1st NPN - Risky?

Question

Hello Guys and Gals,

I'm doing due diligence (preliminary) on a potential NPN in the detroit area and was looking to get your thoughts/ideas on the this potential deal.  More specifically the risk with NPN's with large sums of back taxes and when the borrower is delinquent for 5+ years.  Below are the details...

Property Type: Single Family in Oakland County, 3 beds 1 bath with basement

Occupied: Yes potentially (I have someone checking) but I don't believe it's the borrower (homestead)

Tax: $15,000 owed in back taxes

Delinquent: 2010-present (actual maturity date of loan was 2013, so it looks like it was 15yr loan, unless data I have is wrong?)

Rent in area: $750-$950

Market Value: Realtor says MV is around 50-60K in that area (provided CMA), I'm having someone drive-by and snap external pictures this week.

UPB: 69K while orig balance was 60K

Bid: Seller hasn't provided any pricing

BPO: haven't ordered yet

O & E: haven't ordered yet

What i'm struggling with is assessing the risk due to the delinquent time frame and amount of taxes owed.  Do you follow the same principles on placing a bid with this type of asset?

Thanks in-advance

Jeff Rabinowitz · Answer

It is unlikely you will work out a repayment plan with the occupant if they are the delinquent homeowner. They have been paying nothing for 5 years--anything you come up with will be more than that. If the occupant is a squatter they must be removed. The UPB is immaterial. Value the note based on the current value of the property and the expenses of removing the occupant and foreclosing. Leave enough room to cover unexpected expenses and to make it worth your time to tackle the project.

Jason Fuentes · Answer

Think I'm going to pass on this one but I appreciate everyone's responses

Bob E. · Answer

Iif you are looking at a recent tax statement then I think you are in the right place.

Jason Fuentes · Answer

@Bob E.thanks for your response, tax statement  says it going to the house in question, would that information be somewhere else?

Bob E. · Answer

You should be able to check online and see where the tax bill is being sent.  If it is not the property in question then you either have a landlord playing an end game or a squatter.

It is possible there is a renter in the house so check the loan docs for an assignment of rents clause.

Bob

Jason Fuentes · Answer

@Mike Hartzogthanks for your reply still evaluating if I should jump in.

Mike Hartzog · Answer

Jason I think you are the right track with your last paragraph.  Your biggest risk for NPNs generally is collateral value/condition.  CMAs and BPOs generally assume a saleable condition on the interior, and I have found that this is rarely the case with these lower value homes.  You cannot inspect the collateral, so you need to account for the cost of a major rehab in your projections.  Crime is another thing to pay close attention to.  It can be tough to get good contractors to work in high crime areas.

Jason Fuentes · Answer

@Jeff Rabinowitz@Bob MaleckiI appreciate the feedback...

Honestly I don't think the occupier is the borrower, I believe the borrower is renting out the house and just collecting the cash but i'm not 100% sure.  Reason I say this is because the property is 0% homestead, not the owner's primary residence as of 2013? Sorry for the confusion in my 1st post I stated just homestead.  If the person staying in the house is not the homeowner would there be a way to find out if the people in the house are paying rent prior to purchasing the note?

So if the property in its current state is really worth 30k but mv value for that area is 50-60k I should subtract tax, water,foreclosure and other unexpected expenses from the 30K value and use that as a starting point for my bid?

Thanks in advance

Bob Malecki · Answer

I agree with @Jeff Rabinowitz although if the borrower is the occupant and they would have to move into a rental, if you can mod the loan to be par or lower than a 2BR rental then they would be apt to 'stay and pay'. Plus you can use their arrearages as a negotiating tool, like forgive part of the arrears if they pay some cash towards them. We had note where the borrower had not paid for 5 years and we were able to collect $10K cash to forgive his entire $25K in arrearages. He's been mostly current in his monthly payments after we executed his loan mod.

Also I think Michigan is a Hardest Hit Fund state so you may want to find out what they require for a borrower to get financial assistance through the HHF fund agencies. If the borrower qualifies, you would get some level of revenue from the state.

Hopefully your borrower is still there and wants to play ball. If not then you may have squatter issues which is no fun whatsoever....

1st NPN - Risky?

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