Smaller investors in the note game?

Question

Hi all,

Kicking around a sort of hypothetical situation in my head and trying to come up with what the best way to structure some deals would be. Let’s say you had access to some asset managers for CMBS products who are authorized to sell non performing notes on an individual basis rather than selling as a pool. Let’s also assume that you have an attorney to handle the foreclosure who will contribute services without billing for them, but could receive some sort of ownership interest or other arrangement for services rendered.

What’s the best way to capitalize on this situation without being a wholesaler? If you pay cash for a non performing multi family note with the intention of selling it to a retail financed buyer you will have your cash tied up for at least a year while you manage the property and create solid historical figures, right?

Since this approach is so cash intensive, what are the options for scalability? Investors? Money managers? Investment funds? Pipe dream? I’ve got little experience raising capital outside of people I know personally.

I realize there are a lot of potential landmines when buying non performing notes, but for arguments sake I’m making the assumption that several deals per year could be attained via cash for keys or another structure that removes some of the risk of an ugly foreclosure.

This post grew much longer than I expected – sorry about that.

Eric M. · Answer

Don't know if you plan to do this in Florida where you are from but you probably know there are no quick easy foreclosures there.
People know they can delay and it can take years. Why take cash for keys if you can live rent free for 2 years?
Also the existence of junior liens makes the non-foreclosure shortcuts much tougher even of the owner is willing.
This strategy is one of those that seems like a slam dunk in theory but is not. This usually works best in bulk when you can average out your losers with winners. If you do it 1 by 1 and get one of your losers, it can set you back alot of time and money.

Bill Gulley · Answer

Fees that can be charged by a trustee are generally set by state law, agreeing to an equity position in stead of that "approved" allowable fee would not be compliant.

Reread what I said, after foreclosure your interest is still as a lender, you didn't buy the property.

A deed in lieu of foreclosure would put you in an ownership position and in doing so you give up your right to seek any deficiency if you don't get your money out of the property.

Do some research here on BP in the notes section and you should find this type of "how it works"...

Steve K · Answer

Thanks for the reply. I understand your comments and concerns that i'm way off base.

I didn't expound enough on my original post to include that i'm assuming all purchased non performing notes would be taken through a foreclosure process of some sort, whether via friendly foreclosure, quit claim deed, etc to convert that debt instrument into real property.

Out of curiosity, why would it be unethical for an attorney to handle the foreclosure process without assessing any fees for their time?

Bill Gulley · Answer

I wondered why this note post got so far down that page without a comment, now I see why.

Steve, you need to drop way back and do some legal research,maybe talk to the unethical attorney who will work for food.

Buying a note is not buying the property. The only right you have to the property is as collateral for the debt outstanding, no more.

If you don't get your money from the sale on the steps and you end up with the property, under state law you still may be limited in recovery as the old owner can always step up and say he wants his equity beyond the amount that paid you off (incluing costs and expenses/repairs, etc). The flavor of your deed will always be as a lender with a financial interest, until it is sold to the next owner.

I think you might need to look at more conventional acquisitions even if you have a "new" attorney (brother-in-law) type. Your attorney will need to act as a Trustee....and this would be a commercial loan, the borrower is probably not without counsel....good luck

Smaller investors in the note game?

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