Buying the note before foreclosure?

Question

My company is looking at the acquisition of a pool of first position non performing residential mortgage notes in various states. These mortgages are within 6 months of going to the foreclosure auction. Buying the note before it goes to the auction would seem like a good way to get the property back for flip or rental, rather than being on the other side of the table as a bidder.

Is this something that a real estate investor would find attractive to get the property before it goes to auction? Our thinking is to either foreclose and sell the REO to investors, or just sell the distressed, pre forclosure note so the investor can "be the bank" and foreclose.

Any opinions or insights are appreciated!

Ron S. · Answer

I wouldn't get into this if your objective is to get the property for a flip. That is in no way shape or form, the easy way to get the property. If you are looking for interest revenue and your due diligence is solid, these transactions can be very profitable. The seller is giving you a bid tape and you are going to review it. You'll get their numbers and they will have their sell amount based on what they want to net, and you'll have your numbers and you will have your buy amount based on what you want to net. If everyone is doing their job, everyone wins.

Of course you will want to validate their numbers, especially the values they give you. I'd check dates of values and method of valuation. I'd get my own values (Which I'm sure you are planning on). They are giving their loans a haircut and you are also giving their loans a haircut and hopefully you two come close with your final numbers.

I do note sales all the time. If you are going to buy them, make sure you have your ducks in a row as a servicer or, make sure any servicer you hire for these notes has their ducks in a row. What are their policies and procedures? Are they experienced in the loss mitigation requirements? Default process? Bankruptcies? How do they protect the borrower's NPPI data? Are they compliant with state and federal servicing rules? Do they know what a successor in interest is? Are they verifying SCRA eligibility? Do they send modified periodic statements to borrower's in or discharged from a bankruptcy? do they have the original note? Do they know the difference between judicial and non judicial foreclosure states? Etc..

Wayne Brooks · Answer

Not a new strategy at all. Of course it’s not as simple as it appears.....lots of hidden costs, taxes, insurance, preservation, etc. and much depends on the jurisdiction as to length of foreclosure process.

@Chad U. plays in this arena.

@Chad Urbshott plays in this arena.

Ron S. · Answer

No one is going to sell you a "property bank note"...from a bank. Maybe some onesy twosy mom and pop investor but no one is going to sell you volume if you are a onesy twosy mom and pop note buyer.

Farhad Novian · Answer

I’m looking property bank note only. Before forcloser

David Nolan · Answer

@Jan Gates

I suggest you seek the advice of an experienced note investor and possibly some legal advice to get a broader understanding of the process, the risks, and the costs involved, and then determine if the investment makes sense. I am sure you can find some people here on BP that could help you. You may need to hire them though.

Notes can be a good investment when bought correctly or a potential nightmare when bought incorrectly. Whatever time you spend learning the pros and cons, and getting professional advice before you make your offer to buy them will be money and time well spent.

Good luck on your journey!

Brian Ploszay · Answer

I have experience in note purchasing from the days of the crash, 8 to 10 years ago.   I invest locally and in a judicial state, which is more difficult to foreclose.  In my state, if contested, a defaulting party can often stay in the property for two years.  There was absolutely no predictive time line for getting the foreclosures done.  And the holding and legal costs were impossible to predict.  These days, I buy notes occasionally, but only when the case is already filed and completed.  But the Bank doesn't want to take possession, so they sell it at the last step.  Last, banks are not discounting properties much these days.

Chad U. · Answer

Thanks for the mention @Wayne Brooks

This is somewhat why I got into the note investing space a few years ago, as I was getting tired of being outbid at the auctions.  However, my strategy and company direction has changed much since then and prefer to keep the borrower in the property (think keeping a renter in a property to cover costs).

This is a viable strategy, but keep in mind you may not always end up with the property, particularly if there is equity, generally 20%+ above payoff amount as it may be picked up by a 3rd party bidder.  There is also a strong possibility of borrower declaring BK, adding another 6+ month to your hold time (if BK Ch. 7), or for 3 - 5 years if Ch. 13.  And as @Jay Hinrichs mentions, in some states the borrower can reinstate and you become the owner of a paying (or in many cases, a non-paying note again) and you need to start the foreclosure process all over again.

It sounds like you may have a tape from Kondaur, they are notorious for taking their loans right up to the foreclosure then dispose of them.  Beware they tend to give BPO's which are closer to ARV's vs As-is values (as do majority of sellers) so don't leave much room for profit after taking into account holding costs, legal, taxes, etc.

Jay Hinrichs · Answer

yup  or they redeem and reinstate..

Buying the note before foreclosure?

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