My 1st NPN

[Steve Hodgdon]

I'm new to note investing and decided to take a learn by doing approach. I own some commercial real estate, ran a property management business for a while (ugh!) and owned a collection agency for 17 years.  So distressed notes seem to fit my experience.

What I bought:

A 1st from Harbour Portfolio through a Southern California broker. He sold me one account from a pool.

It took a few weeks for the hard file to arrive from NAA, Harbour's servicing entitiy.

I boarded the loan at FCI and hired a local experienced attorney to start the foreclosure process. Paid a $2500 retainer. $500 over the Fed guideline. I had a trusted local reference.

Why jump straight to foreclosure? I think I will every time. Urgency will help bring borrowers to the table.

All contact #s for borrower are no good. TLO had 2 potential hits, both parties claim no contact with borrower. Borrower made a $1600 down payment on a $32,000 note. Never made a payment. So, no reason to attempt a workout.

Harbour had repossessed this home from prior borrower. In fact they sold this home 3x over 5 years. Pictures from 2014 show a house that is marginally inhabitable at best.

Taxes are owed for 2015. $1400.

Property is assessed @ $60k. UPB including taxes and interest is $38,000. I paid $14k.

I believe I'm paying for my education. Broker has been very forthcoming with advice and experience.

By the time I get possession in 6 months, I'll be about $20k into the property. A pipedream sale @ $30k, but likely $25k.

I'll update as events warrant. I'm hoping to share newbie mistakes with my fellow BP'ers and get back new connections in return. Please feel free to comment.

Best of luck to all.

[Don Konipol]

Seems lot a lot of work for a rather small payoff, IF you are able to collect on the rest of the LC payments without more attorney fees.  If not a loss may be the ultimate result.  When time is figured in you already lost money.  I believe this is "the best" outcome with these toxic assets.  Other outcomes would involve taking 3 to 5 years getting ownership cleared, paying attorney, taxes, insurance in the mean time, and finally getting possession of a property so deteriorated that its declared a dangerous building and leveled by the city government, resulting in a near total loss of all invested.  When you average it all out, buying mortgages that have been picked over by hedge funds, investment partnerships, and bulk buyers, and are whats remaining, can not result in a profitable experience, on average, especially with adding a reasonable cost for your time.

I guess I somewhat understand the individual investors fascination with these NPLs.  The fascination appears to be based on the following misconceptions

1. I can buy NPNs at a low price

So what? A bad investment at $10,000 is still a bad investment.  If all you have is $10,000 why not use it for a good investment?

2. I'm acquiring the note for a fraction of the principal, so my downside is limited.

The real criteria is the price you pay in relation to its VALUE. The amount of the principal owed is not the notes value, and UPB can be a very misleading figure.

Further, the amount you lose can be far in excess of the amount paid for the note.  You can end up paying large amounts for attorney fees, property taxes, insurance, etc.  The amount you can lose can be double or triple the amount you paid for the note.

3. Buying NPNs are a way to acquire real estate for significantly less than its market value

Except that when you purchase a note you are not acquiring real estate, you are acquiring a promissory note secured by real property.  Your ability to turn that note into  clean ownership title depends on the laws of the state the property is located in, possibly the rulings of a bankruptcy judge, the quality of the paperwork associated with the note, how the note was serviced, existing liens and encumbrances on title, future liens and encumbrances on title, city code enforcement and violations, and about a dozen other things you won't know about until they happen.

While it is possible for an individual investor to make a profit on any individual NPN, a large enough portfolio of these NPNs purchased from institutional "left overs" will result in a guaranteed loss.