Buy note, foreclose on the property, rent/flip?

Question

Is this a viable strategy, to find a local note, buy it if its non-performing and just foreclose and rent or flip it? How hard is this to do?

What are the steps involved in doing this?

Does this happen alot?

Appreciate any responses (especially from dion and dave)

J Scott · Answer

As others have stated, but I think needs to be repeated for the OP -- just because you foreclose doesn't mean you'll end up with title to the property.  It's very possible that someone will be willing to purchase the property at auction for the total owed (including all fees and penalities, etc), and if you try to outbid them and win, the amount you pay over and above the total owed may legally be able to be claimed by the borrower you foreclosed upon.

Dion DePaoli · Answer

Justin,
	 
	 The question is a little broad to some degree.  Is it viable to purchase a loan that is in default and finish the foreclosure?  Yes it is.  Obviously, you will need the capital to purchase the note and pay for the advances including foreclosure fees and other advances to protect your interests such as paying for property insurance, taxes and other related advances.
	 
	 Not all foreclosure processes and events are easy and/or simple.  Many things will impact the ease or complications that will be involved with completing the process.  The list of those concepts is too numerous to list here.  It is possible to buy a loan and have defects within the paperwork or origination or servicing process amongst other ideas that provide barriers to completing the process.  Those issues can cause an investor to loose some or all of their investment money.
	 
	 Ownership of real property is not a right or guarantee that comes with an investment in a loan.  The Mortgagee has a right to collect the amounts due under the note including principal, interest and advances.  A property can go to foreclosure auction and be sold to a third party and the Mortgagee will never take title.  The Mortgagee will be paid what is due from the sale proceeds and any overage from that amount will be dispersed to junior lien holders then the borrower.
	 
	 Further, large equitable gains realized by a Mortgagee can be recaptured by a borrower in some instances such.  This idea can be found in cases where a bankruptcy is filed around the same time or shortly after foreclosure runs it course.  In addition, large equitable gains can be grounds for considering a Wrongful Foreclosure action against the Mortgagee.  These ideas and a couple other ones similar to them are what tends to be overlooked or omitted in some plans by newbies and by some of the guru strategies.
	
	I am not sure I can describe hard or easy in regards to these concepts.  They just are what they are.  More experience with these matters affords better understanding like seeing the different angles here in the thread of your question.  
	Foreclosure is a state governed process.  You can search on line for the process for each and typically find descriptions of the process on the state website or attorney websites.
	
	Does a foreclosure resulting in a property reverting back to a mortgagee who then resells the home happen a lot?  It has happened often in the past but as we reduce the inventory of foreclosures and as property values more and more homes may trade at foreclosure auction.  It the property doesn't go at auction it will be title to the Mortgagee or vice versa, so there the odds are somewhat 50/50 in that matter, only two results are possible.

Mario Am · Answer

@Justin B. Any news justin?

Joe Stafford · Answer

I have completed transactions just like this. My advise go for it if the numbers work. Foreclosure can be an expensive nightmare or cheap it depends on your laws and the owner. I was super lucky on one where I provided a satisfaction of mortgage in exchange for a quit claim deed. Cost me $300 and 2 days to foreclose. I then had to pay back taxes and HOA dues as well as repair the property.

This note holder called me.... so as to finding more, I'd like to know too!!!

Doug Smith · Answer

@Justin B. Sure, it can be done. The concern that I have for you, outside of things that others may mention, is that your home market of Ohio is a bear to foreclose in. We actually avoid buying loans in the State unless the deal is part of a much larger bulk buy. You may find that the time value of money is not worth the time you have to wait for the foreclosure to go through. You may get lucky and the borrower may sign the property over to you through a deed in lieu of foreclosure, but this requires relatively clean title and a borrower that doesn't want to fight. Good luck.

Dion DePaoli · Answer

You could also seek to find well seasoned foreclosure files so you don't have to wait so long.

I agree, finding is harder than it sounds.  Sounds like they NY loan is only a year in, those files take some time.  They provide a mandatory mediation which in early stage FCL can be a good way to get in and get out but that can also be a barrier to large returns.  
	
	Three years of taxes, insurance and other advances add up pretty quick.  The classification of safe is subjective to the desired out come and investor.  Geographic concentrations and exclusions impact can be limited, since faster process states will have higher purchase prices for the asset and vice versa.  The sooner you can collect and the lesser required capital to do so the more valuable the asset and higher the price.

Account Closed · Answer

To answer original poster's question, the main issues I see are:

1) Finding local notes is harder than it sounds.

2) Foreclosure isn't something you do like writing offers on MLS homes. It usually takes several months if not years. ie I have a foreclosure in process in New York. It's a killer deal in terms of expected return and it's 99.9999% safe. But.. gotta wait another 2 years before FC is over!

You could try to focus on one geographical area, in a fast state, but it is a lot easier said than done.

Bill Gulley · Answer

Buying a note is not buying the property, you step into the lender's shoes, as Dion mentioned, you're only entitled to the loan amount and costs. If you take a property and fail to obtain your cash and any possible equity the owner had, sleep well because you may very well get sued. The concept of collateral interests are spelled out in Sec 9 of the UCC I believe.

Now, if the owner willingly gives you a deed in lieu then you will own it.

Say someone else was foreclosing and that borrower was will to give a deed, you might buy that note and then deal with that owner, that's fine. :)

Buy note, foreclose on the property, rent/flip?

Most Popular Reply