Non Performing Loans - Simple Case Study

[Chris Seveney]

We are seeing more and more people looking to get into note investing. The easiest way to explain it for many is we are similar to home flippers - with the difference being in lieu of fixing up a property that is in distress and selling it, you do this with the borrower. Here is a simple case study of a recent loan:

Amount Needed to bring loan current: $18,560

Loan Payoff at Purchase: $77,426

Acquisition Price: $41,500

Property Value: $400,000

We acquired this loan in April 2023 as part of a pool of 16 other loans. The borrower was 11 months behind on payments and between the payments and legal needed $18,560 to bring the loan current.  

We started legal after acquiring the loan and got a foreclosure sale set for October 2023. 

Once the borrower realized we were serious and the foreclosure date was set, the borrower reached out in September with a Financial Hardship Application.

We analyzed the financials and offered a trial payment plan along with a loan modification upon completion of that payment plan. 

As part of the trial payment plan the borrower was able to put down $3,000 towards arrearages and agreed to an increased monthly payments.

Borrower has made 6 months of consistent payments and we modified the loan to have the past due rolled into the unpaid principal balance. We have received $15k to date and have the loan under agreement to sell to another investor as a reperforming loan.

This is BEST case situation but it is not uncommon if you do it right. 

[Chris Seveney]

Quote from @Account Closed:

Quote from @Chris Seveney:

We are seeing more and more people looking to get into note investing. The easiest way to explain it for many is we are similar to home flippers - with the difference being in lieu of fixing up a property that is in distress and selling it, you do this with the borrower. Here is a simple case study of a recent loan:

Amount Needed to bring loan current: $18,560

Loan Payoff at Purchase: $77,426

Acquisition Price: $41,500

Property Value: $400,000

We acquired this loan in April 2023 as part of a pool of 16 other loans. The borrower was 11 months behind on payments and between the payments and legal needed $18,560 to bring the loan current.  

We started legal after acquiring the loan and got a foreclosure sale set for October 2023. 

Once the borrower realized we were serious and the foreclosure date was set, the borrower reached out in September with a Financial Hardship Application.

We analyzed the financials and offered a trial payment plan along with a loan modification upon completion of that payment plan. 

As part of the trial payment plan the borrower was able to put down $3,000 towards arrearages and agreed to an increased monthly payments.

Borrower has made 6 months of consistent payments and we modified the loan to have the past due rolled into the unpaid principal balance. We have received $15k to date and have the loan under agreement to sell to another investor as a reperforming loan.

This is BEST case situation but it is not uncommon if you do it right. 

I'm a hard asset type of guy, so bear with me here,
I understand the foreclosure process, done a ton of those, so arrears and payoffs and legal fees etc, I get.
Loan modifications, I've helped a lot people get those. Property value is obvious.
It appears that the payoff + arrears is about $95,986 and about 24% LTV.

What exactly is the Acquisition Price: $41,500?

Did you pay $41,500 Acquisition total to the previous lender and transfer the loan, assuming the risk of the missed payments and amount still owing?

or did you have to pay the arrears of $18,560 + $41,500 Acquisition for a total of $60,060 to take over the loan in it's current status?

or did you have to pay the arrears of $18,560 + $41,500 Acquisition and $77,426 current loan amount, for a total of $137,486 to take over the loan in it's current status?

Was it a Fannie/Freddie loan, VA, FHA or private loan?

Why were they behind on their payments? What changed?

Does interest rate play a role?

Is it Judicial or Non Judicial?

First off these are excellent questions. 
Clarify:
1. Payoff included the arrears so its not $95k but the $77k.
2. Acquisition price is how much I paid for the loan.
3. Yes we bought it at a discount. So we paid $41.5k for $77k worth of debt and took on the risk with this borrower.
4. Arrears are what the borrower owed. So they had roughly a principal balance (or UPB) of $59k + 18k arrears = $77k
5. This was a loan that a non-bank lender kept on their books and eventually sold to us.
6. Great question about being behind. They lost their job during COVID and never sought additional assistance. They now were gainfully employed but the prior lender wanted them to get current on all payments and was not interested in a  Mod. 
7. Interest rate was 6.5% and it does play a role, but not a huge one. 
8 This was in a non-judicial state. 

Hope this answers your questions.