My first non-performing note

7 Replies

Investment Info:

Single-family residence note investment investment.

Purchase price: $9,750
Cash invested: $9,750

I bought a non-performing note with a value of $16,000 for the price of $9,750. My exit strategies include motivating the borrower to perform, which will give me approximately $22,000 over 7 years, to foreclosure, which will give me the $16,000 plus expenses and interest, to finally, cash-for-keys which will give me possession of a house valued as is at $36k to $60k.

What made you interested in investing in this type of deal?

I'm interested in the potential returns with this type of investment

How did you find this deal and how did you negotiate it?

I looked at 100 notes from a broker rejecting some, bidding on others and losing until I finally scored.

How did you finance this deal?

My self-Directed IRA

How did you add value to the deal?

I will get this note to perform.

What was the outcome?

TBD

Lessons learned? Challenges?

I'm learning about the non-performing note industry. This note is my first non-performing note. The borrower has declared chapter 13 bankruptcy, so I've hired a bankruptcy attorney to navigate around that challenge.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes.

Good Afternoon Alex, I'm in the first position, the state is in Landlord-friendly Kentucky, interest rate is 8.5% and have 87 more months on the note.  The BK 13 has been resolved, I just received a payment from the bankruptcy trustee for $939 two weeks ago.

Originally posted by @Rob Pattison :

Good Afternoon Alex, I'm in the first position, the state is in Landlord-friendly Kentucky, interest rate is 8.5% and have 87 more months on the note.  The BK 13 has been resolved, I just received a payment from the bankruptcy trustee for $939 two weeks ago.

can you let the audience know how much you spent in legal getting your first payment

and how much does our servicer take  etc etc.. 

IE net returns.. would be good to know.

sounds like a solid deal on its face though.

Good Afternoon Jay, 

The borrower was well into their Bankruptcy 13 proceedings by the time I bought their note.  Legal, I've spent About $1,000 on a regular attorney to make sure I've received all the paperwork in the collateral file of 161 pages.  I've also spent $800 on a bankruptcy attorney to make sure my rights under the note are protected and to file a "transfer of claim" from the previous servicer, who initiated legal proceedings once the borrower started down bankruptcy road.

My legal costs are governed by government guide lines and will not exceed the $1k, and the $800.

I've hired Madison Management to service my note.  Their monthly rate to service a non-performing note is $40 per month.   If the borrower will be consistent and pay every month, via their bankruptcy trustee, then Madison will drop my rate to $20 per month after an appropriate period of performance.  If they have to mount a collection campaign, at my request, in the event the borrower stops paying, then the rate goes to $80 per month.

This note is my first of the non-performing category, so I'm learning as I"m going, and can't give you a net return projection.

I bought this $16k note for $9,750.  The note runs for 88 months, a little over 7 years.  My costs will be $40 per month, plus the one time $1,800 legal, plus $50 for the transfer of claim.  I also placed forced insurance of $640 on the property.    I'm due $246.18 P & I every month for 88 months,= $21,663.84.  The property taxes of approximately $400 per year are paid up, but I would step in and pay if the borrower doesn't.

All of my costs, with the single exception of the $40 per month servicing fee, are to be reimbursed to me by the borrower, by law.  If the house goes to foreclosure, then the winning bidder needs to repay all my costs, except the servicing fee, plus the remaining note.  The costs to be reimbursed are any property taxes I pay, the forced insurance, all my legal costs.

@Rob Pattison

Are you aware that in Kentucky you need to be licensed to own notes ? If you attempt to foreclose the courts may kick it out of court if you are not licensed

In order to be licensed you need to show a net worth of $1M and the costs to get a license are not cheap because of bonding requirements.

Hey Chris,

Thanks for bringing that potential issue to my attention.  I'd rather hear about this type of challenge from a fellow investor rather than from the judge.

I checked with the attorney I've hired to oversee the legal aspects of note.  He's a partner with Bleeker, Brodey and Andrews.  He said he's not aware of my needing to be licensed to own notes in Kentucky.

Half of the people in any profession, including attorneys are in the bottom 50% of that profession, so if you can give me case law or a statute which says I need fit the criteria you stated, I'll thank you for your help.

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