Bought a 1st Lien Non-Performing Note: Foreclosure vs Short Sale

[Cody Krecicki]

I'm about to purchase my first distressed note on a property near Chicago for a whopping 1.98% of UPD it'll cost $977 or so. Original loan value was for $52,000 the property is worth $35,000 after doing some research. It has $6000 in tax liens on it. It is also vacant an 120+ days no payment. Owes balance is $50,000

This will be my first investment flip.

As the 1st lien holder of a property like this: should I short sale it or foreclosure on it? It'll take 90-120 days to go through the foreclosure process and it'll cost $3,500 in fees.

How would a short sale work out on this investment? I'm doing this from out of state in Nevada. I don't want to have to go there and get my hands dirty.

[Bob E.]

@Jay Hinrichs Thanks for the Tag.  Our note ended up working out very well but it took over two years to resolve through the court system.  We were all in for ~25k and netted 59k and change after closing costs.  If I could build a solid portfolio of these I would but it is rare to find a del like that these days.  More then likely that note would be 40k in today market, add in taxes and legal, rehab and things can get thin. In our case the owner had passed away and her nephew was living in the property.  Once we cleared liens through the FC process they were more then happy to buy from us and, since it was occupied by the buyer, there was no rehab needed.  As you know this whole scenario is a rare set of occurrences.

@Cody Krecicki  Definatly get in touch with a local lawyer.  @Joe Mueller  might have someone he can refer you to.  I had our servicer handle all contacts with the lawyer, I think they used Pierce in downtown.  I would defiantly secure the property- that process should also give you a chance to get some inside pictures so you can estimate the repair cost and decide if it is worth investing anything else in the note.  By far your best value is going to be to pull title check for liens, and if possible, to get a Deed in Lieu from the owner.  If you can't find them consider hiring a private detective - it could save you years of time and thousands of dollars.  

I do know some people that will have the DIL go to an entity they own other then the one that holds the note.  They then rent it out and foreclose on themselves.  This gets possession much sooner, allows for cashflow much sooner, and allows them to stop the decline in property condition.

The challenge with NPN notes in low price band neighborhoods is you can easily spend 30k on a rehab, add in back taxes and legal and you need a really wide margin to know you are going to make money on the note if you have to take back the property.