The Art of a Mortgage Note Deal

http://3krealty.com/projects/art-mortgage-note-deal/

It was a dark and stormy night. Oh wait, that’s how my memoirs start, not this story. In fact, it was a clear, beautiful day when this deal came to fruition. We were working with an aggressive wholesaler at the time, a true bird dog. Right on the heels of buying a mixed-use property in downtown Rahway (another story I will soon tell!), he had an interesting deal for us from the same estate. This one came in the form of purchasing a mortgage note. We had never done that before, so trepidation was high, but interest was piqued. In an effort to get comfortable with purchasing this debt we dove head first into our due diligence to get to the heart of the details. Here is where things get a bit complicated, but stay with me; I promise it’s worth it!

The story we were told was that the note was created when the original owner gave this piece of property to his mistress and had her sign a first-lien mortgage for almost $70,000. She subsequently took out a second mortgage with a “supermarket bank” in south Jersey for the remaining equity, repaid an even twenty thousand dollars on the first lien mortgage, and never made another payment. By the time we were looking into this five years had passed. There were now tax liens sold from the town, so those positions would trump the note we wanted to purchase. With some very aggressive negotiating by our bird dog, we were able to purchase the note for eighteen thousand dollars, which came out to roughly twenty-seven cents on the dollar after taking into account accumulated interest and late fees.

As part of the note purchase, we were able to assume the “Assignment of Rents” related to the property at the time the mortgage was initiated. This particular property had one commercial unit and one residential unit. The commercial space was vacant at the time, but the residential unit was occupied. We performed searches for contact info in order to serve notice to the tenant that due to default on the mortgage by their landlord they were now ordered to pay rents directly to us. At first they balked, but with a more formal notice from our attorney we were able to receive two months’ worth of rent before they ceased paying us. Concurrently we attempted to contact the owner and see what her intentions were regarding paying the mortgage. As expected we received no responses to our repeated attempts. In the meantime we contacted the attorney for the supermarket bank who had filed foreclosure proceedings against the owner to see if they were interested in buying out our position in order to strengthen theirs. The attorney asked for us to submit a “formal offer,” but we had no confidence that the bank was interested in playing ball. This all took place over about an eight month period since, as I’m sure most of you know, the real estate industry can move at a glacial pace.

After progress had seemingly stalled and after several visits to the property in an effort to acquire further information came up empty, we ascertained that the property had been put on the market. Of course the owner listed it at a ridiculously high number, trying to get whatever she could out of it. Once my laughter had subsided, we decided to call the listing agent for a showing. We toured the property as a potential buyer, and made a formal contractual offer to buy the property from one of our other entities. We made a relatively laughable low-ball offer, because why not? If for some reason she went for it, we would be paying ourselves back the face amount of our first-lien position at closing! She didn’t go for it, but it did open a line of communication with the listing agent so we were kept up-to-date with any other offers for the property. A month or so later the foreclosure process was proceeding towards a final judgment whereby a sheriff sale would be set in motion. This seemed to spur the owner to accept a “real” offer that came in. She ended up under contract two weeks after the final judgment, and closing happened three months later. All-in she accepted an offer for eighty thousand dollars less than her listing price and we netted full value of our mortgage note with interest and late fees. On the original investment we netted a cool profit of almost three hundred percent! We’re not saying this is in anyway a typical example of earning a profit on purchasing a mortgage note, but it sure was exciting for our first one. Here’s to happy hunting for your model deal!