Purchasing a Non-performing Note

4 Replies

Hey All,

I have the opportunity to buy a note from a bank on a commercial office property for well under what the property is worth, about a 40% discount. I have attorney's involved but am not clear on this process. I know the owner being foreclosed on and there are two mortgages on the property. I would be purchasing the first standing note. The owner is looking to be foreclosed on quickly as the remaining debt that he owes elsewhere will be wiped out. 

Could there be risk from the second standing mortgage holder upon foreclosure? The outstanding balance is $396,000 that is accruing interest of 9.75% on a daily basis as it is in default. Any and all advice would be appreciated. Thanks!

@TJ Verdiglione

Just remember you can only claim what is owed on the note. If the balance is $396,000 and it sold at foreclosure for $500,000 you only get the $396,000 and then the rest goes to other debtors then the borrower.

There is always risk in non performing notes, borrower could file BK. Foreclosure could be contested.... you name it and it can go wrong.

@Chris Seveney Thanks for the info, Chris.

So if I buy the note at $300k and the note sells for $450k let's say, I still could make some serious profit? Or is there more to that?

If the borrower files BK, it would go directly into an auction process right? Where the building is either bought above the note's balance or I retain ownership? As far as the foreclosure being contested, do you mean being contested by the mortgagor? 

@TJ Verdiglione

Put it in simple terms - say you owned a first position note that had a balance of $400k on one World Trade Center building which has a value of $5B.

If it forecloses and sells for $5B, you get the balance only (400k) you don’t get $5B. You only get what you are owed.

If it goes to bankruptcy it STOPS foreclosure process as they try and restructure the debt and go back to regular payments potentially (depends on type they file)

To be blunt if you never have bought a note before buying a non performing commercial note would be like handing the keys to a tractor trailer to your 16 year old kid and say go drive this as their first car they ever drove.

@TJ Verdiglione

I think you may be either confusing a couple of different things, or not expressing them clearly. The owner getting foreclosed on a property he owns doesn’t wipe out debt he owes elsewhere. It may wipe out lien that are junior to that property, but not to him personally if they are judgements against him or have his personal guarantee. Further, that the debtor prays for a quick foreclosure is only relevant to the extent that he may elect not to use legal maneuvers to delay the foreclosure.

The process of bankruptcy can be very long and costly for creditors, as well as debtors, with many delays, traps, and court rulings that defy logic and fairness.

Additionally, what may seem like a 40% discount from market value may turn out very different, especially in lower priced, special use or location challenged properties. Back real estate taxes do not get wiped out in foreclosure, during the period you have the property for sale taxes are accumulating, insurance must be paid, the property is deteriorating, vandalism can be a problem, sometimes security is necessary. Further, broker selling the property want 6% commission, the buyer wants you to make needed repairs, pay for a survey, pay for title insurance, pay for an environmental report. Any environmental issues must be contended with, zoning or land use

violations will come to light when a property goes under contract and may kill any sales or drastically reduce the property’s market value.

The niche of dealing in non performing notes requires a much broader expertise to be successful than most other real estate niches.