96 performing contract for deed note offering

[Serge S.]

I've been offered a note portfolio but have not had much experience here. Looking for guidance and what you would pay for this deal.

96 Contracts for deed and note modifications.

Total BPO value $3.29

Total unpaid principle balance $2.58M

Monthly principal and interest $21k

Also - who would you use to service the loan and what would that cost??

[Dion DePaoli]

Originally posted by Serge S.:

Thanks. They are 96 contracts for deed and note modifications. Its a sale by an appointed receiver. The problem is they allow very little time for DD (less than 10 days) and one day to close but there is little competition.

This is fishy and risky. Most sellers with any legitimate experience will not expect buyers to conduct due diligence and close in 10 days plus 1 on 96 assets. This sounds like a broker-joker fire-drill. I would never have my team attempt to conduct diligence so fast, it is reckless and we are pretty good and efficient at what we do. You will barely have some of your vendor services back such as your title run downs and property valuations. Let alone, time to review them.

This whole Contract For Deeds bulk sale idea has tried really, really hard to take off over the last several months but it is plagued with problems. The assets are plagued with 'underwriting' deficiencies similar to sub-prime mortgages of the past. The home was acquired on the cheap, fixed and then sold, many times above market value, based on a payment to a buyer/borrower. The maker of the instrument usually doesn't see past their nose. Most of the time, the borrowers are not properly underwritten. Think about it like this, I have seen folks use a rental application as the means to underwrite a 30 year contract with a buyer/borrower and minimal supporting documents. As long as they could keep the payment low and the borrower 'thought' they could afforded, then it didn't matter. It's selling a payment not a house. The Seller does't care, since most of the time, the sale price has a hefty margin in it above acquisition, rehab and holding that any rental payments are simply icing on a triple chocolate fudge cake with ice cream.

Clearly, this pool has much of the same characteristics. A 'reperforming' pool of contract for deeds, eh? I am guessing they are not that seasoned, like over 10 years, and much of these were written in the last 2 to 3 years. So you have a pool of buyer/borrowers who within 36 months already have trouble paying the bill. And, if the pool has a WAC of around 9.0% what on earth was 'modified'? They deferred principal or something silly more than likely, essentially not eliminating or softening the burden, they just kicked the can down the road to make it your problem. That concept points me back at the idea of non-institutional type owner trying to make a quick buck and not a prudent investor and portfolio developer now trying to exit. In short, bad on bad.

In regards to putting a price on the assets without performing any look or due diligence, well that is just plain silly. To suggest all re-performing loans trade at 40% of UPB is ignorant. That is simply not true. I have traded re-performing loans at double that level in both directions. Would 25% to 40% of BPO price be considered a deal? Depending on the asset and features, along with the buyer/tenant detail, it could be a deal and it could be a nightmare. Pricing loans and other secured debt obligations doesn't boil down to such a simple metric. If anyone ever tells you it does, they have zero idea of what they are talking about.

The QCD feature here is also another red flag for me. As Bill targets, why is warranty not being included? There is a reasonable answer, where a buyer might say, "OK" to that question, funny thing is you will not find it 99.9% of the time. I am guessing the QCD, is because you are not really dealing with the owner of said assets and they are trying to jump in the middle of something and use your money to close on the transaction hoping to make money on the difference between your bid and the seller ask. Those scenarios usually end up looking like a fire drill, like this. I suppose you could easily get to the bottom of this by reading a couple of the CFD contracts and see what type of deed you as the owner/seller have to convey to the buyer/tenant. If the contract requires you to deliver warranty deed and you only get a QCD, you get stuck warranting title behind you, which could have it's own risks.

One of the other elephants in the room from the post I see. A pool of CFD's in receivership? So, some type of action is happening against the owner/seller that involves these assets. Otherwise, there would not be a receiver. Were these assets used as collateral for credit, is the owner in BK, a receiver in and of itself demands to understand the reason they are present. If this is some type of default on credit line, I would just put another check mark on the side of poorly underwritten, it could not hold it's own and service the debt. Not a good sign to say the least. If I had to guess, it's a a story and not a reality made up to promote the fire drill. As Bill points out, a real receiver is not going to (a) burden themselves with a fire drill created by themselves and (b) put them selves in a position to not obtain highest market value. Why not simply call a national real estate company and list the properties for sale and get 90% of market value?

Most institutional sellers, especially one that is experiencing receivership is going to usually keep control over deed redecoration. When I see the QFD needs to be filed by the buyer, that is contrary to ensuring, from a Seller point of view, the liability of the assets is removed properly. A sign, this is not really legit. Secondly, I am guessing the receiver would not relinquish that much control to begin with. Again, under the idea that a receiver is there because of liability the Owner/Seller had in the first place.

Doug mentions it, but I want to highlight it, if the Seller/Owner makes the condition you have to use their due diligence material and that is why the short time frame exists.....RUN!!!!

I lean toward the side of pass on this from an OP experience point of view. Way too many potential issues that I don't believe are being seen. To some extent, coming to BP and asking in a post to price out a pool of 96 assets, speak to the same lack of experience and know how. This might not be one single nightmare, it may be 96. Bear in mind, the issues pointed out here in Bill's, Doug's and my post are only high level interpretation and much, much larger issues will likely surface as more details are looked at. Details, we only skimmed here.

Serge, if you have $1.0 Million plus (based the inquiry of 40% BPO bid), I suggest you find an experienced loan seller or broker or investor who has access to either loans or CFD and think about scaling your education down significantly to one or three assets so you can get an idea of what you don't know and learn a thing or two about the asset class(es) that you are interested in without starting your wallet on fire.