Does "the bank" always win?

Question

Dion DePaoli · Answer

Patrick your characterization of my posts is not entirely on point. While I do indeed bring up points around potential issues and liabilities I have never not provided a solution to any thread. I would even venture to say I provide an abundance of detail to the same.

In my opinion, that is much of what the boards are about. I do not see it as being the harbinger of doom but rather identification of risk typically otherwise unidentified. Perhaps my vantage point on those matters is different than some, I have been around the industry for a long time and I have experienced loss and seen some pretty messed up assets and situations. To some degree, I would impose on to myself an obligation to bring those points up since I do have knowledge of it. I also view the boards as way to help folks think about the asset class not just a place to list steps for resolution. Teach a person to fish instead of giving them a fish and all that. I also think the nature of the boards, to some degree, warrants the mention of those risks simply by the mere void of information that sometimes occurs in posts seeking answers.

From a deal perspective, believe it or not, my posts are how my brain works. That is how I look at our deals but admittedly, I tend to have a better grasp on the facts with file and data in hand. I like to think of it as iterations on the matter coming from my experience. I see the concerning concept until I prove it is no longer a threat. While many situations with loans can be resolved, there is a counter-balancing side of that equation where in fact they can not. Perhaps much of that also stems from the grade of loans that I think many here on the boards find themselves getting involved with. That lingering idea always tends to set off my concerns. I simply can't find myself being all pie in the sky.

So I suppose my point here is, what you have been recently referring to as theory are actual risks that can and do come up. Do they come up in every deal? No. Can some/many be cured? Yes. Can all be cured? No. Clearly it depends on the issue. Further, the absence of a cure for that defect usually warrants a new course of action.

Like I said, my gift to the boards is to help folks think and rationalize around the asset class. I know there are a fair amount of folks who enjoy and find value in it and I would venture to say those folks seem to out number the ones who think of those responses as negative nancy.

Happy Holidays.

Patrick Desjardins · Answer

And you portray that all these loans have major problems, which simply isn't true. It's a disservice to readers of this forum to constantly beat into them that they are fools for buying notes and that they will lose their money.

So yeah, I'm all for listing all the things that can go wrong... As long as it's understood that if you do your due diligence and a decent network of vendors and attorneys it's the exception and not the rule.

I'm sorry Dion but not every note people buy will have incurable title defects, or bad origination.. no matter how hard you try to sell that story.

Dion DePaoli · Answer

Patrick you have this persistent message of theory vs reality.  What are the theoretical problems that do not materialize in your view?  Further, are we to assume that since you haven't experienced them they in fact, do not exist?

Bob Malecki · Answer

Great discussions, guys. My simple answer to Daniel's OP is that there are many ways to lose money in NPLs as there are in any real estate investment. Thorough due diligence is a major key to help mitigate this and even then -- you have no guarantee based on some of the other situations that both Patrick and Dione cite here.

Its a somewhat different set of risks than let's say, owning a rental for flipping a property, but in my world the risks with NPLs are easier to control and work around. I'd rather be a lender any day over being a landlord.

Bob

Wayne Brooks · Answer

All good points above, knowing what you're doing and what to look for, can eliminate the majority of the risks.  But, from the phrasing of the OP's post, he likely doesn't know the things to look for that most note buyers know.....like another thread here where someone is buying a note for $2k, then finds out there is over $20k in back taxes and city code violation liens, on a boarded up house in who knows what condition, and quoting value off of neighborhood comps(in perhaps good condition?), hopefully before he actually bought the note.

Patrick Desjardins · Answer

We agree and I fail to see where the disagreement is.

My point is simply that if you buy notes intelligently, you're going to make money long term and major problems are going to happen very rarely. Not that they never happen - just not as often as is often portrayed here.

The best analogy is the one about the due on sale clause. It exists. Yet people still buy subject-to every day and still sleep at night.

This stupid thread about listing every ways you can lose money in notes makes it sound like it's a daily occurrence. It's not. All this does is reinforce the underlying belief that notes are too risky and you shouldn't buy them unless you were a title examiner for the state of Missouri or other nonsense. A guy who buys one first mortgage per year, institutionally originated, isn't likely to run into major issues.

I would venture a guess that most of the posters on this forum that are getting any success with this investment are self-taught or learn through the various educational programs. The person is a much bigger risk in my mind than the actual note they buy, as we learn when problems arise and don't have the systems in place that a bank would have.

Going back to the things that can go wrong: taxes, HOAs, vandalism etc are a daily concern but they're also the easiest problems to mitigate.

Patrick Desjardins · Answer

Just a quick reminder though that these are theoretical problems that are rare. It's like the good ol' slip and fall for rentals. Can it happen? Yes, and people get insurance. But it's not like it's a daily occurrence.

Dion DePaoli · Answer

There are numerous ways to lose.  You won't be able to really create a list as loss can come from all sorts of angles.  As mentioned, competing claims to the collateral.  Enforcement issues.  Regulatory and compliance liability.  Lots of issues can be mitigated but will require capital to be deployed into the asset.  Throwing good money at bad investments is obviously not a wise thing.  A lot of the risk can be mitigated with good due diligence and understanding the laws pertaining the jurisdiction of the subject property and properly enforcing the remedies provided in the security instrument.

Ed W. · Answer

@Daniel Fierros Everything that @Patrick Desjardins said plus:

Legitimate Occupant or Squatter doing substantial damage (I've bought burn-outs from this)

Governmental agency condemning the property and tearing it down (happened to a note investor within the last 6 months or so and he learned about it when I couldn't find the house he wanted to sell - the land was now a community garden)

Note and/or mortgage improperly or illegally written or originated or not properly executed.

Assignment docs not properly executed and/or recorded.

Substantial decline in the value of the collateral due to the local economy (major employer shuts down, etc.)

Substantial violation of various laws related to credit.

Failure to have title insurance and having a valid title claim arise

You not catching that the note seller sent you a mortgage and/or note for a different property.

You filed the foreclosure and waited a year or so to get to court only to find out that the filing and/or service wasn't correct or complete and you have start all over again or, at a minimum, wait for another few months while the errors are corrected.

The list isn't endless but can be very long.

Patrick Desjardins · Answer

If you pay too much, if you get wiped in bankruptcy, if you let tax sales go through, HOAs in some states, incomplete collateral that prevents you from completing the foreclosure..

There are multiple ways to lose but most of the above can be detected in the due diligence or fixed after your purchase.

Does "the bank" always win?

Most Popular Reply