All Forum Posts by: Dion DePaoli

In short. Yes. HML will not give you money for marketing. They lending money secured by real estate. If you can pledge real estate, then they may give you money which you might be able to use for marketing. If you do not have property to pledge as collateral, they will not give you money. Try looking for a partner not a lender.

Why not take the gifted deed from your dad. Wait six months to season your title and then refinance the property as a cash out and payoff your siblings? After all, it's only six months and you guys are all related.

IMO, that is cleaner than the other idea you have. Since the transaction is not arm's length I think you will have some difficulty with the proposed purchase structure in #3. If you did want to do this method, you would be better to reduce the purchase price by your share of what was going to be the gift and simply take that as gift equity upfront. Giving cash to your father through the purchase, so he can then give you cash back will not sit well with most lenders.

The idea around cost basis resetting is a little flawed. It is not resetting, you don't currently own the property so it's not a reset, it is a new asset to you once you come into ownership. So you will treat it as such with your own accounting moving forward. Your father depreciated it on his financials which are not yours nor do you assume his. In that regard, you automatically start new no matter how you structure the transaction. The book value you enter to open will be affected by your structure. Bounce it off your accountant to see how best to maximize.

You may also want to look into vesting in trust as an advantageous ownership structure. Remember all of the dollars here may create tax events for each party with the gifts and perhaps gains. An experienced estate planner or accountant maybe able to help minimize those tax liabilities.

Financing notes is hard, financing a single note with no experience is ten times harder than that. Financing an NPN in full including all future advances is not financing it, it is having someone else buy it for you. If you do not have money to pay for this along with money to cover what could be a large amount of money needed to start, continue or finish the needed disposition then you should stop thinking about this asset as a note, perhaps wait until it becomes REO and simply make an offer.

Buying the note does not mean you get ownership of the real property. The borrower has a capacity to redeem or even reinstate. In addition, you may have bankruptcy risk which would stay any of your collection attempts. The property will first go to a foreclosure auction where any third party can bid the property and become the new owner. While you could go and bid along side, if you needed money to buy the note, it is likely you will need money to buy at auction.

If you need financing, then chances are you really are going to be looking at making an offer on the REO to the Mortgagee or a New Owner post auction.

Wendell,

Echoing what was mentioned. This is not a trade you seem to be ready for.

Question number 6 above clearly illustrates that idea. YOU need to understand that before you go marching off into the sunset.

Additionally, the purposed plan you have is not very good. If you purchase a NPN and then try and sell it three months later, just exactly what was done to increase the value of the asset?

The real life answer is NOTHING. You will loose money. If you can achieve the same sale price as you paid, you will loose your due diligence and closing cost money. There is this ridiculous idea out there which is growing ever larger on the newbie note investor landscape which believes that NPN loans have some innate perpetual value increase. They do not. That is crazy. That loan is not performing, this means there will be capital demands on the investor in order to maintain their interests through the security instrument. Those costs do not get redeemed from the asset until the asset is dispositioned.

I have seen this very often lately. Two ideas apply. One, no foreclosure action is commenced and you do not initiate one either. So the asset is as far away from any type of disposition as the day you purchased. The result, no price increase since the capital demands to take the asset through the process are still 100% present, whatever those costs might be. The second, a foreclosure action was started so the act of you holding the loan will result in time moving forward on the FCL timeline, however in the scheme of things unless a substantial action occurs, say a Judgement of Foreclosure or you are right on top of a FCL Sale date, then the margin of value increase is not even worth trying to measure. Further, the majority of the capital demands will still be present in comparison to your entry into the asset. That is since your desire was to deploy the least amount of capital into the asset to keep your cost basis low in an attempt to make a margin on the re-sale, there really can not be much if any of a value increase, since the relative cost to dispostion the asset is the same for all potential owners. Third, if you do manage to achieve a milestone, say a Judgement of FCL, then I would tell you that your mind is lost if you would rather sell the loan at a discount instead of sending it to sale and either getting paid off or getting the REO to sell, lease or whatever, since well, you and the asset are here at that point. So that is the equivalent of giving your money away.

If I had a dollar every new note investor who tosses in the idea of modification to reinstate the borrower into a more affordable loan, I could get Detroit out of BK. While most understand at some basic level of what that means, there is usually a massive misunderstanding of the work and costs to achieve said results. Not to mention there tends to be no method of identifying those assets pre-purchase. So often times, nice thought, zero results in modification.

This is the point where I could easily argue on a vacant property the value decreased since nobody is actually taking care of it. I can make a similar argument on property taxes as well. However, I will digress as I think you get the point.

On the offer in the OP. You have 5 Ohio assets at roughly $60k UPB average. Great. Ohio 'warzone' properties. I am guessing the property value securing those balances is close to $35k to $40k if not less. So the asking price or indication is about $22.8k or 65% of the property value. (granted I am speculating, but odds are this is correct) That loan's price is closer to $12k. That too may be way too high based on costs to cure title defects and remaining time to foreclose. So you would be paying almost double the price an experienced investor would pay. With your $12k purchase price you will need an additional $12k (in general ballpark) in order to disposition the asset. Taxes, insurance, servicing fees, legal fees, property preservation all of these things add up quickly.

I am not as overly concerned as Doug as the geographic concentration or exclusion. Is Ohio a tough state? Sure. So is New York, New Jersey and Pennsylvania. The toughness seems to be defined by FCL duration. That said, there is still a "proper" price for the asset which accommodates the amount of time and capital demands to dispostion the asset. To his point, you can choose a different state with shorter times and a different legal process (judicial vs non). In that sense though, I tend to allocate that idea to simply preference. I also recognize to some degree loan investing is opportunistic. You can only purchase what you see or are offered.

In regards to the last question, what items are needed for due diligence? All the same items you reviewed in the performing loans plus any legal actions taking place such as FCL or BK. Having a list of items to look at is not the same as understanding what each component means or how it translates into increase or decreasing risk and capital demands.

Not trying to deter you from getting your feet wet. I am trying to make sure you get a better operational plan and expectations.

Glad some common sense creeps in here Leslie.

Just like with anything you purchase, you should first get to an understanding with the Seller of what offer price you have and if they want to accept. Certainly this can derive itself in reverse order where a Seller gives an indication of price and you agree or in a typical buyer/seller fashion where the buyer offers the price first. Point is, we need to agree on a price as step one. Until that happens there is absolutely nothing to do and "working" on a file prior to this idea could be equivalent to burning your dollars.

Until a price is agreed nobody can quantify just how much in funds are needed. So, if you don't know how much funds are needed, then how can you know what amount needs to be shown? (You can not)

I will go out on a limb, that 99.9% of anyone asking you for a proof of funds prior to talking about firm sale price, which would mean providing a potential purchaser with enough data to make a price decision, which could be subject to due diligence, is a broker that has little to no experience with the asset class.

I wouldn't waste much time on the matter. Just go look elsewhere. As with real property, when a Seller wants to sell a note, they seek a competent and capable counter-party. If you are receiving redacted data or have hoops to jump through, you are likely standing in front of a broker who has never traded a loan in his life. A Seller is just as interested in your authentic offer and the propensity to close as you are (a real Buyer) and they will take steps to ensure the two of you are moving toward an agreed price and terms like you should. That's because that is how you put all deals together. Notes and real property. It's no fun to negotiate with yourself.

Do not deal in anonymity, that does not exist in our industry. It amazes me when I see these broker structures, they can't be done. Counter-party MUST know each other and MUST contract with each other. Do not use "Clearing Accounts" or any other silly term used to describe a bank account you fund which is not owned by the Seller.

As an experienced Buyer/Seller in this asset class, frankly the amount of money you have is not really a priority on my list. That is more of the easy stuff. Are you competent with the asset class? That is question number one. If that answer is yes, then we can proceed. If the answer is no, then any actions will be an exercise in futility. I have had plenty of folks trying and bang their chest with how much money they have as some evidence to being able to consummate a deal. None of those trades ever materialize.

Hope that helps.

ALL loans have redemption either in right or in equity (pre or post action). Default definitions are not new. At 120 days a default notice can be sent with a 30 day time to cure before the next legal step can occur.

A NOD is just that, Notice of Default, until the redemption period has expired, according to the state statue, the borrower can cure the default (their right or equity to redeem).

In the case of the OP, in certain states (not sure on CA) the discharge of a mortgage debt is grounds to initiate Default Notice (NOD) and start the process. This means that regardless (if true in CA), the days past due is of no consequence, they could be current and the discharge allows for the process to initiate.

From this post there is nothing in DF that affects any of the above, all pretty standard stuff prior to DF.

@Account Closed

Your course of action is inline with a more proper way to handle it. Sometimes you have to let the letters sent do the talking for you. I too would sub trustee and send letter.

I am not sure the 8 months do not apply, as the borrower still has redemption rights. The discharge is simply grounds to initiate the action not cause to by-pass the process.

@Bob Malecki ,

I just so happen to do a drive by on this thread.

The answer is NO, you can not contact your borrower. If your servicer will not do something, that is a great indication that you should not do it either.

If the loans was discharged, as you say, in BK, then the recourse collection on the borrower is what is discharged. This removes the recourse (personal liability) from the borrower but does not satisfy the loan which is collateralized by the property. Therefore, you can initiate FCL proceedings. In many cases, this can be done as an explicit reaction to the discharge, it is state dependent though.

I am not a huge fan of Mortgagee's simply creating their own letters and mail campaigns, I actually cringe when I read that stuff. You have a Mortgage Servicer for a reason, you really should be using them so you are compliant. It will not take much to fall onto the bad side of a confused borrower post BK discharge who calls their attorney back to complain and the attorney finds that you violated the discharge by ignoring it and running collections on the borrower in an inappropriate manner. Attorney then moves to have you fined or worse.

Also, @Bill McCafferty advice seems like it can be taken the wrong way. You are NOT a workout specialist you are the Mortgagee, do not lie to borrowers. Contacting a borrower as a 'workout specialist' and engaging in a conversation around the idea of relief creates a laundry list of violations. You are initiating the relief conversation and Dobb Frank has rules on how a Mortgagee must respond to a request for relief.

Simply stated, the FCL action will likely be very silent on your part. Your Mortgage Servicer knows how to navigate these waters. There is no 'workout' without a new note being issued, which could be a trap you put yourself into if you are not careful. This too would have a laundry list of issues for you, since it would be an extension of new credit.

Moral of the story, you have the the licensed, experienced team member (your Mortgage Servicer) already at your side. Listen to them, they clearly know more than you and more inclined to give you the correct advice on an asset they are servicing since it affects their license and they are familiar with the file.

Good Luck.

@Bill Gulley is correct on the possible DOS trigger, I had coffee blinders on and was only thinking about the insurance issue. That said Pat, you can probably contact and disclose your intentions of the CFD transaction to be to a more comfortable spot and not have to live in the shadows. As Bill mentions there is a good chance the state requires perfection of the contract, so it will need to be public record thus anyone can see it. In a case like this, the lender can still trigger DOS but they may stay that privilege. Depends on the lender.

Bill BFT is no different than LC/CFD and they are used in South Carolina as well, where the OP is. I have never owned any but have seen a couple, same contract concept as CFD/LC, almost word for word.

Why do you believe it to be different?

The first paragraph is correct, the one above is not.

Even a AITD is Subject To, subject to as you state in paragraph 1 is when the Buyer takes title subject to the existing financing. With the AITD a junior mortgage (junior since it records behind the current Seller mortgage) is made and recorded. The note which is secured by the new AITD simply includes amounts and interest payable above the current obligation and for the additional equity above the current obligation which benefits the Seller.

So the current Seller mortgage is NOT satisfied therefore it cannot be "taken out of the Seller's name". That is what is being 'wrapped' in or around.

More expensive? - I don't think so, I think these tend to be less expensive than traditional finance since most of the time there is less of an underwriting and origination process.

Better credit? - these are not conventional lending or financing arrangements. If you have good credit, you should really just go to the bank and get a loan. AITD have risks of loosing money due to the structure and the superior lien position of the current mortgagee.

Liability on Buyer? - Not really true. That, to me, sounds like guru sales pitch. See the idea above where the current lien is not satisfied and still remains on the property, so the Seller has that liability and is now basing his debt service on the lower priory lien from the Buyer. The seller's liability still remains, pay the current mortgage or default and get foreclosed. Due on Sale is also now a concerning liability. So, that to me means the Seller's liability increased a notch.

Yes, you can put a servicer in place to handle the collections and remittance of borrower payments. A mortgage servicer is not going to split the remittance between the Seller and his mortgage company, they will simply remit all funds to the Seller and the Seller will have to pay his bill. The deal could be structured with a Trustee who handles this task for the benefit of the Seller but a Trustee is not a Mortgage Servicer.

In the event the Buyer defaults on his loan, the Seller will have to foreclose. That foreclosure action could trigger the Seller's lender to foreclose him to protect their interest.

In the event the Seller defaults on his loan (and the Buyer does not), then the Seller's lender can foreclose and the Buyer would have zero protection from such an event. Money delivered under the AITD contract would have to be sued for in order to receive back in civil court.

The title company suggestion of Land Contract / Contract for Deed works or perhaps an opition contract not sure what the circumstances are really to judge. Clearly the underlying idea here is that someone needs to use these non-conventional financing arrangements, my guess is the Buyer for whatever reason. When you play with some of these there are risks that go along with them. If given the oppurtunity or if possible just choose the conventional financing methods and sleep better at night.