Buying non-performing note of abandoned property
Real Estate Investor · Member since 2011 · 6 posts · 0 votes
I am interested in buying a non-performing note of a property in California that is tied up in BK and has been abandoned for several months. Ultimately I would like to foreclose and acquire the property. The former owner (borrower) has left the country and is unlikely to dispute any foreclosure proceeding. The property has no equity (worth less than 50% of the first) and thus is of little interest to the BK trustee/court. There is no 2nd and some relatively small liens and tax default amounts involved.
Can someone on this forum please explain 'credit bid' and how that comes in to play at the foreclosure auction? How does the amount that I pay for the note affect the outcome? For example; if I pay $100k for a note of $300k and the property is worth $150k can I bid above what I paid for the note at auction (without adding any additional money) since the original note was for $300k?
Thanks for any input!
OK, the note is purchased at a discount, the cost to acquire the note is irrelevant.
The amount to bid in, or deamnd is the outstanding principal plus accrued interest to the date of demand as stated in the demand, plus costs of collection and any amounts that were expensed in safeguarding the property, such as weatherization, title search, paying hazard insurance premiums, taxes or other such reasonable expenses in protecting the collateral security. The total of such amounts less any escrows held which can then be applied to offset amounts due in accordance with the note and security agreement. The remaining total is the amount to bid in as the amount to be indemnified from the sale, no more.
A note holder can ask for less, depending on the market. Bidding in a lower amount may be done to move the property, but if the note holder agrees to take less than the amounts owing, they will be limited in seeking any deficiency from that sale. In order to seek a deficiency the note holder needs to make an attempt to collect the full amount due. Don't get a short sale confused with foreclosure where less is agreed to but where a deficiency can be required or sought.
The BK Trustee has a duty to collect all that the market will bear for the benefit of other creditors. If any claim is made that an amount is greater than what is actually owed, that would simply be fraudulent. Having someone bid at the sale over the amount owed is clearly acceptable and paying the total amount of the winning bid.
Did that do it? sorry if I missed it...thanks Steve!
I don't know what the "credit bid" means, or even how the foreclosure process really works from the note-holder side of things, but if you own the Note and you are the one foreclosing, aren't YOU the one who sets the minimum bid? I'm guessing you can't set a minimum bid for more than what is owed, but other than that, I would think you could set it to whatever you want. It doesn't matter what the property is worth, it matters what is owed, which is why most houses in a foreclosure auction (at least here in LA) go to the bank. As for what you paid, I would guess that it doesn't matter, either.
But again, I don't KNOW. You should speak with a real estate attorney who is intimately familiar with the foreclosure process. Your questions could likely be answered in a half-hour conversation.
Hopefully Steve will pop in and give you the thread where this has been discussed recently (or someone more technologically advanced than I, lol).
The foreclosure is to indemnify the note holder of amounts due and costs, that's all. If you are saying you want to buy the property at your own foreclosure sale, I suggest you use a straw man, someone to bid for you, buy it and flip it to you.
You have a problem trying to show at a foreclosure sale that you want to buy it, even at a higher price, it would look like your motive is to acquire the property rather than receive amounts due under the note, which could be a problem for the BK Trustee....that would indicate that there is money for other creditors.
I suggest you go with the note plus costs at sale, as required and have another bid a purchase that you could work with later on. Much cleaner that way.
Bill,
I don't think the other threads cover what the OP is looking for. If I grasp the question correctly, here is what I think is being requested:
Note is purchased for discount. Property goes to foreclosure auction. Noteholder (potentially the OP) sets starting bid based on costs (as you suggested). If OP is noteholder, OP would like to bid up to the full debt owed on the note. And the original note amount may be quite different from the actual accrued debt - it is the debt amount that the noteholder is entitled to receive. Would noteholder have to pay anything on that bid?
I am not from CA so I can't be certain this is the rule there. But I believe that the noteholder in due course is entitled to collect on the full amount owed, regardless of the amount the noteholder paid to obtain the rights to hold the note. Assignments between banks happen all the time (and they happen with discounts too), and the banks always foreclose at the amount of the debt even when they are noteholder by assignment.
The fact that things are in BK means that it won't be going to foreclosure right away. The BK will either have to be discharged (debtor pays off the obligations of the BK as agreed) or dismissed (debtor fails to pay as agreed). If discharged, foreclosure might be dropped, since the noteholder would have been paid and the loan should be re-instated.
OK, the note is purchased at a discount, the cost to acquire the note is irrelevant.
The amount to bid in, or deamnd is the outstanding principal plus accrued interest to the date of demand as stated in the demand, plus costs of collection and any amounts that were expensed in safeguarding the property, such as weatherization, title search, paying hazard insurance premiums, taxes or other such reasonable expenses in protecting the collateral security. The total of such amounts less any escrows held which can then be applied to offset amounts due in accordance with the note and security agreement. The remaining total is the amount to bid in as the amount to be indemnified from the sale, no more.
A note holder can ask for less, depending on the market. Bidding in a lower amount may be done to move the property, but if the note holder agrees to take less than the amounts owing, they will be limited in seeking any deficiency from that sale. In order to seek a deficiency the note holder needs to make an attempt to collect the full amount due. Don't get a short sale confused with foreclosure where less is agreed to but where a deficiency can be required or sought.
The BK Trustee has a duty to collect all that the market will bear for the benefit of other creditors. If any claim is made that an amount is greater than what is actually owed, that would simply be fraudulent. Having someone bid at the sale over the amount owed is clearly acceptable and paying the total amount of the winning bid.
Did that do it? sorry if I missed it...thanks Steve!
This stuff varies from state to state, and I don't know CA law. Here in CO it is pretty common to start the bidding at the foreclosure sale at a price lower than what is owed and to file a deficiency for the remaining amount. So, at least for CO its not necessary to start the bidding at the full amount owed to be able to file a deficiency. In the information provided by the public trustee (that's a county position here), they explicitly show both the starting bid and the deficiency amount. Feb 10 2011 sale results for Denver County
So, in the example, if the OP buys the $300K note for $100K, he could start the bidding at any amount up to $300K If he wants the property, he could start at $300K and ensure nobody else will bid. If a lower starting bid is offered, someone else might bid and get the property.
The problem I see with this deal is the owner is gone and has filed bankruptcy.
What Steve said above is correct. What you paid for the note should be of no consequence at sale.
Yes, Jon you're right in that you can start below what is owed. And state law governs. As a note nolder I could bid in a lesser amount and hope to generate bidding activity. And my point was not that if I didn't receive the full payoff after starting at a lower bid that I was barred automatically from asking the borrower to make up any deficiency. But, as a note holder, if if I repossessed a car and auctioned it off, if I did not make an attempt to collect the full amount in good faith, in other words I asked for a lower price with the intent of sticking it to my borrower, such tactics are disallowed when the judgment is sought.
The cost to acquire the note is irrelevant???? Purchase price, your appraisal if any, running title if you did....all costs of acquiring the note are only relevant as to your investment and taxes.
And OH! I see your question Steve, no, the difference between the disount and the par value of the note does not need to be paid for in any way. Now, on that there may be some states that might limit you to that actual cost, but I doubt it. My reasoning here is that secondary notes are sold at a discount with servicing retained. When there is a foreclosure the servicing fee (basically) stops for the collection of payments and it moves to foreclosure fees, but the par value is what is due under the note.
That would be like buying any asset at a good deal and being barred from selling it at market value just because you didn't pay a higher price. What I buy is a debt for 300K, that is the amount assigned to me for the consideration given, regardless of the amount given.
I have had many borrowers who talked to the old note holder who told them what they sold their note for (and I have to thank them all and point out the confidentiality part of the sale, lol) and then the borrower tried to tell me that all he had to payoff was what I paid for it! Wrong! A few minutes on the phone explaining it to them, they either got it or didn't....or didn't want to understand. The obligation is what I bought, what I paid for it is irrelevant, that is the amount I'm due.
Well you'd have to work with the BK first and foremost, even if you bought the note along the way, in that you may have to wait until the discharge is rendered before proceeding.
Second, ignore the whole foreclosure auction bit. Once you buy, close, and own the note, YOU are the bank. End of story, especially as you're buying it before any foreclosure auction or trustee sale.
So the whole "courthouse steps" auction thing can go by the wayside. The easiest way if you can work with the BK lawyer/getting in touch with the original owner is just do a deed-in-lieu once you own the note properly and you can quietly take possession of the property (then do whatever you want with it). Not to mention you don't have to report it on any credit reports of the owner (the BK is already bad enough). However, by doing a deed-in-lieu, you would have to pay the small liens and taxes off as you are now the owner of the property...if they are that small, you're better off as it'll be less hassle then going through any foreclosure/court proceedings. (tax defaults, heck, maybe you could even negotiate them down a bit...who knows?)
Third, you are buying the note based off of the current market value of the property after doing your due diligence on it...if the unpaid balance is underwater, so be it...it'll be a bigger "discount" that you need (and sounds like you'd get one heck of one right now). If the lender/bank wants too much, pass. It's not worth it. Don't pay "full property value" plus repairs (likely something needed as it's been abandoned for a while), unless if you are renting it out, it still cash flows nicely with your setup, or you love the place so much you're willing to pay that much...
Thank you all for your responses! Great information and much appreciated. I am finding this site to be a wealth of valuable information and feel fortunate to have found it.
So, I understand that purchase price of the note is irrelevant - the full value of the note is still the obligation and what would be due to me as the note owner. Since my ultimate goal is to acquire the property it seems that buying the note & foreclosing is a sound strategy in that I would then have the leverage to effectively lock other potential bidders out since no one in their right mind would bid up to the value of the note, which is more than twice what the property is currently worth.
I like the idea of quietly taking possession of the property via a deed-in-lieu but that would likely be difficult as the original owner is purposefully in absentia. He did some creative refinancing just before the real estate market fell apart, pocketed the cash and disappeared, apparently out of the US. The paper trail indicates he knew exactly what he was doing and never intended to make good on the note.
I spoke with the BK trustee's counsel and he said that if I were able to secure the note and prove that the property has no equity (easily done), the BK court would abandon the property, which would then allow me to proceed with the foreclosure. I deal with a BK attorney who would facilitate note purchase and navigation out of BK court.
I will only purchase the note at a a deep discount - repairs, market, what is unknown @ the property, etc., indicate anything other than a deeply discounted note purchase would be foolish.
A few more questions:
1) With the original owner out of the picture is there any way to proceed with a deed-in-lieu through the BK trustee/court in the original owners absence?
2) If no to the above and I need to proceed with the foreclosure, is there any state (CA) legislation or other bureaucratic barriers that would delay my ability to foreclose? It seems banks are routinely postponing or canceling foreclosures in California and I am concerned that underlying factors I am unaware of may affect me accordingly, leaving me in foreclosure limbo.
3) Is there any way the original owner could weasel his way back in to the property if I were to proceed with purchasing the note/foreclosing? Mortgage payments are delinquent for about 1.5 years but the original owner is real estate savvy and may possibly utilize any loophole available, perhaps through another party.
Thank you all again for your valuable input!
It's my understanding that the lender is willing to sell the note. And that the borrower is in BK. The bank can sell the note, they can walk away from the claims in BK, the BK court has no reall effect on anyone making the claims, however it has been listed as a debt and in the process now, you would want the court to approve the sale without placing the claim in jeopardy.
Putting your situation in the same boat as other banks, in this case, is not really the same thing, since the court can order the sale of the sale of the property to cure the default and specifically allow you to proceed to take the property. I have no idea why foreclosures may have been slowed, I could think of dozens of reasons, but again, if the court sets it aside, you probably have a clear path to proceed.
You can ask the BK Trustee if the court would order the delivery of a Trustee Deed or QC as a short cut. In all of the bankruptcies I have been associated with for creditors (note holders) we simply proceeded with foreclosure or when the borrower was there, asked for and obtained the deed-in-lieu, but the court could order this as well. You need to ask.
As to loop holes, state law may provide a right of redemption and notice from the note holder usually starts that clock for the borrower to post a bond for redemption or state if they elect to retain the right to pay the obligation, but again, the borroweris in BK and will not be in a position to pay for anything or pay any debt without court approval. So again, it's a mute point. The court orders the disposal of the note/property, that's it.
As I mentioned above the borrower could always get with a straw man to buy the property at foreclosure, but the borrower would be treading on thin ice in doing so, attempting to work a deal to circumvent a BK court order, but that's another issue. More importantly, if you bid in the outstanding par value, balance with accrued interes as I mentioned above, anyone bidding would have to bid that amount or more, which means you wouldn't have to mesperty for a tidy profit! You have already said that no one will [ay that amount since the property is underwater.
There is no flim flam razamataz that the borrower can do to redeem the property that would not require him to pay the full amount of the note, so again...you win. But if there is a right to redeem the collateral, there will be a time limit. Buy the borrower will be required to give notice of the intent to do so and if he does not, such right is waived. I think I'm beating this to death, like I said, he can't pay off anything anyway in BK.
If the court agrees to allow the note sale without losing the filing (which is no boig deal) and orders the property sold or assigned to cure the obligation, the game is over! You have a slam dunk deal. Check inusrance, the Trustee will usually ensure that is paid. Pay any taxes accrued or other liens if the property is assigned without predjudice.
Get with the Trustee and you should be able to work this out. Good luck...
The one thing I see post foreclosure is that the occupants try to drag things out now. They will declare BK, they will contest legal actions. And of course properties do get trashed quite terribly by occupants about to lose their "possession". The debtor in your case could come back to legally occupy the property once you acquire the note (you still have not foreclosed or received a deed), and could try to do any of the above.
You just never know for certain, there's always some risk you'll end up taking.
I will explore the possibility of the Trustee's Deed with my lawyer and Trustee/Trustee's counsel. That seems a straight forward and seamless solution. Also, the bank is slow to do anything without the BK court's blessing so indication that they would ultimately issue said deed would likely calm the bank's jitters and nudge things along.
Thanks again for the great ideas.
I'll keep everyone posted...
Consider the timing of the BK. If the court allows the sale before the discharge you are pretty well on easy street. If the court orders the disposition as I mentioned and say the bankruptcy continues with other matters and is discharged 30, 60 or 90 days later, I doubt the borrower will be showing his face as he would be in violation of a court order. Talk to the trustee, it's in his best interest to get things moved along and off his plate