Foreclosure process/costs after purchasing non performing note?

[Samuel S.]

Hey BP,

So say I was to purchase a non-performing note, and ended up having to foreclose on the property...What would be the ballpark costs associated to execute the foreclosure? Would it be roughly the same as when traditional banks foreclose?  

I am just curious, as I feel like another exit strategy would be to just rent the property if the market value price was not worth selling?

Any input would be greatly appreciated!!

[Dion DePaoli]

A couple ideas to add here for OP.  The biggest cost in NPL's is time.  Often times newbies attempt to discover the true cost of dispositioning a NPL and the common jargon they use is "how much does it cost to foreclose?".  What that is asking is how much in legal fees can I expect to pay?  

As stated above fees will vary by state and firm accordingly.  What tends to be overlooked is the additional expenses involved in attempting to recover on the investment which will include past due and ongoing taxes, property insurance, property preservation and maintenance if the property is abandoned and servicing fees among some others.

Each of those cost categories have a periodic factor to them for the most part. Most of those costs will accumulate each month and many need to actually be capitalized on an ongoing basis. Lender placed insurance generally can be paid on a monthly basis, although depending on your vendor they may attempt to have you capitalize a longer policy and rebate unused premiums. Property maintenance such as mowing a lawn to avoid local fines can cost money every week or two. Past due taxes generally only need to be capitalized if and when they jeopardize your priority in title and ongoing taxes owed can be net from sale of REO if it comes to that. Servicing fees for full service servicing will run anywhere from $75 to $100 a month.

So every month the asset is not dispositioned you have expenses that can be a couple hundred dollars.   Above the cost to foreclose.  This doesn't include additional capital costs such as winterizing properties (Winter is coming), securing vacant property, cleaning up debris or REO repair.  Additional legal actions such as eviction and bankruptcy defense can also increase costs.

The point is, there is more to it than simply buying a defaulted loan and foreclosing.  So when I personally see responses to newbies regarding costs that don't get closer to tens of thousands of dollars, I cringe.  The basis of the discount which is agreed to for sale is based on both the amount of additional capitalization required to disposition the loan along with the estimated net proceeds from disposition.  The discount applied is more influenced by time than most other ideas.  We can see this idea in comparing discounts in states which provide quicker resolutions such as Texas which typically carries a lesser discount versus states like New York which carry deeper discounts.

Working with non-performing loans should not be a race to zero in regards to properly capitalizing the asset to recover the investment.  Unfortunately, all too often it seems to be sold and understood in that manner by newbies. 

To clean up another couple ideas, just because a lien has first position doesn't necessarily mean a DIL is possible or prudent.  Any junior liens would cloud title and taking a DIL would mean loss of priority and power of foreclosure to clear those junior interests.  Additionally, for the sake of the newbie mentality, A DIL is something a borrower must give a mortgagee not vice versa.  A borrower who is forced or coerced into surrendering title may have claims against the mortgagee for predatory and deceptive practices.

Additionally, the common street level sales pitch is that investing in loans is less of a headache than that of real property.  Well, that is not entirely true.  Distressed loan investing, especially defaulted loans, can and often do carry a comparable workload if not sometimes more depending on the barriers to disposition.  Don't buy NPL's if you want passive income - defaulted loans are far from passive investing, very far.

Lastly, due diligence should not be approached as a limited set of things to inquire about.  Collection and recovery from a loan can come from the collateral or the borrower or both.  Due diligence should involve the borrower, paperwork and collateral in full.  Anything less is gambling not investing.