Non-performing note, couple of questions

Tax Liens & Mortgage Notes
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Non-performing note, couple of questions

Malhar B.
Investor · Atlanta, GA · Member since 2009 · 35 posts · 49 votes

I read through a bunch of posts about non-performing notes and I haven't really been able to find the answer I'm looking for. If I could get some help on this I'd appreciate it.

I work mostly with REO property, but a seemingly lucrative note came to me recently. I have the opportunity to purchase a note for about $400-450K on a property that has an ARV of over $2MM fixed up. The original mortgage amount (note amount) is $1MM. The issue is that the Deed is not held by the mortgagee. The note is a first position note and the foreclosure process has been started already. Is it possible to foreclose on the property and still take it even if the owner on title is different than the mortgagee? What should I be careful of? How should I be going about the due diligence?

My intention is to purchase the note and work out a deed-in-lieu (which I don't think is possible because the mortgagee doesn't have the deed to the property) or wait until Sheriff's sale, take possession of the property, fix it up and resell it. The property has already been boarded up by the note holder and the tenants no longer live there. I've been told that the property owner was collecting rents and not paying the mortgage. Any advice/words of caution? Thank you in advance.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y

    Malhar,

    I think you are being confused by terminology:

    mortgagee = lender

    mortgagor = borrower

    Mortgagee won't be the owner on title until they have completed the foreclosure, and then it is REO. When you become the new noteholder, you'll also get to be called the new mortgagee.

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  • Malhar B.
    OP
    Investor · Atlanta, GA · Member since 2009 · 35 posts · 49 votes
    15y

    Oops, yes sorry. I'm incorrect. I always think about it as Grantor vs. Grantee (Seller vs. Buyer... goes to show you what I know about notes :)... got any pointers?

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y

    If / when you purchase the note, you can then do a "workout" arrangement with the borrower; a DIL is one option (along with things like principle reduction, interest rate reduction, etc).

    Since it is boarded up, you might find it hard to track down the borrower, so doing a workout might not become feasible; you may end up having to foreclose (take it all the way to the Sheriff Sale).

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  • Ali Shah
    Real Estate Investor · Las Vegas, NV · Member since 2008 · 127 posts · 10 votes
    15y

    Or you may be able to flip the NPN to another wholesale buyer. all really pending the note situation and how much you can get the note for.

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  • George P.
    Real Estate Investor · Baltimore, MD · Member since 2008 · 1k+ posts · 268 votes
    15y

    I'd check the comps again
    Who in the right mind would discount the note by half when the property is worth 4x the discounted note value? Since they started the foreclosure process, they will own the property in a couple of month and be able to resell for at least the face value of the note.
    it doesn't look right, that's all I am saying

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  • Matt Feato
    Real Estate Investor · Springfield, MA · Member since 2010 · 49 posts · 10 votes
    15y

    At face, this would be a screaming deal. Maybe they just want cash fast and don't want to bother with the rest & the foreclosure time frame?

    Due diligence would be done on this property like pretty much any other. Only possible downside is being able to gain access to look inside.

    Once bought, you may be able to continue on with the foreclosure process depending on where it's at. Or because of the vacant state, finding the owner for a workout/deed in lieu would be fantastic.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    You'll need to begin the foreclosure process as the new note holder starting with a letter of demand. The old note holder made the demand to cure a default, when they sell the note they receive settlements and no longer have an interest in the note. At that point, you have a relationship with the borrower so you'll need to allow them to pay it.

    There is a more complicated way of doing it and continue with foreclosure, as a participation where you buy the first (or any) part of the note, say the first $XX,XXX, but that may not meet you goal, depends on what the participation agreement says.
    Frankly, starting over with a couple months of holding the note would probably be better.

    Keep in mind that with NPN if the note holder fails to make attempts to collect amounts due, the obligation may become uncollectable, so make sure the holder shows proof of demands and check state statutes on the perfection and release of liens.

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