NPN Story: Sub Performing Gem in Memphis, Tennessee

NPN Story: Sub Performing Gem in Memphis, Tennessee

This house might not look the best in this picture but the rest of the houses in its solid, working class neighborhood in Memphis, TN, were nice and clean.

Borrower Reinstated after We Purchased

We bought the loan backed by this house in February, 2019. The borrower was delinquent for 120+ days so we started a foreclosure. The borrower reinstated and avoided the foreclosure.

(For the record, I’m rooting for all borrowers to succeed. When we get a reinstatement, we get an immediate inflow of cash. If the borrower starts making payments again, we can hold the loan for 6-12 months and sell it for more than we paid for it. Win-win.)

Then, Borrower stopped Communicating

The borrower made a couple of more payments and then stopped. We tried to contact him but he wouldn’t call us back. Our servicer also called for months as the borrower stopped making payments but no answers or call backs.

Sub performing note

For note investors, the sub performing note is problematic. When the borrower reinstated the loan, we had to wait to season it for 6-12 months before trying to sell it. When the borrower started to fall behind again, we were motivated to find out why and try to work with the borrower, if we could.

A sub performing note will trade like a non performing note, meaning that note buyers want the biggest discount they can get. The sub performing note puts the note investor in limbo and you can’t do much until the borrower fully re-performs or fails to perform to the point where you can foreclose.

Foreclosure it is….

We continued to reach out to the borrower for months with no luck. You can’t help someone who stops communicating with you. Tennessee was one of the few states with very limited moratoriums on foreclosures and evictions during the pandemic. We foreclosed in May, 2020.

Why?

We were puzzled at the borrower’s behavior. During our due diligence before buying the note, we saw that the borrower had followed this pattern a couple of times before: he would allow the loan to get delinquent before coming in with a lump sum of cash to reinstate the loan. Didn’t he realize that he was racking up late fees and that he would have to pay for the costs to foreclose?

We got a partial answer when our real estate agent made contact with the occupants after the foreclosure. The borrower’s ex-wife was living in the property. He was sending money to her and she was supposed to be making the mortgage payments. We didn’t know if that was the actual truth but it was too late at this point.

Cash for Keys

We arranged cash for keys with the occupants. The ex-wife vacated the property in time but left behind a mess, which invalidated our cash for keys agreement.

Again, it’s hard to understand why some people do what they do. The house has been lost to foreclosure and you have to move. Why not leave it in “broom swept” condition and collect a check to cover moving costs or to put down as a deposit for the new rental?

Instead, the occupants left the place trashed and collected nothing.

Quick Clean Out

We did a quick clean up of the property and listed it right away in this hot real estate market. (We did the same with this REO in Oklahoma.)

We went into escrow with an investor buyer within a couple of weeks and closed on this at the beginning of August, 2020.

Numbers were great on this sub performing note that turned non performing!

Final Numbers