All Forum Posts by: Dion DePaoli

Jonathan Everett, a "NPN" or "NPL" is a Non Performing Note (...or loan, "L").

While as it relates to the real estate world, it usually refers to a loan secured by a Mortgage or Deed of Trust or Security Deed. Those instruments secure the Promissory Note, usually referred to as just "Note". There are notes and loans on other types of assets. So the term is not unique to just real estate.

The Note is simply the I.O.U. that spells out the debt and terms of repayment.

The concept of performance is the continuity of payments made by the borrower for the debt obligation in line with the terms of the Note. (A Mortgage/DOT does not have performance to it, the Note does)

In its most simplest definition, a non-performing note is simply a note which the borrower does not make payments that coincide with the terms of the note. Notes define the repayment method within their text. The payments are made in a per period basis. A period can be a calendar month, which is typical, or can be defined differently inside the note, for instance semi-annual (6 months) or annual (1 year), etc.

In a little more in depth concept, a real estate note, or a note secured by real property, has its performance defined in the following manner:

Payment made within 0 to 29 Days of the period due = Performing also considered a 'Current' loan - the note will call for each payment to occur on a defined period, such as the 1st of every calendar month. If the payment is not received on the specified period day or date, the payment is considered Late. Many notes provide for a Grace Period, such as 10 to 15 days, which is a period of time where a borrower can make a payment late without penalty for being late.

When a loan becomes 30 days past due, it is considered "Delinquent". Loans are defined as delinquent while the payment outstanding is between 31 to 89 days.

When a loan becomes 90 days or greater past due, it is considered "Default". That is, the borrower has 'defaulted' on their repayment obligation.

A Defaulted loan is a non-performing loan.

A Delinquent loan is sometimes referred to as a 'Sub Performing Loan'. That is, it is performing below the requirement of staying current.

When a loan goes 90 days or greater past due and then cures the default, bringing the payments current, the loan is sometimes referred to as a "Re-Performing Loan".

In banks, when loans hit the 90 day past due, they are also considered "Non-Accrual", that is the bank should not longer expect to accrue and get aid on the interest due since the borrower is not making payments. So if you talk to a banker, they may refer to NPN's as "Non-Accruals".

One other term, "Whole Loan", which is the loan with all of its interest and parts still held together under one ownership. This is aside from when a loan is stripped of Interest Payments or Prinipcal Payments or Mortgage Servicing Rights, which is when loans are clearly considered securities.

When one purchase a whole loan, they receive all interests in the loan and parts of the loan. The loan consists of the obligation of the borrower to repay the amount of principal that is outstanding along with the interest accrual.

The obligation of the borrower to repay is secured by the instrument, such as a Mortgage or Deed of Trust. The instrument is a pledge of collateral by the borrower, to the lender, to secure the repayment. A borrower gives a Mortgage (or similar instrument) and a Promissory Note to the Lender in exchange for the Lender to give the Borrower money. The Lender then owns the Note and Mortgage not the borrower, since he gave it away.

A Mortgagee is the owner of the note and mortgage. A Mortgagor is the borrower. (Not the same as Lender)

When a borrower defaults on their note. The remedies afforded to the Mortgagee through the contents of the Mortgage include:

1) Possession
2) Foreclosure
3) Power of Sale
4) Receivership
5) Action on Personal Covenant

Jumping to the most common concept in that list, and leaving the others for another day, Foreclosure. In Foreclosure the Mortgagee calls for the liquidation or sale of the collateral or real property in a public manner, so as to achieve a fair value, which proceeds are to be used to satisfy the unpaid note or debt.

This seems to be a little confusing to many laymen. Many folks jump to an idea of Mortgagee ownership of the real property and that is not necessarily what will take place.

If the result of the foreclosure sale is the sale of the property, the proceeds first go to the foreclosing Mortgagee, then to other lien holders and finally to the borrower. This can only take place if the liquidation value or bid at auction, exceeds the debt owed to the Mortgagee. In cases where the debt exceeds the liquidation bids at auction, the property itself will revert to the Mortgagee as consideration for the unpaid debt.

Either way, at auction, the property will transfer from the Borrower to a new owner. Either a winning bidder or the Mortgagee. Any new owner of the real property is then considered the legal owner in full and can do what they please with the property.

There are other disposition strategies with a NPN. Those include obtaining a Deed In Lieu of Foreclosure from the borrower or "DIL".

A "Short", which can be a "Short Pay" which is a refiance of the current debt where the Mortgagee takes less than the full amount owed for full satisfaction of the debt. Or a common tactic, "Short Sale", which is where the property is sold by the Borrower for the less than what is owed to the current Mortgagee for satisfaction of the debt. The key here is the idea of short, which means the Mortgagee takes less than what is owed.

Reinstatement is also a strategy. A reinstatement is when a borrower brings the default current and the Mortgagee agrees to recognize and allow the same. The Mortgagee is not bound by a duty to allow the borrower to reinstate the loan. This is because as a function of default, the Mortgagee calls on a clause referred to as the "Acceleration Clause", which the Mortgagee's ability to call the entire debt due and payable by the Borrower. Acceleration is a need part of the entire process since if the borrower is 365 days behind, the only owe the sum of the 12 payments opposed to the entire loan balance. So when a borrower defaults, the loan is accelerated and the entire balance becomes due.

When selling a loan, I am not sure I really understand what you are asking about your "options". You have the option if you are the Mortgagee to keep or sell, not too many other Sale Options. You can sell at a gain or a loss or break even just like anything else.

That is likely enough to chew on for now. Ask further as needed. Cheers.

As far as insurance coverage goes, a landlord should really read their insurance policy to understand.

In a general sense, usually "criminal activity" is excluded from property coverage. However, this tends to be specific to the property owner. If the property owner is unaware, they may be able to seek damages from the insurance policy for clean up. Again, this really needs to be analyzed in the policy itself. They could sneak an exclusion in.

Seeking a claim will likely require an attorney as the insurance companies first line of defense will deny the claim under criminal activity. Most agents will likely say it is not cover, so you may have to inquire with someone from the claims department.

The damage from the meth lab is technically a covered "peril" in most policies. However, you may have to have an "All Peril" policy, which would cover all things not listed as exclusions in the policy.

The remediation of a meth property is not that long of a process and depends on the actual verified damaged area. The residue from the methamphetamine seeps into porous material like carpet, drywall and wood, etc. Because the substance is cooked, its vapors can also cause accumulation in the ducts and air handler.

This may sound a little silly, but, meth lab makers or builders, or whatever you want to call them, are also aware effects of the chemicals and usually take steps to create some form of confined space. Now, these are also idiots, so I am not saying they do a good job, but they will attempt to put up plastic lining or put the lab in a detached garage or shed or similar, depending on property. Not saying you can overly rely on this, but, to some extent, their build out might have confined the spread of the damage.

The level of damage can be tested and a proper as well as state approved or local government approved cleanup terms can be met. Having a meth lab does not always mean, everything must be torn out and replaced. That really depends on the damage. Sometimes the damage can be cleaned by a washing technique with some approved equipment. There are companies who do this professionally, just like companies who clean up after floods and fires, etc.

Most states then require notice to tenants and buyers of the about the lab being present in the property. So this can cause folks to just stay away even if it was clean properly and thoroughly.

Clean up costs can range from $5,000 to $40,000, like I said, depends on the damage. Costs of rental loss or marketability for sale are a bit unquantifiable but add on to the top of tangible expense of clean up.

If you find a lab, you should not touch and you should not hang out around the chemicals. Seek fresh air immediately, open ventilation will help diffuse the concentration levels of the meth but even small traces can cause harm. A county or similar hazmat team will come and inspect the property and if they find the chemicals, they will section of the property until cleaned. You will have to have a final inspection in order to have a C/O back.

One other costly item is the disposal of the other chemicals that are found on the property. Any investor who is use to purchasing vacated properties who runs into old paint, fuels or similar petro-chemicals will tell you this can be costly as those materials have to be 'properly' disposed. In other words, you have to pay for it.

It is not property specific it is borrower specific. Once you have owned and operated a rental property for two years and properly reported on your taxes, etc, then that income can be used in the calculation of your DTI. The rent will be set at 75% of gross and PITI will be reduced, any proceeds left over is positive cash to your income in underwriting. Any negative cash flow is a burden on the rest of your income. For the first two years, you can still get a loan on an investment property, it is simply that your income must support the debt service of the investment property without the offset of rental income.

75% is used to auto accommodate for vacancies, rent loss and other nuances. That percent is used for all investment property income underwriting. The utility of that percent has nothing to do with time other than, until you have owned and operated a rental unit for two years, most underwriting will not allow you to offset the rental property expenses with the rental income at 75% of the gross monthly rent.

From the post, there doesn't seem to be any glaring reason why you should be experiencing underwriting pushback on the matter. 5 years of ownership is over the minimum.

One other point to this thread.

The interest rate she seeks is not too far off. A brief browse of the hard money rates from folks here on BP put rates around 8% to 9%. I would say the concerns about this coupon are simply unwarranted. There are investors who will take an 8% yield on their capital in today's market.

Whether or not this loan with all of its characteristics has a risk level that associates it with 8% is a whole other story. But again, a hard money loan around 55% LTV at 8% to 9% seems to be pretty close to the HML market rate right now.

There are some other issues with this, even though it started off a little confusing.

Sandra Ruiz, I can only assume you are NOT a licensed Mortgage Loan Officer. You are on the fringe of acting without a license on this matter. You can not negotiate between a lender and a borrower without a license for a mortgage secured by residential real estate. The borrower needs to go out into the world and find a lender or a licensed broker who can then find her a lender. Without a license, you should not attempt to assist the borrower with this loan. This includes trying to find a new investor to originate a loan for her, that requires a license. In addition, don't take this the wrong way, but you don't seem very qualified with your knowledge to be able to really assist in this event either.

Lender licenses are state specific, so not knowing what state the subject property is located prevents a lender who can lend in that state from understanding this might be a deal for them.

The financial advice you gave to the borrower about increasing the loan amount and putting it into other investments is not sound. Your advice presumes the loan was a cash out refinance and the lender is willing to allow the cash out to be freely invested opposed to being specifically deployed in the Subject Property. Point is, even if she wanted to pull extra money out, the lender may not have let her if the money was not used on the subject property. Those terms are lender specific. If this was a purchase money mortgage, which some of your post leads me to believe it is or was, she couldn't have pulled cash out at all.

The subject property is not fully identified here. The current loan term being over 10 years is a bit long for the ordinary hard money lenders. Typically those are short maturities. Is this a residential piece of property or a commercial, what type of 'building' is it? Does the borrower reside in the Subject Property? These concepts will affect her qualifying.

It is unclear how seasoned this loan is. She has 120 payments left. Not sure if that is a balloon or maturity. We don't understand how long she has had the loan. This brings into play possible prepayment penalties. It also can bring to light credit issues or concerns if she is trying to get out of the loan a little quicker than she should.

One other phrasing correction to the OP, "I am a new investor and I have a client that wants to sell a hard money loan."

I don't have any issue with you using the term client, it does not designate you in a role. She could be your hair salon client. However, the borrower does not 'sell' their own loan. The current owner of the loan, either known as the investor or mortgagee, is the only party who can sell the loan as they are the owners. Your client is the borrower. Borrowers have no control, influence or say so regarding the sale of loan which they are the debtor.

You made this same reference in one of the later posts at the bottom of the thread too. You wrote, "So if she has 120 pymts left at $1500, she can sell them for let's say $1,200 providing her with $144k cash?" Just repeating my point above. NO. The borrower can't sell anything. The borrower makes the payments, she doesn't have cash flow to sell, she is the cash flow. The current Mortgagee could sell the loan, if they wanted to, which they have no duty to. The sale would include an entire sale or partial sale of the payments. Moral of the story, the borrower has little to do with any of that. The borrower receives zero monetary benefit from a Mortgage selling the loan or payments, that is not the borrowers money to receive, it is the borrowers money that she is require to pay.

The borrower, as it seems from the information in the thread, does not really have any ground to stand on with her wants. She is already in a hard money loan and a long term one at that. This means she had less than adequate credit and qualifications to be approved for a conventional loan at a market rate. Usually when a borrower takes out a hard money loan they put together a plan of some kind to get their credit and qualifications back on track and they refinance the hard money loan out with a conventional loan. It is unclear why she has not done so. The longer she has been in this loan, the more of a concern may arise from the same.

My spider sense is going off on this and I would guess there are some more issues under the hood that can likely been seen with a little more of a trained eye regarding this borrower and her current loan and chance of a new loan. Her new loan at $220k would be around 51% LTV, "IF" your RE Value is correct and is not chopped by a conservative appraisal or underwriting. In addition, not knowing if the borrower resides in Subject is a big deal. If she does reside in the property, she may be restricted by the new lender to 55% LTV and if they cut the value even a little, she will not get all her money. Understand, the general demand on capital is $220k, however that does not include closing costs or broker/origination fees etc. Hard Money loans usually have a point or two in them. As you add those pennies up, she could be eroding her cash out amount.

I encourage you to learn from this but I would suggest you back out of this as a player so you don't end up stressing out a friendship or a friend in need due to lack of knowledge of this asset class.

Title Agent License is a state issued license. Both for the business and person. The license is not portable, that I know of, across state lines. However, some states have reciprocity, where getting a license in state 2 is easier if you have a license in state 1.

The location of the title office you use can be just that, one of many locations. If the company holds a license in the state where the Subject Property is located, then they can handle the transaction and issue title insurance. If they do not hold a license in that state, they will not be able to issue title insurance on the asset.

Abstract work or title reports such as Owner & Encumbrance Reports can be obtained from any office anywhere provide the office or the person pulling the property abstract can access the needed record repository.

Typically a company will not take on work they can not perform so simply calling and asking will produce the definitive answer.

I can't speak to whether this is a norm for real in this market but I can say it sounds a bit silly.

Even if the norm is not asking for a finance contingency, you know you want one and will feel better in contract with one. To me, it sounds like the agent is trying to get an offer he knows will have a higher chance of being accepted. If this is your agent, I would find a new one. Sounds like they just want an offer with a high chance of acceptance. (so does everyone) Problem is, they are sacrificing your security and protection to accommodate the acceptance. Sort of the opposite of looking after your best interests.

Unless there is a contingency in the contract which says, if you need more time to close you can have it and the Seller agrees to extend the closing date, then the 'norm' just went out the window. The Seller, with no contractual obligation to extend, does not have to extend and you risk losing EMD.

Clearly the idea stems from failed financing situations. As a Seller, when I have seen finance contingencies I have called on the loan officer to see where they borrower is in the process of the loan and approval. Often times, I asked for any conditional commitment from the lender. That is not the same as a Pre-Approval Letter.

That same idea as a buyer could help you. Ask for the contingency and turn in a conditional commitment from your lender with the contract or offer to the Seller.

As a seller, I have often asked for either more EMD or the EMD goes non-refundable for extensions.

I think there is a maturity level that a Seller must have in regard to the finance process. As a Seller, I say involved with the loan officer. Typically most contracts afford open communication to the Seller for any financing situations. If an extension is needed, I usually tried to assess whether the extension is needed due to the lender moving slow or the borrower not delivering needed documents information to the lender.

Not all borrower are the same, not all lenders are the same. Sometimes good borrowers have terrible loan officers or untimely lenders. As well as vice versa. When the stall is on behalf of the buyer, I would be pretty tough with extension terms. If the issue is at the lender, like the lender is just slow, I might not be so tough on the extension. Again, provided I believe the lender will produce the loan.

There have been times, where I have told the buyer that they need to find a new lender in order for me to extend.

Moral of the story, contract contingencies exist for a reason. They are valuable tools to protect the interests of the parties to the transaction. To unilaterally throw those to the curb, IMO, is a little irresponsible. As a Seller, I want to sell the asset at the price we agree to. Sometimes that means working with the Buyer and his lender to afford enough time to get the loan and hit my sale price. In that sense, it is pretty simple, the Seller either accepts your offer and terms or counters those terms. At the very least, I would have the contingency in my offer and let the Seller respond to them. If the Seller strikes down the contingency, then you can choose to remove it or find a new asset to pursue. Not putting a contingency in the original offer takes any opportunity to see if the Seller is willing to accept and removes it before you ever asked.

I would suggest the 'better' question is, will the investors place money into your care without having an investment to make. The driving force of that answer is whether they will make return while doing so. Why give you money which doesn't generate return that I can leave sit generating a return while you hunt for an investment?

Typically when a manager takes on capital, from the day it is received by the manager, the return is calculated against that time. That is regardless of the investment being made or capital being deployed. Good managers will perfect the timing of capital deployment and investment identification. This saves the manager money by not having to pay return or calculate return on capital that is not invested.

It is not exactly clear what you mean by, "...see if a property pans out.". The interpretation being used right now is you mean, when you have an offer pending. Hopefully that is what you mean and not whether or not the investment makes a profit.

What you can do, as some other managers do the same, is create a capital call with the investor. This means you sign them up, get all the agreements set up and then go hunt for an investment. Typically you would retain 10% in an escrow account from the investor and when the investment is identified you 'Call' on the capital in full balance to be delivered. Penalty for the investor is he looses his 10% if he fails to capitalize the venture. Clearly the other similar way to do this is simply escrow nothing and call on the investor for full investment only after the investment is identified. This really depends on the relationship you have with the investor. The idea there is you might take a little while to find an investment and want to make sure the investor is ready when the investment is ready and doesn't tall you he is good to invest and then makes another investment without you and ties up his capital. These types of agreements with the investor can be a little ad hoc, you can let the investor earn the interest on the escrow funds, provide they agree, which will help offset the holding time, even for the 10%, you would have a return to calculate.

There will be some complexity to pooling independent investors. They may want different terms. In addition, they may have different ideas on the capital structure, ownership structure, investment structure or other structural issues. So you need to think through who your investors are and will they all be homogenous investments in terms of structure or can you pair them somehow to make similar terms. Concerns about rates of return and investment horizon might create more than one grouping of the investors. For instance, if J. Scott and I both invest, say he wants an investment horizon of 3 years, but I only want 2 years. Will you liquidate the asset in 2 years? Will you simply replace me with another capital investor? If so, how you will you calculate my return, do I share in any equitable upside calculated on the future exit of the asset? What if one investor likes debt and the other does not want to be in a first loss position? The list goes on.

You may be able to solve this by putting investors into each asset in smaller groups opposed to taking all investors and pooling all money. That too becomes a bit complex. How will you structure your enterprise? Will you have a parent company owning subordinate asset holding companies with each investor inside each sub company? Perhaps you will not roll them up into a parent at all.

Certainly the other approach is you go formally into a pooled fund structure. This means you have to produce a prospectus and subscription documents with all the terms and conditions spelled out. This creates a uniform investment structure for the investor. They all have the same investment horizon and have the same powers subordinated to the manager perhaps. The investors are simply pro-rated in to the fund while it is open for investment.

As you become more formal, you will incur more administrative costs. Because of this, you will want to really plan that out. Accounting, including auditing if required for your exemption as a security, distributions to investors, plus asset management all will take time and money to stay on top. You will want to make sure you have a good team to use.

If you are thinking of this formal investment fund approach you should look up some of the threads on Regulation D and start to become familiar with the general idea of the securities exemptions.

All of the above, by the way, is for an equity investment by the investor. What if the investor wants to come in as debt, inside the LLC or attached to the property, both have their own new set up situations separate from above. However, in that case, if you take the capital as debt, you would accrue interest from the day you receive the capital, regardless of deployment.

I am not sure what you question is regarding 70% off.

Subject property in average condition seems to be pretty inferior to Sale 2. Would have to look at the other comps in the area to see if there is a better homogenous match to Subject. This sale went down at $112.17 per square foot.

Sale 3 seems like it might be the best match to Subject in terms of condition and size. That sale went down at $87.42 per square foot.

The 'asking price' for Subject Property of $150,000 would make that $111.52 per square foot. Ask yourself, is Subject as nice, as big and in overall similar condition as Sale 2? If the answer is no, the Subject Property is overvalued at $150k.

Sale 1 went off at $89.04 per square foot. Problem is this is only $2.00 ahead of Sale 3. So Sale 1 seems superior to Subject but that is loosely shown in the price. You should look at some comps to see what is happening here. Sale 1 was updated but seems like it left some money on the table at sale. OR...Sale 3 sold for more than it should. A couple other comps will expose this better I think.

Generically, this comp set doesn't seem to be a great set to use but it has it's discovery properties of sending you in the right direction. You can tweak the distance and sale time a little to get to the most homogenous set of assets possible.

At this glance the Subject Property is more likely closer to $115,000 depending on more research and some ensuring the condition is average with average repairs.

Can the Subject property be updated/improved and will those repairs help capture more dollars in the value range of the neighborhood? I think you need some more comps to understand this. That will tell you, is $115k a good price to enter the market on this asset. In order for your ROI to be close to 20%, you would need subject to be able to capture more than $105 per square foot. Is there a market for updated property around $110 +/- per square foot in the area of Subject, that seems to be the question. We know Sale 2 hit the number, but can't see if that is an anomaly or a good representation of the upper side of the value range.

In most cases of MSR sales (Mortgage Servicing Rights), the original lender is not the current investor. MSR's are routinely sold when mortgages are pooled and sold as securities. When any part of a whole loan is stripped away such as principal, interest or servicing rights the loan is no longer whole. In most cases, that will make a security out of the instrument.

That is really not the same thing being discussed here.