How to determine how much someone else paid for a note?

Question

Hi!

I need to determine how much someone else purchased a note for and what kind of margin they are looking for to flip it.

There's a property I'm pursuing that is a little out of the ordinary - so I can't quite wrap my head around a few things. I am not a note investor, but need help from people in this arena to help me figure out what to do.

I've been looking to purchase a mobile home park and stumbled across an interesting lead. I found a desirable park that fits my criteria that's currently in pre-foreclosure. The note was purchased by a hedge fund about a year ago and the property is going to auction in a few weeks. I have a chance to make an offer prior to the auction on either the note or the property.

I know the majority of the information I need to determine what I'm willing to pay (income, expenses, back taxes, etc), but I need to find out how much they bought the note for and what kind of margin they may be using as a baseline.

I contacted the hedge fund to see if they'd be interested in re-structuring terms and holding or selling the note at that point if I purchased the property, but they are really just trying to flip the note and/or property.

The best way to acquire this MHP is probably via purchasing the non-performing note and either executing the foreclosure or pursuing a quitclaim deed. However, I have no idea how to determine what to offer in this instance - since I'm not underwriting the park as I normally would.

Any help would be appreciated!

Thanks

Mike Hartzog · Answer

Note transactions are not a matter of public record in the same way RE transaction are.  There is typically only an assignment of mortgage/DOT recorded and these do not include the purchase price.  I think the price they paid is not really material here because at the end of the day, they own the asset now and will be looking to maximize profit and limit holding time.  Understanding the current title situation (taxes and liens) will be key in determining the best way to pursue a deal.

Jay Hinrichs · Answer

OREO =  Other Real Estate Owned             its a banking term that most bankers never want to hear and quite prevalent in the GFC. and I had my fair share as a lender as well.. these are when you making originations that you expect to perform then they don't and you have to foreclose... when you buy a bad note or NPN not sure what you call the asset as you half expected to get it back.. half expected to turn your borrower around and or end up with the asset.

Mike Hartzog · Answer

@Joseph Sangimino - You mentioned that you cannot underwrite based on NOI, and that tells me that you don't have a good idea of value, so that's that's the first thing to solve before looking at possible options for acquisition.  I would contact the owner as a potential purchaser and gather the information you need to value it.  Once that is done and you understand the value and equity situation, you can pursue the acquisition strategy which makes the most sense.  If there is equity, you could look at purchasing directly from the owner (who is likely a distressed seller), or purchasing the note from the hedge fund and pursuing DIL or FCL yourself.  If there is no equity, you might negotiate a short sale deal with the hedge fund and owner, or purchasing the note at the discount.  As others have mentioned, I would not get hung up on what the hedge fund paid for the asset.

Cody Cox · Answer

@Mike Hartzog is exactly correct in that the purchase price of the note by the hedge fund is not public knowledge. What we do in the note space if run an ROI caluclation that determines what your costs will be and how that mixes with the entire transaction. In addition to taxes, you should be very certain about value, and any other title issues. You might call the city for any code violations that would transfer to you upon buying the note. If all these factors work in the numbers, then submit the offer.

Rick Pozos · Answer

Sometimes hedge funds make mistakes. We all do. They could have paid $5mil for the note and they may be willing to sell for $1mil if there are liens, judgements, taxes, etc on the property that total several mil. So what I am saying is that it does not matter what they paid. If they are trying to get out of the deal, they will sell to get out.

Since it is close to the sale/auction date, they may not be too willing to negotiate. As mentioned above, it might be better to wait until all the work is done and title is clear. They will also have a clear idea of what they are into the deal for and they will probably want to get out.

Something to think about. If you have talked with the owner of the park, they may be willing to almost walk away. You might be able to get into the property with very little down, then give the note holder something down to be able to modify the mortgage. You do need the cooperation of the owner of the property and the willingness of the note holder. Gotta get moving to get this one done.

Jay Hinrichs · Answer

@Joseph Sangimino  me personally having bought a note in PA last year ( not my normal day job)@Mike Hartzog  I like to leave that to the experts LOL.

but if I was looking to buy this park  and I have owned a half a dozen of them so I like the asset.

I would let this hedge fund clean up the title there in PA and then buy it as an OREO with new title insurance.. let them do the heavy lifting..  Or bid it at the sale.. but if your in contact with the bene and they will sell post sale .. I like that play the best personally.

Unless you make an offer on the note that is just too good to be true or a screaming deal.. then you can do all the work it takes in that state..

it was an eye opener for me to do the one I did and it quite the process .. NOT at all like a west coast trustee sale.. were its fast and clean and such.

Jeff V. · Answer

Sounds like you have a few exit strategies.  Chances are slim that you will get a workout on this being they are so close to foreclosure.  Same for DIL... doubt you will be able to get that only being a couple weeks away...  (It is taking 3 weeks just to get our recent note purchase transferred to our servicer, and another month of waiting after before we can even begin outreach)

Foreclosure will most likely be the case which will result in a couple possible scenarios.

1 MHP is purchased by another bidder at foreclosure auction.  In which case you need to run the numbers to see what you could collect at the sale and work backwards to get to your desired return when putting in an offer.

2 MHP doesn't hit your reserve which will then become an REO.  Run the numbers according to this scenario.  Most likely you will have to estimate expenses ect being you won't have access to the borrower to get this information up front.

Bid based on worst case scenario of the 2, or most probable outcome....  Worst case scenario bid is probably the best way to go and least risky.

I'm still new to the note space, so just throwing some ideas out.

Hope this helps.

Jeff V

Odie Ayaga · Answer

I can confirm that that is not @Jay Hinrichs normal day job. Despite what his BP title says I believe it's actually Professional BP Contributor. Out of curiosity Jay, I've always wondered what the first O in OREO stands for when you post it or if it's just a Jay thing.

Joseph Sangimino · Answer

Thanks for the advice Mike. That explains why I found the assignment and no price. I know the taxes and liens on the property; they are substantial. Considering it needs to be cash since it’s going to an auction (no time to line up financing), I can’t underwrite it based on the NOI. How do I determine an offer purchase?  My assumption is that they will accept whatever margin they are looking to flip the note for if I try and buy the note rather than the property. What do you recommend I do?