NPN Story: My Second Time

The second time I bought a non performing note wasn’t as gentle as the first. Foreclosing was almost as easy as the first one was but this time we had to rehab an REO in a sketchy neighborhood while relying on a real estate agent to manage the rehab and call the cops whenever transients decided to camp out or do drugs at the property. In retrospect, the rehab was the easy part. The hardest part for this second time came from our buyer’s lender.

Buying in Your Own Backyard

When we buy notes from a seller, we’re limited to what they have available for sale. We can’t go looking in particular neighborhoods or specific areas. In the note business, you talk about states when you talk about the areas that you buy in and finding something in your backyard is just getting lucky.

Our second note was secured by a house in nearby Victorville, California. The town is not as economically strong as the rest of southern California and sits at the edge of the Mojave Desert. From 2011 to 2013 I bought about 25 condos (typically in lower income areas) in and near the Inland Empire and one of them was in Victorville. For my one rental, I had a great property manager who was also a real estate agent. If the loan turned into an REO, I knew that we could have her sell it for us.

The Victorville loan file was thin just like the other one we bought in Phoenix. We had the essential docs we needed. Our value came in where we wanted it to. At our buying price, there was plenty of margin in case we had to take it back as REO, rehab, and sell it. This house looked to be owner occupied and the borrowers were 5 years behind in their payments.

Another Easy Foreclosure with a Severely Delinquent Borrower

We bought the loan, had our servicer reach out to the borrowers, but they didn’t respond. We started the foreclosure process. Still no response from the borrowers and the property had no bidders at the trustee sale so it reverted to us as an REO.

The borrowers didn’t fight and left the property on their own. This note thing is easy, I thought!

Not So Easy: REO in a Sketchy Neighborhood

We got our agent (I’ll call her “Carol”) out to the house right away and she got her handyman out to secure it. Carol let us know that the area wasn’t that great and that we’d have to be careful regarding transients and drug addicts breaking into the house. In particular, there was an outside shed that some homeless people had already converted to a temporary shelter.

The shed turned out to be a focal point for transients and drug addicts over the next few weeks and Carol was diligent, drove by the property frequently, and called the cops when necessary. It’s great to have a trusted, local agent, who knows and is comfortable dealing with the neighborhood and the community. The problem finally went away when we replaced a large section of missing fence in the backyard.

It had been easy for people to come in through the alley to the shed and the new fencing made it difficult enough so that a lot less people we’re coming into our yard.

On Site or Remote Rehab Management?

Victorville was only a couple of hours away. As a hands-on real estate investor, I had the urge to drive out to see the house and direct the rehab. As a future note investor who wanted to scale up his business, I had to resist this urge and focus on the other highest value tasks that I needed to focus on to grow the business.

We were in great hands with Carol. She had connections to contractors and handymen. She took photos of the inside and got the bids for a light rehab. We decided on which bid to go with and Carol made sure that the contractor did what he was supposed to. This rehab thing from afar was too easy! I was proud of myself, I never went to the property once.

Listing the REO

We put the house on the market for $99,000. At this price point, we were dealing with first time home buyers who might have problems qualifying for a loan. It was 2016 and lenders still remembered the housing crisis and were trying to adjust to the additional regulations brought on by Dodd Frank. Borrowers were getting turned down left and right and it wasn’t a sure thing for any type of borrower.

We received offers at a decent pace and accepted a good offer. We fell out of escrow within a couple of weeks because the buyer couldn’t qualify with the lender.

The Lender that Just Won’t Fund

We went into escrow a second time with an even better buyer. We got through the inspections and were waiting for the lender’s final approval. The delays kept coming, one week at a time, with one excuse after another. The lender needed additional documents executed, they needed the borrower to re-sign others, they couldn’t seem to keep track of the documents.

It became a running joke with me and Sean, “Has Victorville closed yet?” “No man, maybe next week….” It turned into a 6 week delay, which became unbearable. Not only were we needing to close the deal so we could earn our paycheck but just having a property in a sketchy neighborhood had us worried about people breaking into the house or the shed.

The buyer’s mortgage broker was using a lender that he had never funded a deal with before. We were all frustrated because the lender just would not fund the deal and we couldn’t seem to get through to anyone that could help us. It was one of those situations where you invest a lot of time and energy in seeing everything through only to have the goal posts moved back 5 yards, then 15, then 30. You feel like if you quite now, you’ll have to start all over and waste even more time.

This lender (a smaller outfit) would not come out and say that the borrower was not qualified but, for whatever the reason, they would just not fund it. Why would the lender not fund the loan? We could never get a good answer and it didn’t really matter.

Second Deal, Second Escrow, Second Lender

We felt bad for the buyer because it wasn’t his fault. If we could keep this buyer and use a different lender, we wouldn’t have to start from the very beginning. We asked the mortgage broker and the buyer if they would use one of our recommended lenders and they were happy to. Our frustration and stress eased up over the next weeks as the buyer used our recommended lender and we saw the difference in how a legit, professional mortgage origination operates.

We finally closed the deal. A first time home buyer got their chance at the American Dream, to own their first home and build a life for themselves. Carol got a commission for a job well done, the mortgage broker got his commission for finally getting the loan closed, and we got our paycheck. More work and stress because of the never-ending escrow but that’s part of what we get paid for. Not as easy as the first time but you always learn so much more on the hard ones…

Things I learned:

• - I don’t need to physically inspect every property I do a rehab on. Most of the time, pics, videos, and email are sufficient when you have trusted and competent boots on the ground to handle things for you.
• - By not viewing the property personally, I keep myself available for the things that are the highest and best uses of my time. For me, I’ve identified that evaluating and acquiring note deals and identifying the best liquidation strategies are the things I do best.
• - Make sure that you have enough margin in your deal to cover the additional risks of properties in sketchier areas. Better yet, don’t buy in those areas when you don’t have to.
• - Simple things such as fixing fences and installing security lights will go a long way towards protecting your property from crime. Don’t be the easy target so that most bad guys will look elsewhere.
• - A lender’s prequalification letter is worth little by itself, especially if it doesn’t come from a well established business. Vet the borrower’s lender before accepting an offer. Google the lender and evaluate the reviews. Bring up your concerns in case the borrower is willing to go with another lender that you know will close the loan.

Final Numbers:

Purchase Price: $38,520

Total Cost Basis: $62,685

Net Sales Price: $93,698

Net Profit: $31,013

Days Held: 447

Return on Investment (ROI): 49.5%

Annualized ROI: 40.4%