All Forum Posts by: Dion DePaoli

In most cases, a 15% of UPB bid would mean the second is performing as well. Those 2nd NPN's I believe trade closer to 2.5% to 5% of UPB.

Hate to be a pessimist but putting in $18k and getting back over 3 times that is not normal. Especially if most of the $18k repairs are really cosmetic. If the property has a real ARV of $151k and it is not selling with a $45k discount on it, which is a 30% discount, there has to be something more to the home's issues. Perhaps your future evaluation is skewed?

As far as the loan goes, most hard money lenders will want to see more of a 35% down type of thing. Some lenders will include rehab costs if they believe the equity is there. I think the $10k will make it tough to work with some of them, as you will still have to pay closing costs and lender fees.

You might think of trying to find an equity partner to join you guys who has the capital available and you split the profits with. Work out an agreement on how to split and what he/she puts in. There are threads on BP which talk about those discussions and stratagies.

Not necessarily. Depends on the area.

Unique properties, are valued all the time. The agent you're speaking to may not be familiar with how. Try chatting with a local property appraiser instead of a real estate agent about it.

The valuation will not be the standard real estate agent approach as adjustments will be made depending on the cabin, location and construction. Better suited for a licensed appriaser in my opinion.

The title company needs to be licensed to issue title insurance in the state where the Subject Property is located. There are national title companies like Attorney's Title or Stewart Title which cover multiple states.

The location where the buyer or seller physically sits down and signs the closing documents does not matter. It can happen at the title company office, in the home, on a boat or even in another country....provided a Notary Public is present for the execution of the paperwork.

Usually when either party is located away from the title company used for the transaction, that is referred to as a "Remote Closing", where the party is in a remote location from the Title Company. The title agent at the title company will usually make arrangements finding, scheduling (to some extent) the closing with a proper Notary Public for the party that is remote. The remote closer (the person) usually charges a fee for doing the closing as well.

I am not clear on whether you are asking for a 15% to 20% discount on the value of the real property...or...if you are trying to find assets where the purchase price is at 15% to 20% of the value of the real property.

If the latter, and you seek to be purchasing at or below 15% to 20% of value. That bid price is pretty low. Most of what you will get for that is war zone stuff with low real property value to begin with.

The first step in buying anything is having a Seller willing to sell. The price level of 20% of BPO wouldn't get anyone's attention that has any type of 'decent' inventory. This could also be some of the problem with the broker circles you find yourself in. Many brokers don't know much about evaluating and pricing out loans for disposition thus these low levels tend to be passed around as if they are legitimate sales percentages.

20% of BPO will get you a nice detroit foreclosure riddle with liens and a real property value of less than $40k. The foreclosure process will likely still have a bit to go through until resolution.

If you were thinking those levels would get you into median valued homes, say around $180k +/- you are easily 35% shy of having even a conversation about the assets in most cases.

The failure to recover 100% of the principal balance of the loan means there is an investor somewhere who is taking a loss. In most circumstances, the idea is to make that as small of a number as possible. As such, I always like to say, nobody is going to hand you an easy return on your money. Investors should focus on what makes them niche, so they in turn can express that in their bids. This means having a better understanding of the real property market, which in turns means capturing a greater value from the asset disposition. It also means being able to disposition faster.

If you are after the low bid stuff, at a true 20% of BPO. You really need a productive and well oil machine and you need to be pretty good on your numbers, if not excellent. In those low level assets, $100 can make or break you. You need experience with negotiating liens down that encumber your title. You need good real estate marketing plans and even a good, reliable and well priced construction effort.

Now that we touched on some of that, I am curious what the numbers mean in your post and if the was a misguided conception to the price of these types of assets. I would also be curious then, where the valuation education come from if your not in the church on pricing.

Subject To Mortgage transactions mean a new Buyer takes title to the real property "subject to" the existing mortgage(s). Whereas, Subject to refers to the new Buyer being subordinate to the existing lien and also creating some form of liability for said lien.

There are clauses in many security instruments (Mortgage/Deed of Trust) which allow the Mortgagee to call the loan due if any portion of interest in the real property is transferred. This is the Due on Sale or Alienation Clause. Lot's of BP threads on the DOS if you search. These go hand in hand, you would be wise to read up on them a bit.

When a Seller sells real property it is customary for that property to be contracted to be sold under the condition of free, clear and marketable title. That is, title which does not carry any other interested parties, liens or encumbrances which would be superior interests to the new Buyer. In a Subject To deal, the new Buyer agrees to take said title free and clear "except" to the current Mortgage(s). In a traditional purchase and sale, the existing Mortgage would be paid in full at closing with the new Buyer. In Subject To, the existing Mortgage is not paid off. So the mortgage stays senior to the interests of the new Buyer. The new Buyer agrees contractually to take on some form of liability for existing lien. Generally this is only recognized with the Seller and not the Mortgagee. As Mortgagee recognition is an approved assumption when it takes place.

The legality of Subject To can get tricky from that point forward. Since the security instrument from the Seller stayed in place, there is some level of interest that the Seller still has. The Seller granted interest to the Mortgagee, while the Mortgagee is still present, the interest originating from the Seller is also still present. As such, sometimes a loan can be assumed, formally. This is the formal approval of the Mortgagee to transfer the liability of the note to the new Buyer. In many cases if the loan is not formally assumed, the Seller is not absolved of liability. Any failure to pay as agreed in the note, along with enforcements for default is still the primary liability of the Seller, which is the Borrower contracted to the Mortgagee.

In the OP example, the Seller agrees to allow Buyer, to take title to the property for a payment of $3k now. The Seller has a mortgage on the property, which is not being paid in full. So title is not free and clear for the new buyer. The idea per the post, is to leave that existing mortgage in place of $61k for one year. After which, the Buyer is responsible to pay the mortgage in full.

The Seller has risk in regards to their obligation on the mortgage. The Buyer must pay, usually through third party, on the Seller's mortgage account if they don't the Seller's credit is dinged and/or foreclosure action is brought against the Seller. That is regardless of the Subject To transaction, since the mortgage from the Seller is still the senior instrument on title. Nothing that happens after it matters.

Having an event earlier in time rather than later, such as this one year term, cause the new Buyer to have to take action to achieve the agreement. As we don't know how 2014 will affect new originations, that could be a blessing or a problem. Some, like Ellis, would prefer to not be forced into a short term corner which may limit the future solutions.

Your plan will have some issues and it has been thought of in the past.

1. In order to negotiate between the Borrower and the Mortgagee, you will need a license issued by the state. (Mortgage Broker License)

2. Negotiating a modification for gain on behalf of the borrower is a licensed event.

3. Most modifications are preceded with a trial period. Those can last from 3 to 12 months.

4. When a loan is distressed it goes under a watchful eye at the Mortgage Servicer. Changes in the title to the real property may be found and create situations where the loan is accelerated and called due. (Due on Sale)

5. The plan seems to rely heavily on negotiating the balance down to less than the value of the real property. That is not all that common. The modifications that do get done on negative equity loans tend to stay in the negative equity status forcing the borrower to earn equity through payment and secondly through property appreciation. So, I am not sure the margins would be present all that often to get other 3rd parties in the mix.

6. Attempts by you to 'lock' the borrower into doing something with their property while the property is in distress may have some not so fun legal implications. Those types of actions could be viewed as predatory in nature and may, after review, be unwound or vacated or unenforceable.

You may just want to leave out the mortgage modification part and try and get some deals done with short selling and wholesaling. That too has its challenges but a few less than the direction you are thinking of right now.

I wasn't a fan of how this read, so I wanted to comment on it. These are not mutually exclusive ideas. A balloon is when the term of the loan is shorter than the amortization of the loan. A fixed rate is a rate that does not float with market indexes. A loan can have a balloon and be fixed or adjustable. Adversely, a fixed or adjustable rate loan has no requirement to balloon.

The OP suggested rate seems reasonable at 8.0%. The other loan stipulations will play into the risk on the 8.0% such as down payment percent and borrower income and asset underwriting. That interest rate seems to have large enough to cover extension risk on the rate. Bare in mind, conventional loans are around 4.0% still and hard money is around 9.0%, plus or minus on both.

The idea of making a balloon can be good or bad depending on your capacity to underwrite the borrower. A good borrower in the future will have no problem refinancing the loan when it matures. A bad borrower, not so much. It is also important to check your state laws on balloons before you make the loan. Some states have increased the minimal term for a ballooning loan.

I also want to correct the idea behind the way @David Beard is describing the loan. The better way to look at your loan is not through the idea of maximizing its value and more of maintaining its value. In other words, preventing or limiting any discount that might be applied in the future to the loan. It is a small and perhaps to some insignificant amendment but I think it speaks volumes to what you are trying to do. Coming from the crash of 2007, there tends to be a general idea that all things are discounted. That may be true at Costco but in RE discounts occur as a function of cause and effect. Discounts in loans are not innate. The loan at 100% of its balance is worth the balance plus the interest. Loans are not written to sell for 95% of balance as a matter of standard practice. Although some have been doing that, which I will come back to.

A balloon feature does not enhance nor diminish the notes value per se. The maturity event, if it becomes a barrier for the borrower to overcome, which then forces disposition back on to the Mortgagee, would be a defect. On its own merit. In other words, it is not the idea that there is or is not a balloon that makes this good or bad, it is the idea of whether the borrower can handle the balloon event through refinance, property sale or similar on their own, that makes it a good or bad event.

To some folks, like Tom, balloons are administrative tasks that are not attractive. To other investors, balloons do allow the Mortgagee to protect themselves from extinction risk. That is the risk the rate they issue does not fall below market rates.

I caution the over reliance on the balloon to be a substitute for good underwriting. When the balloon occurs one of two things will happen. The borrower will cause the resolution of the balloon or the mortgage will cause the resolution of the balloon. If the loan balance at the balloon date is greater than its value, the borrower will not be in a good place to refinance. So, the solutions will have to involve the Mortgagee. It is important to note at this juncture, that regardless of where the market is, the Mortgagee does not have carte blanche ability to simply refinance for a much higher rate.

A new rule in 2014 from the CFPB will deal with the concept of "Ability To Repay". While that has always been in loans in general, it now has some regulatory teeth. A borrower not in a good position at a maturity event which creates a balloon might have the ability to produce an affirmative defense to the balloon. This could affect foreclosure and modification remedies. We don't know for sure since the rule is new. We do know, that in general the CFPB doesn't seem to like the idea of a balloon. (probably don't like clowns either)

The idea of 'maximizing' in Dave's post continues through some other tasks. (not picking on you Dave) The same correction in ideology needs to be applied. Using a Mortgage Servicing Company does not increase or decrease the value of the loan, per se. Using a licensed company will ease the administrative burden on the Mortgagee. The company will help mitigate some liability mainly dealing with borrower accounting and correspondence. The idea here though, is just because you do or don't have 3rd party servicing in place doesn't mean the value or price goes up or down. A Servicing defect in that case would create the need for a discount, as the defect could have risk consequences.

The Mortgage Servicing Company will not 'create' the mortgage file, a loan officer or loan broker can/will. It sounds like the OP has done these before and more than one in the future is being considered. As such, you should look into using a licensed and experienced MLO. Get with the MLO and your attorney and standardize your disclosures and documents used in the application and loan process. With some of the coming regulations in 2014, making sure details are attended to is a good idea.

Speaking on the idea of payment seasoning. Payment seasoning is not a requirement to achieve loan price requirements. A loan can be sold with no payments made and still fetch 100%+ of value. Payment seasoning does however, help an unsophisticated investor (possible future Buyer), peer into the underwriting of the loan in a simple manner. Did the borrower make payments? (Yes/No) If No, bad underwriting. If Yes, OK underwriting. Notice, the opposite of bad is not good here. Making payments on time is what is expected. So in that sense, making payments carries a negative when absent but its not really a notch up when present, since it is expected. Simply stated, the longer the time period of payment seasoning the more comfortable a potential buyer can with the borrower's ability to repay the obligation. It is not foolproof though when present. That is, just because a borrower paid yesterday doesn't mean they pay tomorrow. However, if the borrower didn't pay yesterday, the concern for not getting a payment for tomorrow increases.

Last, a couple of the ideas that accompany the OP last post. The idea of getting a property back is mentioned as a win win. This is more an idea supporting poor underwriting rather than good underwriting. Not only does it take a little bit of a haphazard approach to the borrower but it also ignores the process and final outcome of a foreclosure. When a property is foreclosed it does not mean it automatically reverts back to the Mortgagee. In fact, this only happens when the loan is poorly originated to a certain extent. A loan that is originated well will have a sufficient down payment and the borrower capacity to start with and improve on the equity position in the real property. That equity is consumed through the balance due back to the Mortgagee post foreclosure sale. A Mortgagee can only send the loan to auction for what is owed, nothing more. So when the property is worth more than what is owed, the likelihood of the property selling at auction increases. And of course, we have the opposite. A 50% downpayment in most cases will give the Mortgagee more than enough room to recoup costs of enforcing the remedies. A 5% downpayment likely will not. Further, the concept of the property reverting back to the Mortgagee is likely a loss not a gain in the real world. A property selling at auction carries less Seller costs in general as taxes, insurance and other customary real estate items are not paid for by the Seller, which in this case is the Mortgagee.

The idea of a loan is to put money out and get paid that money back plus interest. When banks look at lending money and the risk of default, they don't look at the idea of getting the property back, which also means managing it. They look at the ability to recover their investment capital. They are not the same ideas.

Hope that just freshens the vantage point you use when proceeding with your plans. Plans, like David mentioned, other investors practice successfully every day. Good Luck.

@Josh Rich

What do you believe you are looking for in a little more detail than simply a non-performing loan?

Try listing a little criteria like geography exclusions or concentrations, property type and other filtering criteria.

With the experience in valuation so far, where do you believe you are looking for a trade of the ideal asset, in terms of percent of real property?

You mention your funds are not that large, does that mean you have enough to purchase first liens or should you really be looking at second liens?

There is financing for loans but it tends to be more institutional in nature targeting pools larger than $1.0 Million in deployed capital. The financed party will generally need to have experience in whole loans.

In a very general sense, your assumptions are sort of correct. Remember of course, as with any financing, the debt will be less than the purchase price, so to some extent, the note rate does not always have to exceed the debt rate. Certainly the math is easy to see when it does, simply do the calculation to see if it 'fits'.