Note Investing: Like Watching a Jerry Springer Episode Unfold

[Chris Seveney]

In the world of note investing, you never know what you’re going to get. Just when I think I’ve seen it all, a due diligence case like this one lands on my desk. We’re looking at a seven-figure property in Texas, tied to a non-performing loan. Simple enough, right? Think again.

Here’s where it gets interesting: The borrower passed away without a will. Now, two women are vying for the right to be executor of the estate. Why? Because the borrower wasn’t just a property owner but a business owner with millions on the line. The twist? Both claim they were married to the borrower via Texas’s common law marriage rules. Woman #1 was the mother of his two children, though they split five years ago (but during covid she and the two kids were living with him and woman #2...). Woman #2 was his partner for the last three years until his death. Both allege they were his common-law spouse.

I am imagining this playing out like a live Jerry Springer episode, with probate court as the stage and legal claims as the punches. It's a situation where if it was a springer episode each party would have to be separated after the fist fight/hair pulling contest with one getting thrown in the crowd. 

While the circumstances may seem entertaining, the reality is this is not a laughing matter. Delays like this—especially in probate—impact our timelines and profitability. If we buy this loan, we need to have a thorough game plan on how we are going to be resolving this and understanding these dynamics is key to managing expectations and protecting investments.

[Jonathan Greene]

I see you more as Maury Povich in this scenario, Chris. You will reveal who the executor is or is not.

This is another example of why note investing is not easy or for the faint of heart. It is very complicated; like a snowflake, each transaction is different.

How do you decide risk vs. reward here? It seems like there should be a dividing line somewhere to make it easy, but also maybe not because both of these ladies seem to have pretty solid claims although I would think the last one has a better shot.

From a legal POV (although this is not legal advice although I am an attorney), without a will the estate gets probated along blood lines. If both ladies had wills naming them the executor or beneficiary, the last one dated, if valid, would prevail. The fairest would be to have an independent executor.

[Chris Seveney]

Quote from @Jonathan Greene:

I see you more as Maury Povich in this scenario, Chris. You will reveal who the executor is or is not.

This is another example of why note investing is not easy or for the faint of heart. It is very complicated; like a snowflake, each transaction is different.

How do you decide risk vs. reward here? It seems like there should be a dividing line somewhere to make it easy, but also maybe not because both of these ladies seem to have pretty solid claims although I would think the last one has a better shot.

From a legal POV (although this is not legal advice although I am an attorney), without a will the estate gets probated along blood lines. If both ladies had wills naming them the executor or beneficiary, the last one dated, if valid, would prevail. The fairest would be to have an independent executor.

 Yes lots of moving pieces and honestly, I have NO clue how this gets settled - but what I have  a CLUE on is I have the rolodex of attorneys who I can pick up the phone, call and understand this process and know what questions to ask to understand the risk - such as - what if we petitioned the probate court to use an independent 3rd party (if we buy it).... What does that process look like, how long does it take... 

Yes the risk in this case is time. So lets say its a $1M loan accruing 12% and I pick it up for $800k (or 900k), time could be my friend or my enemy depending on the value of the home. But if this is a 3 year resolution its very different than 6 months.

[Edward Condon]

@Chris Seveney

[Dan Deppen]

This guy sounds like a character. My bet on the next twist is the death turning out not to be natural causes.

[Don Konipol]

Quote from @Chris Seveney:

In the world of note investing, you never know what you’re going to get. Just when I think I’ve seen it all, a due diligence case like this one lands on my desk. We’re looking at a seven-figure property in Texas, tied to a non-performing loan. Simple enough, right? Think again.

Here’s where it gets interesting: The borrower passed away without a will. Now, two women are vying for the right to be executor of the estate. Why? Because the borrower wasn’t just a property owner but a business owner with millions on the line. The twist? Both claim they were married to the borrower via Texas’s common law marriage rules. Woman #1 was the mother of his two children, though they split five years ago (but during covid she and the two kids were living with him and woman #2...). Woman #2 was his partner for the last three years until his death. Both allege they were his common-law spouse.

I am imagining this playing out like a live Jerry Springer episode, with probate court as the stage and legal claims as the punches. It's a situation where if it was a springer episode each party would have to be separated after the fist fight/hair pulling contest with one getting thrown in the crowd. 

While the circumstances may seem entertaining, the reality is this is not a laughing matter. Delays like this—especially in probate—impact our timelines and profitability. If we buy this loan, we need to have a thorough game plan on how we are going to be resolving this and understanding these dynamics is key to managing expectations and protecting investments.

Sounds like a deal more for someone that buys partial inheritance estates and spends years piecing it together than a note investor.  I was caught in a probate case on a note I owned where the subject property was located in Dallas.  The judge in charge of the case was accused of secretly having sexual relations with an attorney arguing a case before her and was suspended while under investigation. No other probate judge was willing to take on the case.  Meanwhile the property was deteriorating and tenants complained and got Dallas County Housing Authority involved.  

The final out come was very unfortunate, but very luck for us.  The property deteriorated so much after 3 years of neglect and vandalism and squatters that Dallas County ordered a “tear down” order and leveled and cleared the property, slapping on a municipal lean.  Finally the probate case was heard, the “inheritor” obtained ownership, and we foreclosed.  Meanwhile, in the 4 years in limbo massive redevelopment was occurring in the area, and we were offered an amount equal to our investment plus a reasonable profit by a developer.  

[Rick H.]

My probate expertise is limited to the many THOUSANDS of deals that I’ve done in California since 1978. Otherwise, I’m ignorant of other state laws.
However, fact patterns are frequently similar and and become easier to resolve (or run away from).

The property is subject to competing spousal claims. Had a number of these before. Obviously, seek marriage certs and death certs for starters. Are there competing probate petitions?
Wonky Wills?
Are both parties represented by legal counsel?

Also, if I recall Texas law (oops, see above) it’s only state that I think imposes a statutory stay on foreclosures pending probate. That’s a problem if trying to enforce a security position as a lender or Noteholder.

You may gain control but economics will dictate structuring a deal to pay the problem spouse something as a “lovely parting gift.” 

[Chris Seveney]

Quote from @Rick H.:

My probate expertise is limited to the many THOUSANDS of deals that I’ve done in California since 1978. Otherwise, I’m ignorant of other state laws.
However, fact patterns are frequently similar and and become easier to resolve (or run away from).

The property is subject to competing spousal claims. Had a number of these before. Obviously, seek marriage certs and death certs for starters. Are there competing probate petitions?
Wonky Wills?
Are both parties represented by legal counsel?

Also, if I recall Texas law (oops, see above) it’s only state that I think imposes a statutory stay on foreclosures pending probate. That’s a problem if trying to enforce a security position as a lender or Noteholder.

You may gain control but economics will dictate structuring a deal to pay the problem spouse something as a “lovely parting gift.” 

 Yep texas puts a six month hold.

[Chris Seveney]

Quote from @Chris Seveney:

Quote from @Rick H.:

My probate expertise is limited to the many THOUSANDS of deals that I’ve done in California since 1978. Otherwise, I’m ignorant of other state laws.
However, fact patterns are frequently similar and and become easier to resolve (or run away from).

The property is subject to competing spousal claims. Had a number of these before. Obviously, seek marriage certs and death certs for starters. Are there competing probate petitions?
Wonky Wills?
Are both parties represented by legal counsel?

Also, if I recall Texas law (oops, see above) it’s only state that I think imposes a statutory stay on foreclosures pending probate. That’s a problem if trying to enforce a security position as a lender or Noteholder.

You may gain control but economics will dictate structuring a deal to pay the problem spouse something as a “lovely parting gift.” 

 Yep texas puts a six month hold.

 To update this, we are closing on this loan on Tuesday. After spending hours on due diligence and speaking with two different attorneys. What is interesting is the property is not in probate because there is no administer and it is within the purview of the BK court (converted to Ch 7 from Ch 11). Motion for relief has been granted and green light to proceed with foreclosure. So will see how it goes and keep everyone up to speed. 

[Andrew Syrios]

So basically note investing is really trashy and you're looking for a continuous stream of income but instead of alimony or child support it's loan payments instead? 

[Dan Deppen]

Quote from @Andrew Syrios:

So basically note investing is really trashy and you're looking for a continuous stream of income but instead of alimony or child support it's loan payments instead? 

 Whether you are getting a continuous stream of income depends on the deal. I believe Chris mentioned this was a non-performer when he went into it. Buying cash flowing notes is certainly a lot easier :)

[Don Konipol]

Quote from @Andrew Syrios:

So basically note investing is really trashy and you're looking for a continuous stream of income but instead of alimony or child support it's loan payments instead? 

Note investing can be divided into performing vs non performing.  Performing notes the investor makes money from the monthly payments at a ROI determined by the payments and the amount paid for the note.  If the amount paid to purchase an existing note is below the principal balance or more correctly, the unpaid balance, the investor will benefit from an early payoff to the tune of the discount.  
Non performing notes have two different possible outcomes. One is that a modification agreement can be reached and the debtor starts making payments as agreed to.  Alternatively the debtor can payoff the note either in full or at a negotiated discount.  As an example we purchased a $3.2 million non performing note for $1.875 million, and offered the borrower a discount to $2.65 million for a payoff.  So far we have collected about $280,000 but the borrower has been unable to pay us off.  
The second outcome of purchasing a loan in default is foreclosing and ending up with property ownership.  

[Andrew Syrios]

Quote from @Dan Deppen:

Quote from @Andrew Syrios:

So basically note investing is really trashy and you're looking for a continuous stream of income but instead of alimony or child support it's loan payments instead? 

 Whether you are getting a continuous stream of income depends on the deal. I believe Chris mentioned this was a non-performer when he went into it. Buying cash flowing notes is certainly a lot easier :)

 Well by the same token you can get awarded child support from a dead beat, doesn't mean you're getting any money out of it. 

[Rick H.]

If you’re looking for a reason NOT to take a particular action, you will always finds it 

Although I started investing in foreclosures in ‘78, I didn't buy my first Note (a 2nd DOT) until 1989.
What a wonderful, wild ride that was! 
Could not have anticipated all the problems and I had yet to invest in Note education. 
I would NEVER trade that experience for anything, despite the hassles. 
The toothless homeowner taught me so much about humanity and character as well as what people are will to do and say to keep their house. 
BIG LESSON: Know what borrowers are capable of doing when in fear mode. Be a Boy Scout and Always Be Prepared. 

[Rick H.]

My email feed brought this discussion up, again.

I’m perplexed at how some posters read too many things into other’s posts. 
@Don Konipol has it right!
While there is money in polishing turds, early note investors should focus on solving problems that they have some experience in resolving. 
A non-performing note is unlikely to produce cash flow but profit can be harvested from enough protective equity. However, you’ll need to kill the cow to make the stew. 
Not mentioned, is recognition of other opportunities that a well-secured note may provide strategically, if placed well. Eg., I’ve occasionally foreclosed on notes merely to clear title.

[Chris Seveney]

Quote from @Chris Seveney:

Quote from @Chris Seveney:

Quote from @Rick H.:

My probate expertise is limited to the many THOUSANDS of deals that I’ve done in California since 1978. Otherwise, I’m ignorant of other state laws.
However, fact patterns are frequently similar and and become easier to resolve (or run away from).

The property is subject to competing spousal claims. Had a number of these before. Obviously, seek marriage certs and death certs for starters. Are there competing probate petitions?
Wonky Wills?
Are both parties represented by legal counsel?

Also, if I recall Texas law (oops, see above) it’s only state that I think imposes a statutory stay on foreclosures pending probate. That’s a problem if trying to enforce a security position as a lender or Noteholder.

You may gain control but economics will dictate structuring a deal to pay the problem spouse something as a “lovely parting gift.” 

 Yep texas puts a six month hold.

 To update this, we are closing on this loan on Tuesday. After spending hours on due diligence and speaking with two different attorneys. What is interesting is the property is not in probate because there is no administer and it is within the purview of the BK court (converted to Ch 7 from Ch 11). Motion for relief has been granted and green light to proceed with foreclosure. So will see how it goes and keep everyone up to speed. 

 update the seller has taken a week+ to review our loan sale agreement (which is very cookie cutter)....

[Chad U.]

Quote from @Andrew Syrios:

Quote from @Dan Deppen:

Quote from @Andrew Syrios:

So basically note investing is really trashy and you're looking for a continuous stream of income but instead of alimony or child support it's loan payments instead? 

 Whether you are getting a continuous stream of income depends on the deal. I believe Chris mentioned this was a non-performer when he went into it. Buying cash flowing notes is certainly a lot easier :)

 Well by the same token you can get awarded child support from a dead beat, doesn't mean you're getting any money out of it. 

 The difference between a deadbeat dad not paying child support and a mortgage note is that you have the security against the property. So you will get your money one way or the other, either a borrower starts paying or you get their property in return.

[Andrew Syrios]

Quote from @Chad U.:

Quote from @Andrew Syrios:

Quote from @Dan Deppen:

Quote from @Andrew Syrios:

So basically note investing is really trashy and you're looking for a continuous stream of income but instead of alimony or child support it's loan payments instead? 

 Whether you are getting a continuous stream of income depends on the deal. I believe Chris mentioned this was a non-performer when he went into it. Buying cash flowing notes is certainly a lot easier :)

 Well by the same token you can get awarded child support from a dead beat, doesn't mean you're getting any money out of it. 

 The difference between a deadbeat dad not paying child support and a mortgage note is that you have the security against the property. So you will get your money one way or the other, either a borrower starts paying or you get their property in return.

 I know, all my comments on this have been facetious