All Forum Posts by: Dion DePaoli

I agree with Dave, investing in non-performing asset is not that big of a deal. It is, what it is....a non-performing loan.

That said, setting up your plunge into the business, understand what your target asset is. A NON cash flowing asset. NPL's trade at the discounts they trade at due to the lack of cash flow and the additional capital costs to enforce the remedies provided in the note and security instrument.

The key to whole loan investing is learning and understanding all of the aspects of the asset. It is not as simple as real property investing. Foreclosure is different from state to state and borrower interaction is regulated.

The asking price and the bid price for whole loans tend to have a bit of a gap. The bid price is based on the capital expenses in the asset and the time it will take to enforce the provided remedies. As such, assets in shorter foreclosure states tend to trade for a lesser discount than those with longer timelines.

The concept of a bulk trade tends to be misguided on the street. Bulk in whole loan trades is not equal to stepper discounts. It is not CostCo or Sam's Club. The bulk, simply refers to a pool of assets, which loans can trade in pools of two or more or they can trade as one off. Each and every loan on the seller's book has a price which creates a sale. By purchasing more than one asset in a pool, the allocation of the purchase price is optioned to the Seller which tends to help get more trades done. When you bid one loan, it is really a hit or miss. Seller wants 65%, you offer 60%, no trade. In a pool, the Seller ask does not have to match your loan level price to his loan level cost. So if the pool has two assets and you offer 60% for asset 1 and 65% asset 2; that sale would work if the Seller wants 65% for asset 1 and 60% for asset 2. Or the Seller fundamentally wants 62.5% for both assets which is what you offered but allocated in a different manner.

In addition, bulk trades are also a function of the Capital Markets, the investors are large in dollars therefore the trades are large in dollars. In fact, a one off street level investor can likely find a better deal than a bulk buyer. The street level guy has more time to hunt for the right asset and at the right number. So it not uncommon to talk to a street level person who found a great deal at 55% when the bulk guy would have paid 60%.

A common barrier to new whole loan investors is deriving a bid which creates a trade. A non-performing loan bid is competing with the actual costs and time to disposition the asset. There is no duty by any bank to fire sale the asset. There are regulatory influences but they are not so far out side of the assets disposition options that they force fire sales. Even further, if your bid for an asset is 65%, but the Seller can simply disposition the asset themselves and realize 85% recovery, why take a 20% hit selling to you?

There is a skill and art to coming up with a bid, delivering a bid and getting a deal put together. Whole loan deals are not easy and they are more complicated than real property transactions.

The disposition strategy that you speak of, buy loan at a non-performing discount, contact borrower and offer to modify the note to reinstate the loan. Seems so simple, right? I often say, there are zero "new" note strategies in the market, they might be new to you but not the industry. Be aware that 50% of modifications re-default. You then have to start the foreclosure process all over again if you reinstated the loan. In a state like New York, that is a 2 to 3 year process. You will need/want to have a skill in re-underwriting the borrower's ability to pay.

A misconception in the OP post, the borrower requests that the note investor get a shot at buying the loan. The borrower has no influence or control over who buys the note or for how much. In fact, a potential flaw in your workflow is having the homeowner involved in the beginning of the deal. It is not safe to assume that all defaults can be remedied, that all borrowers can pay their bills or that once reinstated it will be all flowers and rainbows. I have seen some borrowers expect some form of forgiveness or similar event from the new buyer once they were aware the loan was purchased, let alone at a discount, let alone actual seeing or knowing the purchase price. As Dave mentioned, the NPN will trade off a real property value base line if the loan is upside down. Say, 65%, so then you get a borrower who thinks or wants a loan reduced to the same 65% level you paid. You say "No", they say go pound sand and now you back to foreclosing. Since they helped you, so they think, buy the note, they too should be able to enjoy your discount. You are make believe partners in some sense in their mind.

In addition to misunderstanding the borrower's role and involvement in a loan sale or the determination of a loan sale, the loan sale does not stop, halt or cure any enforcement of the remedies in the security instrument and note. These are two mutually exclusive events. A borrower can request anything they want, but there is no duty by the mortgagee to fulfill the request or even pay attention to it. The only obligations that a mortgagee must live up to are spelled out in regulation and the security instrument and note itself. The contract was made to pay back the mortgagee, those parameters are already setup. Borrower borrowed money and has to pay it back. A mortgagee has no duty to forgive principal, reduce rates or waive fees, etc.

In the venture you plan with investors, be aware NPN's are insolvent assets. You may purchase for 65% but will still have 10% in capital expense to enforce the security instrument and note. So raising capital for NPN's involves the actual purchase price and cost of due diligence but can also include raising money to cover the cost of legal document prep, foreclosure and bankruptcy defense. This does not include any repair costs for the real property or property preservation costs such as force placed insurance and tax advances.

Investing in whole loans is a business and industry with a lot to learn. That learning curve is conquered over time and experience. It is good to start the journey but realize that journey really starts with figuring what you do not even know yet. Certainly attainable but I would recommend to take it slow at start. Trying to break into the industry, especially with investor capital, too fast and with a diminished skill set can be very costly.

To address the specific OP concepts, there are note investor who purchase assets on a nationwide basis. The premium or discount will depend on the note and party. New origination's trade for premiums in the secondary market and distressed notes trade for discounts everyday.

As with any asset, there are counter-parties who will purchase the asset. They all have varying criteria for the note and security instrument as well as the geography and other parameters.

It is difficult at best to create downstream trades with no capital from the first buyer who then turns seller. In due diligence, it is very clear who the owner of the asset is. So buyer 2 could simply contact the real owner.

Another missed concept, you are not likely getting any account information without first signing a non-disclosure agreement with Seller 1. So showing Buyer 2 the loan, which Buyer 1 does not own is a violation of that agreement.

Further and perhaps the most important, the concept of this downstream trade is dependent on Buyer 2 paying more than Buyer 1. Not a safe bet all the time. Nor is assuming the Seller will sell at a price which includes a margin for Buyer 1. If Buyer 2 is a market bid, then Buyer 1 is delivering a bid less than market, so you may not even get into the trade to begin with.

Mortgage servicer which provide services to one off investors typically do not report as the cost of reporting the agencies and setup are expensive. I know as an example, FCI which is a common street level mortgage servicer does not report. You might try BSI or Allied or simply Google search and call around and inquire.

I too have had a credit facility for note purchases. You do not see many street level or small balance facilities as the remedies of breach of contract are cumbersome and expensive.

When a mortgagee pledges the note to the credit provider, a U.C.C. lien is used in most cases. This may or may not include additional guarantee depending on the credit provider. In one of the more secured structures, the note along with an assignment and a note endorsement are all executed and put into an escrow for the benefit of the credit provider upon contract breach.

Some other credit facility structures include all the loan payments to be sent to the credit provider which then nets out their fees and passes the balance through the note investor. This is a bit more like a typical receivable contract finance situation. So the mortgage servicer would pay the credit provider and the credit provider would pay the note investor.

The barriers to this type of credit being readily available to street level investors are the cost of structuring the deal and the costs of default remedies. It simply does not pay for a credit provider to do these types of deals on single assets as in most cases the issued credit would be less than $180k. A 3% setup fee of $5,400 would not be enough to pay for the legal prep and due diligence needed to underwrite the note. Even doubled at 6%, still a tough deal. BTW, look at how much back lash street level investors give when it comes to fees on hard money lending. A one off investor is likely only worth a couple of these types of deal as they do not have sufficient equity to do more deals to begin with.

Another and equally important barrier for widely available one off note financing for street level investors is underwriting the note investor. Most current credit providers want to see years in the business. This helps ensure some internal systems are setup at the note investor's shop. How he will deal with delinquency and default borrower situations matters. Fact is, from the experience angle, most street level folks simply do not have the experience to rep and warrant back to a lender on these types of assets.

Are note credit facilities available, yes, in fact they are far more abundant than most think. Many lenders both conventional and private have some form of credit facility. These are usually multi-million dollar facilities where the cost of setup can be recouped over the life of the facility.

It is important to note, a mortgagor (borrower) default event which makes the note investor who took the credit insolvent is a two layered event. If the credit facility default is a function of the borrower default, you must first take possession of the collateral for the credit facility and then you must also deal with the defaulted note itself by way of some form of mortgage disposition either foreclose, re-trade the note, etc. to get the credit facility capital back.

There is no standard forms in the note business. No standard note listing agreement and contracts vary depending on the principals, loans and deal structure.

Where do you plan on listing the note? There are sales sites, but your a broker, they normally don't put brokered assets on their site.

You can likely search Google for loan purchase and sale agreements. The part to attend to inside the contract will be the representations and warranties the buyer and seller make to each other and any buyback provisions that get offered.

Any broker to principal form is not standardized and you can simply draft one on your own or have an attorney do it.

Need to get educated on the topic of loans, eh?

Only know the surface on the topic of loans.....??

Now that you have been slightly insulting, you have my attention. Please educate us, as the several hundred million dollars worth of loans I have purchased, sold and managed likely didn't teach me much.

If the sale price of the home is $60k, you will not qualify for a conventional loan. The loan amount will be too small as the minimum is $50k.

It might be possible to approach the Seller's bank and ask if they would allow you to assume the loan. This will have a fee and underwriting to it, but would be an easy way of getting it done. You then would have to capitalize the repairs on your own. You might be able to get the bank to issue some additional capital if you ask; since the capital will be used on the subject property. If you don't ask, the answer is "No".

It is unclear if you meant you want a HELOC on your primary residence or the subject property or some other property. If it is not the subject property, then once you get the loan you can use the funds as you desire.

Another option is looking at a Subject To Sale. Since you have relations with this person, that might be the next easiest thing to do to get into the house. Again, with this you need to capitalize the repairs.

You might also think about asking the Seller to conduct the repairs but build the repair cost back into the Sale Price. That would but the purchase price at $80k, which is above the loan minimum. In this case, the Seller would have to complete the repairs prior to your purchase in most cases.

The final option, would be seek a purchase and rehab loan. As needed, look at conventional loan programs first. Some lenders allow for the purchase money and repair money to be in the total loan amount.

If all of that fails, you may want to explore private financing to purchase and repair the home and then exit that loan with a conventional loan. You will need to be mindful of the exit loan underwriting criteria including title seasoning and repair value increase caps.

Good Luck.

I am so glad my buddy Bill Gulley said this: "....I'm totally against one property one LLC, that is expensive and totally unnecessary in any state."

I could not agree more! I didn't want to rain on anyone's structure but it is a bit silly to have one property per one LLC. It seems to steam from a bit of a misunderstanding of what you get from putting a property into an LLC.

The LLC is the protection and as Bill states, insurance is the first line of defense. So the LLC prevents, provided no pierce of veil, liens and seizure of personal assets deriving from the assets inside the LLC.

So then, do you need to protect claims derived from Subject Property A from attaching or attacking Subject Property B? Well if you even slightly prudent and put hazard insurance on your property, then fundamentally most issues are going to be covered. Are there a slew of "what if", sure but you can just as easily talk to your insurance agent and increase those portions of your policy that you have concerns are not enough. The nominal impact to your premium cost is much less than the administrative cost of a whole other LLC.

Justin Greiwe, you would join the manager into the asset LLC via the Operating Agreement or Articles of Incorporation depending on the state.

The manager would have an Operating Bank account. The asset LLC would have an Operating Bank account for income and expenses. The Asset LLC still needs a bank account to operate with, it should not use the Manager's account or vice versa.

The function of joining the manager into the asset LLC, is the manager becomes an owner and can enjoy the legal rights of being an owner opposed to a third party contracted vendor who does not own. It to an extent, removes an administrative layer that if not setup that way should be adhered to. The easiest example is capitalizing the asset from the Manager's Bank Account, which would be not be possible the it was a true third party or if they are both the same natural person it avoids co-mingled funds to some extent since manager owns the asset, he can capitalize it.

When you do distributions is up to you. Typical capital market distributions occur every period. I don't know too many folks who want to wait 1 year to realize their return.

Ron, what you are asking about is called raising capital. If you are raising capital with the intent to loan it out, stand in the middle of the room, look to your left, that is the regulations around raising capital and then look to your right, that is the regulations around lending money.

How to raise capital in compliance with SEC/FINRA is a whole set of discussion on their own. Who you raise money from, how much, how you solicit and how you structure the investment....all things that would fall into that concept.

Provided you gain an understanding of all of that, it becomes a function of raising the capital in either equity or debt or a combination of the two.

From the outside looking in, it would seem that the bank found it easier and better to afford the credit to the LLC client, which you mentioned had two other loans and not just you as a natural person. This can simply be due to underwriting conditions unique to your bank. They get the best of both worlds, attracting business banking clients and also getting a personal guarantee without having to ask for a personal guarantee, to some extent.

It is unclear how much you objected to the addition of the You LLC onto the title. I suppose, that would be interesting to hear, if you objected, what did they say to you? It is also unclear, is this a stand alone mortgage or was this put up as collateral for some form of business line of credit. Regardless, I suspect it is a credit situation and tactically fairly smart by them. This LLC owns two other assets, which the bank holds loans for. Affording some additional level of collect-ability across all three assets now.

The bank couldn't "force" you to vest in the LLC, nor could the bank force the change to the contract. However, they could simply say, you as a natural person do not qualify for the loan.

The response you made, saying this was just a "transfer" seems a little miss stated. If this was a transfer and not a sale, then why did you need a bank involved? Well, the answer is, this is a sale.