All Forum Posts by: Dion DePaoli

There are two types of loans which carry an assumption clause, those are FHA loans and VA loans. All "formal" assumptions are subject to the Mortgagee approval of the new borrower. Usually a 1.0% fee and standard underwriting will take place.

Loans that do not carry an assumption clause tend to have an Alienation Clause or a Due on Sale Clause. Those in general say any transfer in interest either whole or in part can give the Mortgagee the option to call the note due through an Acceleration Clause.

Those clauses, DOS and AC, were found legal and obtained congressional backing through The Garn–St. Germain Depository Institutions Act of 1982. Banks at the time where having difficulty with folks conducting Subject To sales where the new Buyer/Borrower was not approved and could carry more risk of default or delinquency since they were not approved formally by an underwriter. The Buyer/Borrower was fond of the assumption as it also meant lower interest rates than the current market rate, as in the late 1970's and early 1980's rates were on the rise.

If the loan that you are talking about is not assumable, which means there is no assumption clause in the loan documents, then it is not assumable. You can proceed to do an unapproved ("formally") Subject To purchase but the old borrower will be liable for the debt and the Mortgage "could" trigger acceleration and call the entire note due. They also "could" do nothing. There is really no way to predict.

Many folks want to reduce whether the idea of a bank pursuing their remedies related to a DOS as a function of interest payments in the market. While that is certainly a point it is not the only point nor the most important. A borrower has a contractual relationship with the Mortgagee through the security instrument (DOT/Mortgage). Within that contract are terms of agreement which deal with taking care of the property, protecting the interest of the Mortgagee by paying for taxes and insurance and some others. A new party that is not formally approved and then modified into the existing obligation has no contractual obligation to the Mortgagee. This adds a 3rd party to a situation that may require the original two first parties to interact. The Subject To buyer is not recognized as an owner by the Mortgagee nor does the new Buyer receive clear and marketable title to the real property since it is encumber by the mortgage itself. So the waters get muddy, the intent of the new Buyer/Occupant can be malicious and other influences can also weigh in.

With the lack of an Assumption Clause, you can still attempt to put a Subject To deal together. It would be recommended that you put the Mortgagee on notice through some communication, written likely the best manner. Just be aware the Mortgagee may not respond, which lack of response is not an approval. They may in the future come forward and simply decide to exercise their right of Acceleration for Alienation. There is no limitation in time for when a mortgage can enforce the clauses. It is not illegal nor it is it immoral to put the ST together however, you do need to be prepared to handle the Acceleration if it occurs. A Mortgagee enforcing those remedies would still have to follow foreclosure process for the local of the subject property.

The Mortgagee can foreclose regardless of delinquency or default of payment. The Alienation clause removes the condition of default as a trigger to call the entire note due. As such, if the Mortgagee forecloses you could lose every dollar you put into the property in payments or repairs or equity. The transaction structure may also make it difficult to pursue the Seller for any type of civil suit for failure to communicate Lis Pendis or alike on the property if you do not receive service process or to attempt to recoup money you invested. In simple terms, an unapproved assumption by the Mortgagee can mean you lose all of your money with no recourse on anyone to recover it.

All that or you can simply go try and get a home loan with your parents as co-borrowers or non-occupying borrowers which is frankly not that uncommon. As you mention, the rate will be lower than the current rate of the existing mortgage. This also means the loan is your, you get free and clear title, etc, etc. As a first time transaction for you, to me, this should be the path you pursue. Jumping into Subject To with a limited knowledge of real estate could be trouble for you that you don't need or want.

One last thing. It is not clear what the barrier to this is in your post however, an Assumption can cost a similar amount of money as a new loan depending on how it is structured. A closing still takes place which will have various costs such as insurance, deed recording, title insurance (if you find a title company willing to insure) and any type of profit the Seller wants to make. So from a capital deployment standpoint, you may not be saving all that much.

Bill that does not sound right, the REO, the real property post a foreclosure auction that reverts back to the mortgagee for lack of bid or low bid can be sold for a profit but only after auction when it becomes REO for the mortgagee. There is no mandate for the property to revert, which means the property can sell at auction and the mortgagee is only entitled to the UPB, interest and advances and also includes redemption rights where available. Or, any event that takes prior to the foreclosure auction where the asset is still a whole loan and not real property for the mortgagee has an financial outcome limited by the aggregate sum of unpaid principal, interest accrual and advances..

Thomas, I am not correcting Bill, only trying to explain what he is saying in a different manner. Bill is pointing out what we see often where folks want to become involved in NPN's for a reason that seems to only be a small portion of a big picture with loans. For instance, similar to your plan. Purchase NPN's in order to obtain deeds to the real property to fix and flip. Can you purchase NPN's and eventually end up in possession of the deed to the real property? Yes. Does it happen all the time? No.

It is a reasonable point of interest for folks and it is more familiar than the spectrum of disposition and the responsibilities a mortgagee has in dealing with any default event. To open the picture up a little more just to make sure you understand the point. A loan that is current or merely delinquent can not be foreclosed upon. Buying a loan and having a borrower inquire about relief creates a situation where alternatives to foreclosure are likely mandated by state and some federal law. A mortgagee is forbidden from "Dual Tracking", which is pursuing a foreclosure action while dealing with a request for relief from a borrower.

The general idea is, just because you purchased a NPN does not mean you will cause a resolution where you become the deed owner of the property so you can actually fix the property and sell it. The notion of causing a DIL is not ill founded, you can get a mortgagee to give a Deed in Lieu of Foreclosure but in many cases do not underestimate how difficult that might be.

The more equity in the property the borrower has the less chance of a DIL being a successful option. A borrower with equity can cause the loan to be paid in full by selling the property, borrower refinance or a straightforward paid in full action from the borrower to the mortgagee with cash from somewhere.

In addition to that, a DIL may not be the ideal disposition of the real property due to additional liens or encumbrances on title like a second mortgage or mechanics liens, etc. If title is clouded, depending on how it is clouded a DIL might not be the best resolution for a mortgagee as they will then have to deal with the other liens on the property in order to sell the property.

None of this is meant as a deterrent to you but rather a suggestion to make sure you are not drawing conclusions to this asset class that may not be entirely correct. I have seen some other folks mention Eddy Speed in a positive light. I am not familiar with his program personally. I do know there seem to be lots of training classes taking place around the idea of investing in notes. Sometimes it seems like those students come back with a limited scope of knowledge. Perhaps because the seminars are purposely designed to only deal with a certain part of the asset class and are not comprehensive in nature. That could lead to some bad investment decisions if you do not properly round out your knowledge of the asset class as a whole.

To some regard, Celine's comment does have some merit. If you simply want to fix and flip properties, the sure fire way to do that is purchase real property that needs to be repaired. Purchasing a note for the same sole reason carries with it a chance you will not ever get a deed.

A couple other highlights which tend to be skipped over by folks include a note buyer is not allowed to have contact with a borrower prior to a sale. Nor should you want to have contact as you may be deemed with acting without a license since you have no interest in the mortgage. Additionally, real property value assessment is conducted from the outside of the asset only. This makes it hard to know exactly what types of repairs might be needed which will affect your purchase price offer.

In general, I have purchased a lot of NPN's. They can be good investments if you understand and manage the lack of liquidity aspect of NPN's. However as a point to folks making some bad investments, lots of large funds who chased NPN's in the 2008 to 2010 time frame went out of business or severely damaged their P&L being involved solely in NPN's. In regards to the idea that one might be able to purchase a NPN and then resell the same note, this does happen but the profit margin is quickly eliminated on assets where no significant value event takes place. Nothing really happened for a new buyer to price the asset for more than the Seller paid. In that same situations, the Seller may not recover what they advanced (if anything) during the term of their ownership.

What I think many folks get attracted to NPN's as an investment idea is they believe that NPN's will allow them to gain ownership of the real property for less than the market price of the real property. This is true but only on the surface. While the purchase price is a discount from the real property value, the discount is present to allow for advances to be made on the loan to protect mortgagee interest such as paying property taxes, property preservation, foreclosure legal fees and other similar fairly normal events in a NPN. When you start to add those all up, you will find the margins are pretty darn similar to real property.

Do not forget about the time that it takes to actually disposition the asset as well. Yes, you can get a DIL tomorrow. Or never. Foreclosure can be stalled by a bankruptcy for years or it can take place in the standard amount of time for the state and county. The point is, a 20% return in real property flipping can be understood by trying to move through the asset quickly. Plans with notes that require quickly disposition the property, which is usually what folks who include DIL's in their initial plan to NPN investing think, find the same 20% is there but the time is 2 or 3 times longer than real property. In a notes essence, it is real property plus. Since you can't do the real property stuff until after (and if) you get the property deed.

From my owner experience, I have purchased and managed lots of NPN's and I can honestly tell you I never, ever set out to "fix and flip" from a rehaber's perspective the real property if it came into our possession. 95% of the time, I did the least amount of repairs possible in order to sell the house. The other 5%, I did absolutely nothing but discount the sale price in the open market. I always use to say, I am not HGTV (I still say that actually). The margins are tight to begin with. You can understand this same idea by looking around at the small inventory of real property suitable for investors to fix and flip. Much of the pricing in the marketplace requires an end user to enter the property. An investor can find the loan assets that will carry enough of a discount that may allow for a larger rehab event which can translate into better margins, but those tend to come with a bit more issues in title or borrower and disposition in general.

As suggested browse some topics on the asset class and get some education on the matter. If that is through a guru try and make sure you get the part of the picture that is not being sold in the seminar or book. There is money to be made investing in whole loans just make sure you are prudent and become knowledge as you don't know what you don't know yet.

@Linda L.

Commercial loans that have cash flow from a tenant type relationship usually have an assignment either separate or within the documents. It is for leases and rents not operating income though. I don't think you could encumber grant money in any fashion or at least that I can think of so just throw that idea out the door.

So the owner of the property assigns the lease agreement payments for the unit tenant. If the property is Owner Occupied you're talking about income through the operation which you could lien the company assets through UCC. It is not quiet the same either. If you open another thread on this idea, we can comment more. I don't want to go off on too much of a tangent.

@Ryan S. you may be wanting the value from these but I don't think they are good comparables for you without an adjustment.

Comp #1 has a lake view, it has a lake in the backyard. Comp #2 is bigger in the GLA and the Lot size.

Bill has a good idea and underlying point. Folks are not going to "try" and make your value work, they will look and draw a conclusion. Buyers will tend to be conservative in their methods as well.

Bill, you may be right. Essentially, that is how I learned on the retail side of things which lead me into the secondary market. Could essentially write some pretty good stuff around each part of the form.

I know Ellis posted one but I will hyper link it for easy click instead of cut and paste: Uniform Residential Loan Application Form 1003

I looked this up and in my very own opinion you are a good $35k+/- above market. Most of your neighborhood for similar product is around the $180k price. I don't see anything in my quick look that sold for above $190k that is not greater than 2,000 square feet. (Your close to 1,400) You did a nice job with the work but you priced yourself out of the market. If it were me, I would likely drop to $195k and see if someone wants to haggle. You might end up at $190k +/-. A solid comp is a couple of blocks from you: 15618 Sierra Drive, sold in April 2013 for $188,000. Hope it works out for you.

@George Frye

I meant the actual security instrument for the state which will include a mortgage or deed of trust or deed of security along with the promissory note. You can even read through the riders and addendums to each.

What I think you may be referencing is a Uniform Residential Loan Application, Form 1003. It certainly will not hurt to understand what information is collected on that document but it is not much to read.

My underlying point is, when you purchase a loan or make a loan, the documents which create the agreement between the two parties are pretty darn important. I think many overlook actually reading some mortgages and attached notes as a method to increase an understanding of what those documents do and say. Since private folks can choose to use a non-uniform set of documents becoming familiar with FM/FM helps to discern features that may be different from document set to document set. I would not find it too weird to read through a privately originated note and for it to be missing some concepts. For instance, a loan on an investment property which carries no assignment of leases and rents. The absence doesn't invalidate the security instrument (in this case) but does impact the actions a mortgagee can take enforcing the remedies. The opposite is also true for the inclusion of features that may be considered not customary.

While you search for narrative things to read such as books, courses and such, don't forget to actually read some of the actual paperwork used in the industry.

On day one of my career in finance, my then mentor sat me down in the conference room and printed out an entire loan package. He then handed it to me and told me to read it all. You can read all the books your heart desires but do not forget the security instrument and note is what you actually pay for or invest in. Sort of the elephant in the room to get to know if you ask me. You can look up examples of Fannie/Freddie documents for free and review those. Allow what you don't know within those documents to be tangents to follow to learn the concept such as an Alienation Clause.

As another general idea of available information. You can always read through underwriting criteria of lenders and investors such as Fannie/Freddie. They have been around for a while and the rules they have are in place for a reason. Not sure what DTI ratio should be? Look at where there is and try and understand why. Some of that is risk analysis for yourself. If FM/FM says it believes 35% DTI is good and you choose to accept 50% you have at least a benchmark to evaluate on and can apply compensating factors that you are comfortable with.

For the most part, most notes are legally enforceable and not really a "good or bad" buy in that sense however the price can be good or bad. There is no magic formula which predicts future events. We understand basic concepts in most cases such as large amounts of borrower equity is usually a good indication of the borrower's desire to maintain their obligation. However judging prepayment risk or default risk and then the subsequent events thereafter involves making some assumptions. Just like any financial modeling. Being able to evaluate notes well means being able to recognize the probability of the asset following a particular path and what that particular path means to you and your investment.

For instance, a loan that has not had a payment in 2 years has a pretty high chance of remaining in default until foreclosure completes. That idea would be the most conservative amongst the possible dispositions such as reinstatement, short sale/pay or property sale, etc. Understanding the relationship amongst the disposition is important so you can properly choose the disposition path that is the most relative to each loan. Yes, you can do a DIL with someone in foreclosure "if" you can make contact with them and "if" they agree to it. The worst case scenario no contact is made and foreclosure is completed. You price for foreclosure and hope for DIL in less time. A good operator in notes can find ways to reduce time and reduce costs.

So as you build your model to evaluate the loan, the more accurate your assumptions inputs are such as time to foreclose and costs to foreclose will inherently make your evaluation more accurate. The difficulty is that it is hard to get feedback in practice, to some degree you have to put your assumptions to work and see how it plays out in reality. Perhaps the time you used was too short or the costs were too low. Really understanding how your model works is important. Pricing a loan too low means you don't get to buy and pricing a loan too high means you might loose return or your investment.

I don't know of any good place to share practice problems for evaluating the model you build to price the loan out. I suppose you could always use BP and see if we come up with the same answer as you and to see if we see the same hurdles as you in the asset. Without that, the best classroom is unfortunately, reality where you can lose money so definitely stay conservative and stay away from exotic ideas.

Good stuff thanks for the chuckles.

Georgia is a state with some pretty preventative laws in place for simply anyone to get involved. To own a note in Georgia you have to hold a state issued license. So as Chris suggested, a good place to start is with the state laws around mortgages and license. If your are not sure call the department of finance and ask. Speaking to an experienced RE attorney can also be helpful.

Investing in loans is not a riskless enterprise. Loans are risky. You may lose all or some of your money. You can find yourself in hot water with regulators.

Bill's analogy about pick up sticks was probably one of the best and most accurate analogies I have personally heard. (nice one Bill)

In regards to jumping into commercial. Those who lend on commercial are comfortable with the collateral. Without an understanding of how the collateral will operate it becomes hard to evaluate the collateral and loan itself. If you don't know what good ADR's for hotels are or lease rates for retail space or how some of those lease works in a contractual sense, you should be very cautious. If you cast too big of a net, you might end up with a shark instead of tuna. (not as good as Bill's I know)

One last point I will make in regards to use of brokers or any other party for that matter. Again, the risk is ultimately the investors. There can be conflicts of interest when dealing with brokers and sellers for that matter. One of the drivers of the mortgage crisis was the US model of origination with intent to distribute the risk. Investors bought into mortgages that were originated with a sole intention of selling said loan to another investor. The end investor is who suffered as prudent lending practices took a back set as the one making the loan was not going to be the one holding the loan. Moral of the story, take time to understand who you are working with and be mature about reality to some extent, the broker wants to make a fee, the seller wants to sell at a high price. Recognize those conflicts with your intentions and ensure only to extend reasonable expectations on to the other party while the rest rests on your plate.