?How much should one pay for a 1st position NPN?

Question

It would seem that if the formula for buying a fix&flip is 70% x ARV - Rehab, then the formula for buying a NPN that you intend to foreclose/fix/flip should be x% x ARV - Rehab, where x% is less than 70%, but what is x%?? I say x% should be less than 70% because of the extra cost and risk in gaining possession beyond a normal fix and flip.

Tevis Verrett · Answer

@David C. Pleased to be able to give back to my brother. In the thought process, let me take you around to the other side of the pricing argument. . . For a $1MM investment I can buy a pool of NPNs nationwide for as inexpensively at ten to seventeen cents on a dollar (definitely not in CA-which is more expensive). If I want to buy onsie twosieys, I can buy from a contractor whom buys the same pool and then marks it up. At that point the same NPN cost 30-45 cents on a dollar. . . .note: never close to 50 cents on a dollar. Commercial NPNs do run as high as 65 cents on a dollar, and it is because they are more stable. I would never take a bet of anything above 40 cents for the same reason that Charles said, you dont know what is inside. Also, the notes available to me have the homeowner still in the property, giving us numerous exit strategies (loan mod, deed in lieu, forclosure and leaseback, etc. . .) Hope this helps, and please give me call for further clarification. I will put you in touch with my source. . . heck sounds like an eventual lunch get together! Tevis

Account Closed · Answer

Charles and Tevis: Thanks for your response! @Doug Smith I guess I should be a little more specific, I'm looking at buying one or two at a time, not a whole portfolio. With a whole portfolio of NPN firsts sitting in front of me, how do I know which one to buy? It seems I would need some kind of a screening tool like a simple formula to even begin to pare down the list before diving into a full analysis. Unless I'm missing something, discount from UPB doesn't help much in making this determination, it tells me zero about the value of the property as compared to the purchase price of the note which is what I really need to know. I'm guessing that when looking at list of 500 NPNs you don't also have the full file for each one. I like your comment about the time value of money coming into play, I knew I had to do something about the extra time involved with NPNs in getting clear title but hadn't thought of it from a TVM perspective. Having said that, if one sticks to trust deed states in should not be too big a consideration.

Doug Smith · Answer

The guys above are right. It's a question we face every day when we are buying for our portfolios. There are many, many factors that enter into the pricing of a NPN. Seldom do two experienced professionals come to the same conclusion. Keep in mind that the time value of money is going to come into play heavily on your decision with NPNs. In my home State of Florida, a foreclosure can take up to two years, where in a Deed Theory State, such as NC, MO, or VA, the process can be 60 to 90 days. Borrower intent also plays a big role. Is there evidence in the file that the borrower might be willing to do a deed in lieu of foreclosure, such as a listing agreement with a realtor and a request to consider a short sale, or is the evidence that the borrower wishes to fight you in the process. What about the title work and back taxes? If there are several judgements and liens against the property, you may have to foreclose or spend more money settling out all of those items even with a helpful borrower. Back taxes can actually enter into your favor as you can typically discount out your offer price to compensate, but you'll often be able to wait to pay them until you sell the property later on pushing your cash on cash yield higher. The bottom line is that one can't simply use a catch-all math formula to come to a price. Start with your quick-sale value (one that you think it the quick-sale...don't take what the BPO says as gospel), back off realtor commissions on the sale, legal costs for the foreclosure, taxes, the time value of money, liens/judgments, maintenance costs (lawn mowing, etc) and, if you are going to swing a hammer and rehab, calculate all of that in too. Remember to factor in your required profit. I've been seeing an uptick on the asking prices for NPNs over the last several weeks. Stick with your model, don't deviate, and don't overpay for the NPN. If it isn't a deal that makes sense, walk. You'll do well. Let me know if you have any questions or you want to bounce ideas off of me. I'm always happy to help.

Charles Lovejoy · Answer

David, there are A LOT of factors that go into what is x%... With a REO you know what the inside of the house looks like; at least you should. With a NPN, if occupied, you may not be able to gain entry, leaving x% to be a "true" gamble unless you can somehow speak with the occupant and gain entry. Your rehab could be $5,000 or $50,000. You have to add your cost(s) to foreclose, your holding cost(s), and your rehab expense which will be a question mark (?)... So, YES, x% will be LESS than 70% but how much...undetermined until you can get in and inspect the property.