Buying a note that has delinquent taxes

[Account Closed]

Hello, I've been reading a lot about notes recently and I am trying to come up to speed on them. That being said, I am trying to understand the potential risks and downsides of this investment vehicle, and one potential scenario I am having trouble understanding is this: the borrower has a lot of delinquent taxes; say, for upwards of 25 percent of the value of his or her property. Once a tax lien is placed on the property, can the county/tax lien holder take the property out from underneath the note holder if the borrower continues to defer his taxes? In other words, is the note holder's collateral only available to him if the borrower has kept up on his taxes?

Thanks in advance for your help!

[James C.]

Joseph,

You need to understand the order of priority of liens. In general municipality liens are superior to mortgage liens. As long as the municipal lien is redeemable, the mortgage holder can redeem it and protect their interest. At that point, it becomes an issue of how much money does the mortgage holder want to put out.

Keep in mind, NPN sell for a fraction of the lesser of the note balance or property value. If you have outstanding liens, then those need to be subtracted (along with all the other costs) from the recovery value. If the result falls below the acceptable return, then the note is worthless (to that investor). I've seen NPN where the total of all of the liens, paperwork, filings etc. make the value negative (recovery - costs <0).

Think of this as if you are buying a property that needs work. You add the figure for the "cost to cure" to the asking price, and if it makes sense you buy. In notes, there is a "cost to cure" as well, except instead of lumber, tile and cabinets, it's paper, paper and more paper.

Hope the high level overview helps.

Good Luck,

Jim