NPNs for a newbie

[Nathan Walter]

Hey there.. Since this is my first post let me introduce myself a little. I've been a RE investor for many many years. I started with a singe SFR and worked my way up to multiples and then into fix and flip and general real estate practices sales, appraisals, you name it really. Since it seems fix and flip is getting harder due to dummies buying homes that need $100k of work with $20k margins have almost run me out of business locally (if someone knows how to make money that way please let me know maybe I'm the dummy?!), I've been looking online at other ways to find properties and make money doing what I am good at at know. I stumbled across this forum and the idea of buying into non-performing notes. I've done a lot of reading here but one thing I can't find is the doom and gloom (other than the people posting you could lose all your money) I can't find any tangible downside. So maybe some of you smart people can work through a scenario with me?

I'm looking at a note online, non-performing for 12 months or greater, it's a first position note with no other notes or liens (that I've found) Note is 5 years old, note is 250k, UPB is like $255k sale price for the note is 50% so about $125k. Value of the home is about $375k. Now I'm going on the assumption that the home is run down on the inside (seller's website has a good looking recent picture of the outside, no damage, looks lived in still) So maybe they are having a hard time selling it for $250k or maybe they lost their job and just can't pay.. Whatever, doesn't matter. My options are shortsell for below market value maybe 200k and I walk with 75K; renegotiate loan, reduce principal, payments, etc and get them refinanced under government programs after 3 payments, walk with $75k or more; cash for keys they walk, maybe I dump $50-100k in remodel and sell the home for market value at $375k and walk with as much as $175k; foreclose, spend maybe $10-20k on legal fees, remodel as previous and walk with cash after maybe 6 months of work or more?

Ok so I found the plus side which honestly seems too good to be true.. Now tell me the bad?  Where does this go terribly wrong?  Tell me your worst story from NPNs.

[Bill Gulley]

Originally posted by @Steve Babiak:

@Bill Gulley - let's discuss the matter of when a mortgagee does get "fee" with respect to title (and not for late payments, foreclosure proceedings, etc. for those who were thinking of that type of fee).

In the first paragraph of page two of this link, you will find an excerpt that I post below.

http://www.invtitle.com/docs/general-underwriting-...

"By the middle of the Twentieth Century in the United States, only eight states - Alabama, Georgia, Maine, Maryland, Massachusetts, New Hampshire, Pennsylvania, and Rhode Island - still adhered to the theory that a mortgage conveys title to the mortgagee ..."

So would it be correct to surmise that in those eight states, that the note holder upon completing foreclosure does get "fee" title, and would not be bound to only recover amounts owed by borrower?  Or is there more to this "Lien Theory" vs "Title Theory"?

 In Lien Theory states, a lien is placed against title, a financial encumbrance where the owner retains title.

Title Theory states, a lender accepts title to property, retains title until the debt is satisfied. All rights of ownership in title are not taken, the owner retains possession and power of sale. After foreclosure the lender retains title, that doesn't mean an owner doesn't hold an equitable interest in the property. 

Collateral is to be sold to indemnify a lender or note holder (make the lender whole financially). 

Claims arise when an owner enforces their rights, seek indemnification for equity beyond what was owed to a lender. All states have "courts at law" and "courts of equity" which is in seeking justice rather than points of law. While a lender takes title in title states, their interest is to amounts owed and an owner may seek significant excess amounts of equity by asking the court to act on what is fair. This is why I said a lender wasn't going to be keeping a million in equity from a debt that's 10% of the value. 

I don't know that there is any set % for claims, I doubt it as it's going to be based on fairness rather than a dollar amount in title states. 

In lien states, the property or collateral is sold to indemnify the lender and excess amounts, to the dollar, is the owner's equity. A lender is not under any obligation, usually, to notify an owner of any sale or proceeds, the owner makes a demand of the lender. 

Either way, a lender should not be going in rehabbing collateral property, that simply increases the value that is to go to an owner in a lien state or can become amounts claimed in title states. 

The reason lenders don't move in or don't sell off the market is due to the lender's obligation to seek a fair value that may be due an owner, the lender is doing a little CYA dance by listing collateral on the open market or through an auction. Another dance is the deed used by a lender when they sell collateral, a Special Warranty or a Grant Deed or a Quit Claim (the only real exception to conveyances to third parties using a Quit Claim Deed). They are absolved of claims of equity in the property (but may be not to them as to how the disposed of collateral).  

After foreclosure a lender takes legal title with the power of sale and rights of possession. I won't go into the values a lender must carry the asset at, that changes in time, but while it is an asset, balancing the cancellation of debt, it is in limbo of sorts, in trust of sorts to be disposed of, why they call it "other real estate" or "real estate owned" which is different than real estate held for business purposes. 

Individuals are not banks or regulated lenders, but the theory of equity remains the same. Another issue, probably never spoken of by brokers, is the type of loan originated is made with specific and implied warranties by the originator, as notes pass through the hands of investors, those warranties don't just go away, the new note holder inherits them. The assumption of any borrower is that the collateral is sold to pay the outstanding debt, and this must be done for a lender to seek any deficiency judgment. 

The way to avoid all this in all states is for the borrower to offer a deed in lieu of foreclosure, acceptance of a deed granted extinguishes the debt and the lender may not seek any deficiency amount.      

Reality? Most who have a foreclosure walk away and don't look back, but I've found that when you're dealing with large amounts of equity, borrowers will be looking and if the collateral has unreasonable amounts of equity to secure a debt, the lender is at a disadvantage, not an advantage. :)