All Forum Posts by: Dion DePaoli

Not tax advice.

The difference between the net sale proceeds and the cost basis (at sale) of the note will be reported as income (gain/loss).

I don't fully understand what the $30k less actually is. If that is principal, and you are selling for less than your current capital basis then the difference will be a loss.

If that is future interest, then you didn't realize that interest as income so it does not get reported.

There are details that matter to this in regards to how you funded the deal, how you hold the asset, etc. The best answer will come from a CPA that knows those details.

Another quick note. When the HOA initiates a foreclosure, the foreclosing attorney you employ will pursue the proper notifications per statute. Foreclosures still take place when the owner is not able to be located and served directly. For instance, Public Notice may suffice.

Does this all make sense, if the bank forecloses on you then later charges it off, do you regain ownership?

It makes sense but there are common misunderstandings to the use of "Charge Off". A Charge Off is an accounting event where a loss is realized on the financials. The loan is deemed uncollectable and the balance in whole or part will be declared as a loss. A charge off can occur for any asset not just loans.

The charge off itself, is a function of realizing the loss and is not unique to loans that are foreclosed, either. The loss is what is realized. That loss can be recognized while the loan is still owned or after a loan sale or after foreclosure. All of those situations in the loan's life are different.

If I made a loan for $10 and I sell the loan for $8, I write off $2. (No foreclosure) If I decide to keep the same loan, but realize I will not collect all of the $10 but should collect $7, then I may write off $3. (some regulations apply)

When the loan goes to foreclosure sale, regardless of whether it sells at auction, the loan is written off. The loan itself is extinguish and no longer exists after the foreclosure sale event. The asset becomes real property. If the auction captures (sells the property) my $10, I have $0 in write off. If the auction captures $6, I have $4 in write off. If the auction does not sell the property and it reverts back to the Mortgagee the write off is $10. The loan is a complete loss. The real property is then put in as a new asset with a cost basis of the loan loss. When the real property sells that gain or loss is booked against the real property. The loan no longer exists.

So, the answer to the question, do you regain ownership?....NO. Unless you purchased the property at auction, the borrower is removed from title post foreclosure sale and redemption, if any.

If so should I be able to find something recorded stating this?

Well real property is within public record. So, you can certainly pull title on the property and see the last owner's chain of events. You will want to find the last recorded and unsatisfied mortgage and follow that through ownership changes by way of Assignments of Mortgage (or DOT) alone with Lis Pendens related to the foreclosure event. If the property was sent to auction then the result of that auction will be a Sheriff Deed or similar in either the name of the Mortgagee or a entity that purchased at auction. The borrower's interest are extinguished with the loan.

If you review the title of the property and the foreclosure action is not completed then the previous owner will still hold title to the property.

From time to time, a Mortgagee may not conclude foreclosure for various reasons.

And is it possible if all of that is true that the owner doesn't know that they own it again?

Yes. From time to time, borrowers have been known to vacate their property prior to the completion of foreclosure, redemption (if any) and eviction. Example would simply be a borrower who vacates after the first Notice of Default. If the borrower walks, they probably don't pay too much attention to weather the action finalizes, they simply assume it does. In some cities like Detroit, where it is really not uncommon to not finish a foreclosure, that can leave the property owner (borrower) liable. Which is also why the Mortgagee didn't finish foreclosure, they don't believe the liability of the property will be beneficial for their capital recovery.

What would you do in my situation?

Being on the board certainly helps. Initiating an HOA foreclosure will require pulling title on the property. That is really step one, so you can see what you are working with. Who is on title, what happened on title, etc. If you are not comfortable reading that on a title report, have an attorney help you.

The conversation you had with the bank tells you the bank wrote off the loan. That does not mean they finished foreclosure. It means as far as the bank is concerned they do not plan on recovering any more dollars from the loan. The could have sold the loan or they could simply just written it off and vacated or stopped pursuing the foreclosure action to its finality, which is auction. It is possible the person at the bank simply references the asset in accordance to how they have the asset on their financials.

The bank saying they wrote off the loan does not mean the lien is extinguished per se. It means the bank is not pursuing more recovery than they already have. So, a HOA foreclosure may still have to deal with the mortgage (or DOT) on title needing to be satisfied or extinguished by lack of redemption through the HOA foreclosure and depending on the laws of the state in relation to seniority of HOA liens. I suppose in that sense, technically, a bank could write the loan off and still pursue remedies once the HOA takes action or whenever they want (within limitation statutes in regards to collection).

Ron, at my firm, we have worked on both sides of the fence. That said, it tends to be relative to who you know in the deal and who sought your service. For us, we have had Sellers ask us for service and certainly we have worked with Buyers seeking our service.

To that extent, there is a ceiling on what a buyer will pay for an asset, which includes a fee. Adversely, there is also a floor on the Seller for what they will take and willing to pay in fee. There is only one buyer and that is the guy who brings the capital to the table, so in that sense it all comes out of their money anyway. In most cases, provided your upfront and honest with the parties, they realize you're here seeking a fee, so broaching that in a mature manner seeking to create a solution tends to be better than trying to force yourself into something.

There is no norm in loan trades in that manner. These types of deals don't negotiate like real property and perhaps sometimes folks try and treat them like they do. Real property tends to have an established norm with a Seller netting the fee out from their proceeds as a function of the closing and the presence of Listing Agent contracts also helps to establish that norm. Since these trades don't clear through an escrow agent or title company, a third party fee is just that, a separate fee to be paid. So if total proceeds are sent to the Seller, then you really need the Seller to net any fee out and send to you. If the Buyer agrees to pay your fee, then they are going send you your fee separate from sending the Seller their money for the assets. There is not title company that does this like in real property.

I can preempt you a little, these are not easy to put together. Difficulty tends to stem from the way a bid is accepted and then the transaction proceeds through due diligence where sometimes there is a re-price event. The fees are not viewed as an 'on top of' type of thing but more of a 'out of total' type of thing. This is probably easier to understand with a performing loan pool with a WAC of say 7.0%. If the Buyer pays par, no matter what that is in dollars, the net effect of paying a commission is the net yield will drop from 7.0%. Longer term investors can absorb that fee better than short term folks. Simply, the fee can be spread into the assets as a cost over a longer period of time. For instance, if the Buyer pays 0.50% in fees, then in year 1 their yield/return will be 6.5%. In year 2, they are not paying you a fee, so as they collect the 7.0% gross, they will pushing their cost basis down by netting more of the 7.0% so the 6.5% will drop to 6.75% for them in yield. (I am using illustrative numbers not real yield to maturity calculations)

The glass only holds so much. In the above example, the glass only holds 7.0%. So every dollar in due diligence and fees is deducted from that 7.0% and has to be recovered. The only way to recover that is by collecting the 7.0% over a longer period of time. The longer you hold, the more you recover. Mind you, they never hit 100% of the 7.0% since there is always some cost no matter how far it is spread. This tends to be where you can see some brokers illustrate their lack of understanding on these assets. I have seen brokers seek 3.0% in fees not understanding that simply won't fit. Using the same example as above. In year 1 paying that type of a fee, would mean the Buyer only nets 4.0%. Year 2, the net increases to 5.50%. Year 3, the net increases to 6.0%. Etc, you get the idea. Now if the Buyer has a yield or return requirement, which is not uncommon, of say 6.5% we are past holding these for 5 years. If the investment horizon is only 5 years, the 3.0% doesn't fit. The Buyer will not hit their return target.

So then who is the party that will end up amending their desire. Well, it is usually not the Seller, who has a minimal number in order to sell and it is not the Buyer who has a maximum number in order to achieve return. If the Buyer and Seller don't show up to the party, there is no transaction. It is the guy in the middle. This concept in total, applies to loans across all performance and is not unique to performing loans. The same concept applies to sub and non performing loans as well. At times the impact on those types of loans is tougher because they tend to be short term investment horizons in general.

I suppose the elephant in the room then, is what is a good number to ask for in fee. There is no good answer to that either. Firms or brokers that can charge more in fee, do so, however with that fee comes work. Loan trades are pretty involved situations. Everything goes under a microscope and is scrutinized. And you do that for every asset. 10 loans is 10 sets of work. Usually if broker is helping with that workload they can seek more in fee. We certainly see misconceptions of this from time to time with less experienced folks seeking large fees and no workload relief. Consider also, just because you are willing to do more work, doesn't mean a party is willing to receive it, let alone pay for it. Often the case where the broker is less experienced than the party they are working with.

So my best advice on that matter, is really evaluate the work you will do in order to earn your fee. Don't overly evaluate your role and you will find that it is easier to fit yourself into a deal and earn a fee than not. I would chat up both sides starting with the one I know the best. I would make sure both sides then know what my role is, even if I don't 'represent' or get paid by one or the other. You will want to make sure that conversation happens and everyone is clear on what it means before a bid is talked about since, you will affect somebody's number.

The sale of loans to non accredited investors will require a license. Solicitations to non accredited investors who hold mortgages can also require a license. As mentioned above, the details are what carve out license requirements of who you deal with and how you deal with them.

Thanks for the additional information. Didn't mean to offend, but as you can also see from Wayne's comment, sometimes folks make claims that can't be supported.

Licensing requirements protect non accredited investors. So, depending on who the counterparties are will dictate licensing requirements. Institutional and accredited investors are usually thought of as being savvy enough to make investment decisions.

The value of what that is worth, is speculative. Many brokers try and treat loan trades like real property with some similar broker structure, that usually doesn't work because the fees don't fit into the deal. Loan trades are real estate transactions on steroids, with more diligence and moving parts than real property. However, the margins are much tighter.

If your seller is institutional, they usually have some form of acceptable fee agreement they will desire to use. Like anything fees are paid at closing. Usually the fees are due post the close of the transaction.

It generally is not as simple as, put Buyer with Seller and everything works out. As such, the barriers to actually get deals done can be high. The benefit is to your party which you work with, so scoping out what it is you actually do for a fee and what that fee is, should be with them. If you plan to solicit the loans for sale, you should have some legal type look over your plan, as there might be license requirements for those actions.

If, like it sort of sounds, your Seller is asking you to get fees from the Buyer. Then you sort of need the same thing in your agreement with the Buyer. What did you do, that they paid for and when is it complete and due and payable.

Loan sales do not 'clear' through an escrow agent or title company. Nor do either counterparty allow broker agreements to become conditions of their mutual transaction. In fact, most MLPA's actually have langage saying for each, their own in regards to agent fees. So your recourse is normal contract recourse. A payor, might seek to only pay after service transfer or file delivery. Just depends on what you negotiate. If they don't pay, you would have sue on your contract for specific performance.

I know many RE agents/brokers who looked at trying to broker loans but found it to be tough with the learning curve of moving pieces. Loan trades happen in a sort of reverse order to real property, where final pricing is usually agreed to a couple days before funding the trade. As such, along the way, a deal has a million ways to fall apart. Lesser experienced loan brokers have a hard time understanding how they can affect change or outcomes, those many people walk away after a couple of failed attempts.

Liability for you, would be within the reps and warrants for your fee agreement. You will want your attorney to review those so you are not taking on liability. For instance, if a MLPA has a buyback clause, does that also mean you have to give up your commission if that asset is returned?

There are no real samples to review. You would have to pay an attorney draw up some agreements that you can use as a template.

The license requirements in Ohio are in the spirit of protecting the borrower in obtaining a loan. Once the loan is made, the terms are set. In order for those terms to change, the public must be protected via license standards. So if originating or negotiating between the borrower and a Mortgagee or potential Mortgagee (Lender), a license is required.

I am not aware of Ohio specifically require a license to broker notes. However, they do seem to be cracking down on wholesale concepts in real property. It is still difficult to summarize your question in one simple answer as the actual task of what you are doing and how you are doing it would also need to be looked at. Stripping anything from the note could change the definition of asset class very quickly, then you need a securities license. The manner in which you solicit could require you to have a securities license. Ohio has language around those concepts in their regulations.

For instance, you are going to target private notes. OK, for what? How? Are you marketing to the Mortgagee or Mortgagor? As soon as you say Mortgagor, you need a license.

Then what is your actual plan? So I have a private loan in Columbus, OH. It is $50k secured by a $30k home with an interest rate of 7.0% on 30 years. Borrower is paying, how will you help me, the Mortgagee? Your answer here could lead you into licensed events.

I think you get the idea. We don't really understand what it is you are trying to do, thus it makes answer your question difficult.

Your agreement with the Mortgagee allowing the Short Sale should, for your benefit, include waiver of seeking a deficiency judgement. For the most part, only the current Mortgagee could seek deficiency on the loss not the previous Mortgagee.

Jessica, I see you have another thread also asking about Ohio MLO rules. In general, the Ohio statute deals with a person who holds themselves out to the public to negotiate terms of a loan between a borrower and a lender. A MLO license is not required to purchase loans as an investor. Any Mortgage Servicer must hold a license.

Some Statues

1322.01 Mortgage brokers - loan officers definitions.

(2) "Mortgage broker" does not include any of the following persons only with respect to business engaged in or authorized by the person's charter, license, authority, approval, or certificate, or as otherwise authorized by division (G)(2)(h) of this section:

(a) A person that makes residential mortgage loans and receives a scheduled payment on each of those mortgage loans;

Secondly, it is hard to answer your first question since it seems like you have some computation related to your marketing efforts. You mention, in order to have enough business and sustain a living. I don't know what that means. I do know that Ohio has roughly 12 million people and just under half of them own residential units. One third of them is in distress. So, 6 million mortgages and 2 million distressed mortgages seems like it is a pretty large pond to fish in.

Don't know who the "educators" you are talking about are or what they preach. The key to any type of investor is developing more economically and operationally efficient ways to do business in whatever business you do. If you can create a niche in loans using a more localized market approach, that will be more beneficial than being average instead of a master, in multiple areas.

However, this clearly also depends on the loans you invest in. A paying borrower, or performing loan is the same across all geography. A loan in distress which needs attention, is not the same across all geography. Foreclosure is different amongst different states, etc.

The warning from Jackie is nice but it seems to come from a misunderstanding of why it likely occurred. In any type of transaction, such as whole loan pool sales, (or real estate) where due diligence is conducted after a bid is accepted, then the final price of sale is not determined until after that due diligence is done. While there could be some mentality to locking up a Seller in the market, a Seller can't be forced to sell for a number they don't want and the risk to the Buyer is wasting money and resources on due diligence. When terms of due diligence are carved out well, with 'well' meaning understanding what exact defects will cause re-pricing, a Seller and Buyer can confidently enter into due diligence to progress the trade. In my experience, this failure which results in re-price usually is caused by the Seller or the Seller's agents doing a poor job of presenting accurate data on the loans when bids are procured. All of this stems around good experience in putting the trade together, which is always a fair amount of work and takes a decent amount of trade experience.

This post feels awkward.

"I really have no experience in this but I know people that do so I'm giving it a shot at buying individual notes for myself."

So what happen to those people who you know, why aren't they helping you?

It does not seem as though you have purchased a note for yourself yet. Not sure if the multiple mentions of that is serious or not. Wouldn't buying yourself teach you some of this?

In any agreement, there is the idea of agreeing to something, it seems like without articulating what that something is, it is hard to describe, value and vet.

And you are a Florida Real Estate agent? Help us get a little more comfortable with you. This as your first post is not a great opening introduction.