVER trust what the seller says for a FC date. If that is something you are looking into specifically as a target focus then as part of bidding I would be looking at the court dockets at that time. 

Once accepted then you can get deeper in the weeds. 

Originally posted by @Chris Seveney :

Typically yes, but how do you know FC is 30-60 days out? NEVER trust what the seller says for a FC date. If that is something you are looking into specifically as a target focus then as part of bidding I would be looking at the court dockets at that time. 

Once accepted then you can get deeper in the weeds. 

 I know that because that bit of data is in the tape. Of course I am not counting on it to be 100%, but I base my bid on this, and during the DD step I will make sure that is indeed the case. I do not target this types of assets on purpose, currently I am trying to find good deals weather its assets that have not started foreclosure or some that are halfway through the process, if the numbers work, they work.

Do you mean you search the county court records site to get an accurate state of the situation during the DD  step?

Originally posted by @Michael Vaughn :
Originally posted by @Chris Seveney:

@Michael Vaughn

I always base my bid on a specific targeted return

So for example In Ohio is the loan is 30-60 days from FC and it is uncontested then I would pay more as the seller has put out $5-$6k in FC costs that I don’t have to put out. That’s not to say I still don’t carry additional legal fees but I would not carry as much. 

Chris, How do you know the FC is uncontested during the bidding phase?

Originally posted by @Bryan Hartlen:

Hi @Michael Vaughn. I would say it depends on the asset class (<$25k, < $50k, etc) and market. Asset class because FC costs are fixed and affect the classes differently. Market because the going rate for REOs will be the cap on the premium you’d pay for these notes.

We estimate roughly $5k to complete FC from start to finish and 6 to 12 months time depending on the state. The farther down the road the seller is the less time and money you’ll need to spend to get it re-performing.

The question is more, what's it worth to you? Are you a performing note buyer looking to dip your toes into the NPN world or are you NPN buyer that's finding new pipeline source or partially worked assets. If you are the former finding notes closer to FC might be a good thing as it limits risk. If you're the latter then you're paying for part of your value add and your cutting into your returns.

For what it’s worth... in our limited experience, in every situation we purchased a note that already had legal proceedings in play, we tried keeping the seller’s attorney to avoid disruption... it never worked out. We ended up switching and it didn’t save us as much time as we expected. (Maybe part of the reason the notes we’re being sold mid-process?)

Thanks for the response Bryan. I'm a non performing note buyer. The question is how much of a cut are we talking about. That is what I'm trying to understand..

Originally posted by @Andy Mirza:

@Michael Vaughn That's an interesting question and ultimately the market will dictate what the extra value as well as what the seller is willing to take. I venture to say that the value add is more than the $5k or so in actual FC costs just like $20k in rehab costs add more than $20k in value to a fix and flip. Not only do you not have to pay $5k (or whatever the true amount is) in legal costs, the seller has advanced the FC process numerous steps, some of which require a lot of time, effort, and headaches.

We bought a dozen loans at the beginning of the year and plan to put several out for bid next month. We feel that we were able to buy at a great price and then we added value by pushing the NPNs to judgment when they were stalled due to attorney incompetence or the previous seller's bureaucratic delays. An NPN in a judicial foreclosure that has judgment should be worth a lot more than one pre-judgment where you still have to jump through hoops and take the risks of additional delays. Once you have judgment, your risks are reduced to a borrower actually redeeming (not necessarily a bad thing) or filing BK 13, which is more and more common these days. But the hard work is mostly done.....

Interesting Andy, I think your analogy makes sense to me. Your say you plan on putting a few to bid next month. Are they still non performing? Might I ask why would you want to sell those notes when you are so close to FC? You do not want to deal with the REO's?

The reason I might want to sell these now instead of holding on to the end is that I can make a good chunk of profit without additional risk. If I bought my NPN at a great price I should have enough margin to be able to make the biggest chunk of profit without taking it as an REO, which requires more time, money, and risk. In the last couple of years, it seems more and more borrowers are filing Ch 13 BK's. When that happens, my timelines get extended minimum of 4 months and I have one that's going on two years.

My source of capital also is a consideration. We pay our investors a preferred return on the money they invest with us. We want to have a certain amount of liquidations so that we can pay our investors back and stop the accrual of the preferred return. So, there is an art to balancing which notes to liquidate for how much at what time to maximize returns.