All Forum Posts by: Dion DePaoli

Disregard my statement in speculation about where the sum of interest and fees comes to. When I got to typing I incorrectly glanced at the sale price number in your title copy/paste. Better computer to review the thread now.

In this last post it looks like DB gave you a payoff number of $634,000. You mention "outstanding" so $634,000 is what they will take to satisfy the loan more so than a discounted note purchase price, it seems. Did they provide a formal written statement to you, if so, how does that number aggregate? If the number was verbal, I would ask for a written statement.

The property has an ARV of $900k after repairs. There is no mention on what the property would be estimated to be worth right now or what cost is estimated for repairs. That matters. Future value can get you into trouble so stay rooted in the AS IS value right now.

It doesn't make any sense to try and deal with anything else until you square away the situation with the mortgage. I would leave the other liens alone for now, they are not going anywhere. You have to sort out what the deal is and if there is a deal on the mortgage first and foremost. Everything else depends on that.

The HOA liens and Wells Fargo liens look like 'charging liens', or liens that have been attached to the Subject Property to assist in collecting the debt. The liens themselves do not seem to have originated from an interest in the Subject Property. Example, Wells Fargo lien is not a mortgage on this property, it is from another property. I am guessing it is a deficiency judgement and Wells used the judgement to attach to the borrower's house. The Indy Bank/DB mortgage is senior to those liens and a foreclosure can unsecure those liens from title to the property. Because of all that, they really take inferior role in the whole picture right now.

The details of the note and file will need to be gathered, you will want to get the interest rate of the note, see what the current unpaid balance is and what type of amortization the loan has. If DB is actually entertaining your purchasing the note, they will/should understand they will need to supply this information to you. That is the only reliable place to get that information. The loan servicer will have that information and will also have information around the BK action and the Foreclosure Action. The data they provide will also carry the amount in advances that have been made. All of that is going to matter, as if the property has some equity, the Mortgagee is going want a higher percent of the amount owed as a function of selling the note. So understanding what current amount is owed and what interest accumulation may occur during the term of finishing the foreclosure, alone with advances made will likely be where the deal stays together or falls apart in regards to the asking price being proper.

The costs of advances will be the on-going cost of things like, paying for foreclosure legal fees, paying for property taxes. paying for forced place insurance. Advances may also include items paid for which preserve the property such as mowing the lawn to prevent a lien/fine. The borrower is not paying taxes, so that you can look up and get the number. Lender place insurance will require you getting a quote for the insurance, you can simply insure your cost basis, and for the sake of estimating simply use the $634k. New Jersey is not inexpensive in either of those two areas, so there is a couple thousand annually that you will have to inject. You can call an attorney in NJ and inquire about their fees to foreclose. You can use the full price of services as a conservative approach to your costs. If there is a discount to the vendor's service, say like a new foreclosing attorney, instead of paying $3,500 you pay $2,000 because some of the work is done, you can sharpen the numbers out toward the end of finalizing the offer.

Then you will need to get an estimate of time to finish the foreclosure. That time will be the term which you aggregate the sum of these numbers. This is not easy and you will have to include an attorney somewhere as you are not all that familiar with FCL in NJ. The attorney will need to review the FCL file and see what happened with the BK file before they can give you some time feedback. It could be a bunch of work, such as if the current Mortgagee has not pursued foreclosure yet or it could be on the tail end of the process, such as a Summary Judgement already being in file. No real way to know without reviewing the file itself.

What you are doing is seeing what the difference is between where the seller may sell the note and what estimated total due will be when the property can be sent to foreclosure auction. Then you need to look at the property value at the time of auction and you can determine if it is likely to be purchased at sale or not. You can't 'guarantee' that the property does not get purchased at sale by a third party. As such, you can not guarantee that it will revert back to you as REO. So you need to be prepared to either get the property or be happy with a return on your investment if the property is sold at auction.

The OP already went through a NOD and was paid to bring the loan current. That is clearly the path here. The fear came in when the bank said they would foreclose. You let them spook you and stall your plans. Take the steps to secure your interests and enforce the remedies that are allowed. It is good to understand what the strategy may be for the first but you seem to have equity and you have borrowers who want to stay in their homes. Some of this is likely background noise. Send your default notice and reach the borrower and get you loan paid. If they don't bring it current, foreclose. If the first wants to rat race you on the matter, don't forget the borrower doesn't want to lose their property and could refinance both of you away.

Bob, you do not have a risk of mortgage default, you are the borrower. The mortgage default risk would be for a mortgagee not the borrower. I don't really understand how you made a calculation using that data. None the less, delete it; it is not proper here. (unless you plan on writing more than one loan as a lender)

To leverage or not to leverage ends up boiling down to preference as the main driver. Leverage allows for higher returns, that is the point. The more money you can make with OPM, the higher the percent of return you can achieve. If I put in 0 any return is infinite since I have no investment basis.

In terms of calculation to choose a hurdle, I agree with what J. Scott said and add to the tools not just NPV but IRR and PV as well depending what you are evaluating in the project.

I would be happy to comment more but not sure which way to take the conversaton, what are you trying to calculate or model out?

In accordance to what you posted in the title search, DB is the current note owner and it sounds like OneWest is servicing.

The Wells Fargo is a charging lien, perhaps from deficiency on another mortgage.

The BK could have wiped out the capacity to seek deficiency but the security instrument is still valid. You will want to review the BK and see what happened. it may be still active, although I doubt it. If it is you will have to seek relief from the stay. If the asset was not called to be liquidated, it would likely be that the borrower reaffirmed the debt and thus owes payments on it. Not making those payments allow you to file for relief. I am guessing he tried and failed his BK as this sounds like an investment property for the borrower and I would have think the trustee would have looked to liquidate it to pay some creditors off. (some of that is speculation on my part but could be confirmed in the BK paperwork)

The price DB wants seems a little high for New Jersey NPN and I didn't see a property value. The FCL action might have some seasoning to it which may allow you to get close to their asking price.

The play would be to purchase the note and finish the foreclosure. You don't really want to mess around with chasing the borrower, it doesn't seem like he is want to work anything and simply doesn't care. It also seems this is not the only troubled property. Finishing the FCL will help with some of those liens. I wasn't sure if that is the Subject Property HOA or another charging lien from another property.

It seems the borrower's payoff is over $1.0 Million with principal, interest and advances. Again not sure what the property value is but you may have a demand that exceeds the property value and thus the minimal bid might deter a buyer at auction.

The deal will boil down to the asking price DB wants and whether that affords you enough discount to make the needed advances to finish the FCL and protect the property.

You will need a foreclosing attorney, in some cases you can retain the already hired attorney but that is not always the best idea if the foreclosure is stagnite. You will want to find a servicer which will cost you around $75 per month until the asset is deboarded via a auction sale or it reverts to REO back to you and you remove it.

I think the DIL is unlikely and I think the short sale seems unlikely. I would rather wipe those liens in foreclosure than pay them. Unsecure them and let them chase the borrower. I think that is the best strategy here but depends on the value of the property and how seasoned the foreclosure is right now and some insight in to the BK.

Insurance reasons maybe?

Does your guy have stilts? (not be funny, might be the only way)

No offense Nicole, but you are trying to make this something it is not and to some extent I am not sure you get it.

If I am the owner. Why do I need you to refinance and pull $80k from MY property? (I do not)

Through this same line of thinking, you are not giving any 'consideration' (legal tender) for your interest, so you are not really buying anything and you may find they can simply remove you from the deal for a nullified contract. If they decided to let you join in any form to begin with. You gave no consideration to them which is needed to have a binding contract in most cases.

It really seems like you are trying to put this deal together with no capital. Thus the only party with capital in the picture is the Seller. "Seller" seems to also be a key word. The property is listed for sale, they want out, for whatever reason. It seems your main plan is to somehow keep the Seller in the deal, that he seems to want to get out of.

It seems that much of your time has been spent crunching numbers however, I am not sure that any of that is leading you in the right direction. Who cares what the debt service "might" be on a refinance on a property the Seller wants to sell and you want them to refinance. It really has no bearing. Not only is the Seller a barrier in the financing of the property but so is a bank. If the property is still on shaky ground, a bank will not finance this property anyway. You may find some debt but it is not going to be market interest rates.

I dont' mean to be mean or cruel and perhaps I am just the pessimist here but, it seem like you're going through a ton of brain damage to come to an understanding most of what you're working will not work. If it were me, step 1 is figure out what the property is worth. Look at what they paid, if it is around the $140k mark, I would talk to them about that number. Perhaps include what they might have paid in closing costs and humor (slightly) any other proven expense. The purpose is, let them get out whole but they are not making a 20% return for doing nothing. Then you have a real number to work with. With that number you can raise capital for the deal, if you need to, either debt or equity. I wouldn't spend another millisecond on trying to keep this owner, who bought this 10 months ago and essentially has mismanaged it the whole time, in any deal. It seems like he is a little incompetent or he is trying to pull a fast one on people (that is not partner material). Once you have the number and leave this guy out, you can then start to work on the finance structure. If you need to finance it, then talk to a local bank or credit union and gain an understanding on what loan terms the property and the borrowing entity may qualify for. That will give you and idea of what type of equity you will need to purchase and improve the property. From there, you can inject your own capital or talk to your investor network to fund the equity and pursue the deal.

Good luck.

EGI = $84,240
V Loss = $16,560 (3 units at $460 annually)

Net Income = $67,600

Expense = $56,000

Net Operating Income = $11,680 ($973.33 per month)

Cap Rate = 4.67%

That is not a bargain. This property is not worth $250k in my eyes. At 100% occupancy, it "might" be worth the $250k, again not knowing what deferred maintenance is really present.

A lender will not be able to speculate about a real property value on this, that will require an appraisal. Generically speaking this property as a C- or D property, the cap needs to be closer to 12%. That is going to make this closer to $145k, about half of what they are asking. If I were a betting man, I would think you find a similar purchase price for the current owner when you look at the sale history.

Agreeing to pursue this property at the Seller's $250k and then attempting to negotiate down based on due diligence seems like you are just wasting your time, money and resources chasing a deal that may not be able to get done at the right number. You could find yourself losing your EMD and all your due diligence money. That is not prudent investing.

The current owner purchase Subject Property 10 months ago. There has been what seems to be zero improvements or legitimate steps toward stabilization. So AT BEST, the property is worth what they paid for it, it is in the same state as when they purchased so not sure why you would want to give them profit when they added zero value. (+1 renter at the end of 10 months is not much of an impact)

Under that same idea, a bank is not going to give them a higher evaluation, if the property even achieves an evaluation of what the current owner purchased it for.

The numbers in your post are hard to follow. Is the $84k, gross effective income, in other words, is that all 16 units with their some average monthly/annual rental amount or does that number already take into consideration the vacancy loss you have?

Averaging rental amounts might skew your numbers. You need to make sure your unit mix is properly addressed to be more accurate. Higher concentrations of 1 BD/1BH vs 2 BD/BH could push the average up or down contrary to actuals.

You mention only making $400/$500 per month, is that a per unit number or a net per month for all units?

At face value of what you posted:

Gross Income $84,000
Expenses $56,000
Net Operating Income = $28,000 ($2,300 monthly)
Cap = 11.20%

This property sounds a bit more like a 15% to 18% cap, IMO. It is not clear how much deferred maintenance is present, which is a pretty big elephant in the room. Why hasn't this been setup for Section 8 tenants yet? Seems like there is a story there.

If that $84k is gross potential income, the price at $250k is too high for this property as it is.

Responses to the structure ideas:

1. This really sounds like a glorified manager of the property manager, not sure why the Seller would agree to this. It sounds like they are more interested in getting rid of the property.
2. If you "buy" the property, you bought it. This idea sounds more like you contribute $80k to join the owner in the property, with an option in the future to deliver some type of exit payment, through time or lump sum. You likely will not be able to finance the $80k in that manner conventionally. A bank will not lend you $80k to join them, the bank will want a lien over the entire asset which if the Owner stays in, could be a refinance or if you purchase it outright is a purchase loan. Provided the property and the owner and you can all qualify for the refinance or purchase loans.
3. This is a flawed idea, if the sale price is $250k, no bank will allow 100% cash out, ever. So you will not be able to use a refinance to capture the purchase price. Cash out refinance will have a lower LTV than a purchase money mortgage, I am guessing around 65%. That may even be a long shot if the property is not stabilized in the banks eyes. Further, having or including a straw man borrower, the current owner who is then removed post financing, may fall under fraud, likely not a good idea. A bank will keep an eye on the principals of the company and may even have a provision that the bank be alerted if ownership of the LLC is amended.

Not knowing what the Owner at this point is not a good thing. Again, it seems like little to no value has been added. Under that same idea, the property can't be worth more than what he/she paid for it just 10 months ago. You can look up public record and see what the sale price was. You NEED to know this. This will add some additional insight into what else might be the problem here. An investor who knows what they are doing doesn't get into this property and then bailout in 10 months. I am inclined to think there is a decent sized issue/problem that has not yet revealed itself yet.

If you can take the property on yourself, in terms of capitalizing the purchase either through debt or equity, I would pursue that angle and leave this current owner out of the picture as much as possible. I would also start to position the conversation back closer to what they paid for the property and keep any profit on their side very, very minimal. They don't deserve a return if the property is fundamentally in the same state as it was.

IMO, this is not an ideal situation to get involved if the capital being provided can only bring the borrower current. Any lien you secure against the Subject Property will be in junior position. Through the post it is not clear if there is only one lien or two, putting you a third position. Additionally, $4,200 in arrears seems to point to the bigger problem, the borrower can't afford to make the payments. So, helping bring the borrower current does help the borrower cure the on-going issue of inability to pay. Any payment due back to you for the money you contribute to help will be at least $1.00 more than the amount they already have not been able to pay.

The next issue is whether the subject property is already suffering from negative equity. If it is, then you really would be unsecured with your capital. Also, it is not clear just how far in arrears your friend might be which then would also point to how far along any foreclosure process might also be.

I would also point out that in most cases no matter what, you will put negative pressure on your friendship. In the event of a future hardship, while you still have some interest in the Subject Property, you may be the first person the borrower turns to for relief. Again, stemming from what seems to be an inability to afford the housing payment, it will be easier for the borrower to reach you and put pressure on you than it will be to put any pressure on an institutional mortgagee to allow deferred payments or something similar.

Lastly, in terms of the bigger concepts to address, with being what seems to be likely pretty far behind on payments, there may back taxes due, which will also affect your security and/or no homeowner's insurance, which adds more demands on an already tapped out borrower and also could affect your repayment.

In my opinion, being pretty new to REI, I would suggest you avoid this situation. You can still help your friend but I would not monetize that help. Give them some moral support and make sure they reach out to the Mortgage Servicer asking about relief, perhaps they can make arrangements to forebear some payments or even qualify for a modification. Many times borrowers get behind and then avoid addressing the issue by contact their servicer, which is their only hope of working anything out. Being involved as a supporting role will also give you some experience with how these types of situations play out for the borrower and can give you insight to opitions on other oppurtunities in the future.

If the mortgage being delivered to Fannie Mae is secured by the borrower’s principal residence, there are no limitations on the number of properties that the borrower can currently be financing.

If the mortgage is secured by a second home or an investment property, the borrower may own or be obligated on up to ten financed properties (including his or her principal residence).

Properties that are held in an LLC are subject to be included in the count towards maximum amount of financed properties, regardless of ownership interest in the LLC. So "NO", you can't play the shell game with LLC's as a manner to circumvent the property count.

In addition, a personal guarantee on a loan will also be included in the count of loans if the loan was not already previously counted.

In addition, for sake of other thoughts of getting around the limit, if a second borrower joins the picture, each unique financed property is equal to 1 and the combined number of properties is still 10. So if borrower 1 has 5 mortgages and borrower 2 has 5 mortgages, they have 10.

These are guidelines from Fannie/Freddie and the actual lender may put further restrictions on these guidelines.

Cashout is limited to 70% for one unit properties and 65% for 2-4 unit properties.

Your client is maxed out for FNMA. (7 Investment properties, 1 Primary, 2 Flips = 10) As such, his best bet is local banks and credit unions who do not have to adhere to the FNMA guidelines.