Buying a Note on a Specific Property

[Jacob G.]

If I were interested in a particular house, and I know that the owners have stopped paying their mortgage, is there any way I could buy the first or second mortgage?

Do the national guys sell individual mortgages, instead of lumping them together as bulk deals? Have you ever heard of a local bank or credit union selling individual notes?

How would one approach a credit union to buy a second mortgage that they issued, but are not receiving payments on?

[Matt Devincenzo]

Do a search (up in the right hand corner) this question has been asked a lot before and has some in depth answers.

In short if it's a big bank you're likely wasting your time, maybe if it is a small local credit union but still somewhat of a long shot.

[Doug Smith]

It's been our experience that we can buy severely delinquent firsts well below 50% of the value of the underlying collateral value...sometimes much lower than that. That, however, is when the institution is offering us the loan. If you approach them about a specific loan, however, your answer will be considerably different. Put yourselves in the bank's shoes. If you are the special assets officer and you get a call from someone wanting a specific note, it's obvious that they want that specific property. You're probably not going to get the note for any less than you would get the property in a short sale. Notes are great...that's our business, but going to a bank unsolicited and requesting a specific note will not, in all likelihood, yield you a significant discount. You might be better off negotiating a short sale on the deal. Perhaps someone else had had better experience chasing a specific note, but we've found that it is a different ballgame than being offered notes in a pool that an institution or fund is trying to unload. Good luck with your quest. Let me know if you ever want to talk through a deal. I'm happy to help.

[Tom Goans]

@Jacob G.,

Based upon your questions, before you go any further, may I recommend you take the time to learn everything there is to know about the business, especially the laws.

State laws vary with each state. One consideration is the redemption period. A critical consideration.

Never buy a second unless you have the cash to buy the first at the same time.

If a loan secured by real estate is delinquent, there may be other liens that must be considered before buying a loan in any position.

Remember, the finance institutions are full of highly educated and experienced people in this field. They have a file folder on each property and borrower that is probably more than an inch thick. Yet, they are now the proud owners of a non-performing loan. One that may require the upfront investment of thousands of dollars in legal fees to resolve. Then there are the holding costs during this period. Then there may be redemption period issues. The list and costs can go on.

I have been involved in real estate financing, including buying loans, since the 1960s.

[Dion DePaoli]

@Jacob G. , I agree with Tom. You might want to do a little more research on the topic of buying loans. I would say both legal and practical.

There is an undertone of wanting to get the deed out of this event which adds another layer of complexity and is not a direct result of purchasing either a 1st or 2nd lien.

To directly answer your question, a smaller bank will have a bank representative who has responsibility for the loan that is in default. Sometimes in smaller banks this is the banker who originated the loan, sometimes it is just the guy/girl in charge of delinquent and defaulted loans.

Your steps would include look up the property and pull the instruments or names off the instruments. This will include any mortgage or deed of trust and any subsequent assignments. This will lead you to the last know investor who owned the loan. Then how you choose to make contact with them is up to you and a matter of practicality. If the bank is local, perhaps you go in to chat. If not, you will be forced to call. Understand if you are calling into the servicer and not the investor, the servicer in many cases will not be able to do much for you. They do not always possess rights to sell off the loan only to service it, so in that sense you are not talking to the right person/entity.

Understand the investor who owns the loan and the servicing company who services the loan usually are not the same entity. Nor are they related oftentimes. They are more so directly linked when dealing with small community and local banks.

You can give it a try, for sure. Results will vary.

Also understand, you are more than likely viewed as a counter-party risk. Sometimes banks simply will not sell to a novice. Can often be the case for small community or local banks who want to stay on the good graces of the community. This is because bad collection attempts or violations of regulations can reflect back onto the bank which sold you the loan. Say for instance, you desire the property (clearly the case) and the borrower wants to reinstate. The borrower sends in sufficient funds to reinstate and you as the new mortgagee deny the borrower, after all you want the deed to the property. Borrower will sue and the list of defendants will include the prior bank owner of the loan and you. They include the former institutional owner as usually they have more money and assets for lawyers to try and go after for damages. The public seems to be fond of 'blood from a bank'. Additionally, no bank wants to be headline news with bad press.

There then is the whole valuation barrier which gives way to the offer you make on said note. You mentioned either a 1st or 2nd which are certainly similar assets but the lien position changes the value and disposition strategy at times. 2nd liens can be more of a collection play opposed to really being able to have the property revert back through foreclosure as a remedy. In the event the property has two liens and regardless of which one you pursue, understand there is now two investors who desire to recover from the property the unpaid balance of their loan plus fees and interest. To that extent, you compete with each other.

I am a firm believer there is a price for every asset which if offered a Seller will sell. That price is not always relate to what the Buyer wants to offer or should offer. So there is an on-going gap between the bid and the asking price for distressed loans in the marketplace right now.

[Jacob G.]

Thank you all. I should have been more clear that I don't have a particular property in mind, nor am I in a position to do anything now, but was thinking of this as a possible strategy for down the road.

What got me thinking about this was a short sale that came up on my local MLS. I called the real estate agent, and he said that the first mortgage had given them a price they would be willing to take, but the second wasn't really working with them yet, and had denied a previous offer (an offer, which I thought was way too high for the property). That and having seen another short sale where the second mortgage accepted less than $0.10 on the dollar.

I was wondering if this could be a good strategy in conjunction with buying short sales, however, it makes sense that the holder of the loan will be less likely to sell it to a third party for pennies on the dollar.