Non-performing note exit strategy

Tax Liens & Mortgage Notes
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Non-performing note exit strategy

Daniel M.
Investor · Tampa, FL · Member since 2016 · 4 posts · 0 votes

After reading several books about note investing and attending some local REO networking events, I'm still not clear about the exit strategy when purchasing non-performing notes.

Let’s say there is an offer by a hedge fund for the following property:

Principle Balance: $34,255
Payoff: $46,035
Property value: $208,650
LTV: 16.42%

The hedge fund asks for 70% of the payoff.

My general question in NPL with equity would be; how would I maximize profit. I assume, if the owner doesn’t catch up with the payment, in case of foreclosure, I would probably get back the amount I have invested but every excess amount would go to the owner.

I could do a deed in lieu but why would the owner do that if he could wait for the foreclosure and profit there? 

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y

I think you answered your own question.. either way as a hold or beneficiary of the note. if there is this TRUE equity.. the only way you tap into it is a DIL

a public auction will 99% chance get bought 3P  and you would simply be owned what ever your note called for plus costs. balance would go to junior lenders or creditors and if none then the owner.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    I think you answered your own question.. either way as a hold or beneficiary of the note. if there is this TRUE equity.. the only way you tap into it is a DIL

    a public auction will 99% chance get bought 3P  and you would simply be owned what ever your note called for plus costs. balance would go to junior lenders or creditors and if none then the owner.

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  • Daniel M.
    OP
    Investor · Tampa, FL · Member since 2016 · 4 posts · 0 votes
    9y

    Thank you Jay. 

    So essentially the only way to profit in a equity NPL would be to find an agreement with the borrow for an DIL and some kind of cash for keys offer.

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  • Haitham Elbedawy
    Note Investor · Houston, TX · Member since 2015 · 17 posts · 10 votes
    9y

    so in that kind of case would you recommend dealing with underwater properties which don't have any equity? what would happen if it goes to auction and because there is no equity, it might stay in hand? correct me if I'm mistaken

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  • Daniel M.
    OP
    Investor · Tampa, FL · Member since 2016 · 4 posts · 0 votes
    9y

    A property that is underwater is bought for a steeper discount from the hedge fund. If it sells in an auction, the proceeds would go back to the lender since the owner is underwater. If it doesn't then you may take it back at auction and sell it retail since you bought it cheap.

    But I think if the property is that much underwater, the borrower is more willing to do a DIL / cash for keys scenario.

    At least that is my understanding.

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    9y

    We seem to play pretty fast and loose with the term "Hedge Fund".  More often than not, the Seller is not an actual hedge fund.  Nor does transacting with a Hedge Fund mean much beside, they have more money than you.

    This new trend of Sellers asking for percentages of Total Payoff is rubbish(!).  Advances, fees and interest arrears can be challenged and reduced, if not eliminated altogether.  More likely than not newbies won't get enough due diligence data to investigate those sums to ensure they will be included in the judgement of foreclosure.  

    The OP is correct, any amount over the approved Total Due will be remitted to junior interests.  Whether that come by way of owner sale, owner refinance or foreclosure auction.  

    Most notes do not carry a default interest rate or an interest rate on advances. The margin on the UPB is only $2k. We don't know how much more will have to be advanced to actually disposition the asset either.

    A DIL is not a viable option here.  A Mortgagee is only due the sums under the note.  A DIL in this situation could be deemed as unjust enrichment and overturned if an attorney gets involved or if there are any other junior interests.  Case and point, this borrower files for BK and the rest of the creditors go after their rightful claim to some of that equity to pay themselves off.  

    Equity in a loan is a good thing because it gives the Mortgagee the ability to know that advances and fees can be recouped through that equity. So loans with lots of equity (low LTV) can be purchased as a higher percent of UPB knowing that some interest will still accrue and advances will be paid back. However, advances may not earn any return.

    If a property sells at FC auction, it doesn't revert back to the Mortgagee and the Mortgagee is only due sums under the note.  All surplus goes to junior interests in priority of title.  A mortgage is only foreclosed once, it doesn't go "back" to the auction unless the foreclosure was overturned and redone.  

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