Max Purchase Percentage of UPB

[Chad U.]

I'm looking at picking up an NPN for $153K, and I just discovered the UPB is $144K but the Payoff is $176K ish. The seller's BPO came in at $215K and a local realtor has given a CMA of $277K, but conservatively is worth around $240K. The foreclosure process is allegedly well under way, and slated within the next 90 days.

The question is what are the repercussions of purchasing this note at a price over the UPB? I realize that if this were to go to a short sale or auction, there would not be much room for profit. However, I'm told that properties in this price range rarely sell at auctions and should revert back to REO where we'd list and sell as-is.

[Bob Malecki]

Well if you foreclose you are entitled to that $176K and legal fees assuming you can sell it at the auction for that amount. If you take a deed in lieu and there is no subordinate debt then you have an asset with a theoretically higher value than your cost basis. Depending on the state in which the property is located, the time to the auction will erode your margin for servicing fees, taxes and insurance, so factor those in. If you take it back at the auction, account for the latter items + legal fees, auction/sheriff fees then eviction and remodel costs to get it into salable/rental condition.  Frankly with only a potential $60K margin, you may not make that much at the end of the day.