All Forum Posts by: Doug Smith

It's been our experience that we can buy severely delinquent firsts well below 50% of the value of the underlying collateral value...sometimes much lower than that. That, however, is when the institution is offering us the loan. If you approach them about a specific loan, however, your answer will be considerably different. Put yourselves in the bank's shoes. If you are the special assets officer and you get a call from someone wanting a specific note, it's obvious that they want that specific property. You're probably not going to get the note for any less than you would get the property in a short sale. Notes are great...that's our business, but going to a bank unsolicited and requesting a specific note will not, in all likelihood, yield you a significant discount. You might be better off negotiating a short sale on the deal. Perhaps someone else had had better experience chasing a specific note, but we've found that it is a different ballgame than being offered notes in a pool that an institution or fund is trying to unload. Good luck with your quest. Let me know if you ever want to talk through a deal. I'm happy to help.

Jeremy,

Call me and we can chat. I don't mind talking through a business model with someone who really wants to learn. I've made a lot of mistakes over the years. Our primary strategy is similar to yours, so I'm sure there are a lot of questions that we can answer for you as they come up.

Doug Smith

You're right, Wayne. That's why you first pull the title report. It will tell you what you can and can't do on this one. Foreclosure doesn't just get the property back, but it clears most liens. Often we can't do a deed in lieu because of other liens. The foreclosure process more often than not clears that us. Many liens, however, can't be cleared. There are even times when we find it is more expensive to foreclose and take the property (tax liens) than the property is worth. Good luck!

North Carolina is actually one of our favorite States to do business in as it is a deed theory State. The first thing you will want to do, however, is have your title agent pull a title search on the property. The foreclosure process itself, however, is going to clear up most liens, but the law firm you choose will either need you to provide a report or they will need to pull one themselves. Of course, it will be more expensive if they pull it. When we negotiate costs with an attorney, we go off of the FNMA guidelines for attorney fees, which is $1150 in NC. Your other big cost will be publication to let other creditors know of the impending foreclosure. If you have tax liens, etc, they will need to be cleaned up as well, but separate from those liens, you should be looking at between $2500 - $3000 in costs, about 90 days in time, and the hope that the guy doesn't trash the place while you go through the process. Without reviewing the file and knowing all of the variables, it's hard to give you an exact amount, but, if title is clean and there are minimal taxes owed or tax lien - the guy might just sign over the property in a deed in lieu for you once he gets served to avoid a deficiency balance. That's usually what happens with our NC deals. Find a creditor rights attorney in the area (they are not all alike) and they can guide you through the process. Good luck!

Patrick, It can be that short, but we always plan as if there will be a contested foreclosure every time, and then we hope for a deed in lieu. We're just across the Bay from you. We'll have to grab coffee some time and chat. Our office is in the Westshore District.

The bench time - It simple takes too long to get a property back in the State of Florida to make it make sense for our funds. The time value of money is critical in our business...as it is in the real estate business. Even with in-house counsel, it may take 16 months or more to get through the process. The big services can take 3 years or more to navigate the minefield.

Forgive me if I am telling you something you already know. You've heard of Judicial and Non-Judicial States I am sure. That really refers to "Lien Theory" or "Deed Theory" with respect to how the lien is perfected. In "Deed Theory States such as MO, VA, GA, etc, the borrower signs a "deed of trust" where, in the event of foreclosure, the back-logged court system can be avoided. In a State like Missouri, we've typically got the property back in under 90 days. In a "Lien Theory" State, however, the process typically goes through the court system. Some States don't have a terrible backlog...Florida does. If it is not the worst State to foreclose in from a lender's perspective, it's close. You've got Debtor Attorney's in FL telling borrowers to pay them $500 per month and they'll keep filing silly "roadblocks" to use the backlog to their advantage. The big servicers aren't equipped to fight the fight, so the debtor basically lives for free...or at least the $500 per month to the attorney. They recently passed legislation meant to clean this up. After it went through the State legislature, however, the teeth had been ripped out of the bill. We don't see it improving in Florida, so we tread lightly in that State. Hopefully that answers your question. I always enjoy helping others that truly want to learn. You can always call me and ask whatever you want to know. I'll do my best to answer.

Theresa, I was just down in Sarasota visiting a client. I'm sorry for missing your original post, but would be happy to chat with you about the good, bad, and ugly of note investing. We're based in Tampa and we buy notes all over the country. Here's something to think about...our entire business is centered around non-performing notes. That is all we do. I've been in either note investing or lending for 22 years. I told you all of that not to brag, but to drive home the following point: we rarely buy residential notes in Florida. Think about it...this is what we do...and we avoid our home State! There is so much to know about the note business that is not present in real estate investing. The laws change in each State. Since we are neighbors, I would be happy to grab coffee and answer any questions you have. It's not an easy business and I'll give you the good, bad, and ugly.

Great question. There are many good answers. We are different as we buy 1st mortgage notes, work through the issues to get the property back, and then sell the property for a profit, so we are going to be different from a flipper, but here is how our investors typically do it with us:

We open a segregated LLC for each investor, not one for each note. The principal is all owned by the investor or his/her entity. Several notes are then purchased, but our average turn time is about 120 days, so we leave the profits in the LLC until the end of the year when we, the manager, pull our portion. We do take $750 when an asset is purchased and $250 when the asset liquidates, but that covers costs and overhead for us as manager. When the investor decided it is time to liquidate, we work through the liquidation process as quickly as possible and cover costs first, principal second, and then split the proceeds in accordance with our agreement. The LLC does cover such items as legal fees for foreclosures, servicing costs, and other costs that arise from the process. That structure puts us on the same side as the investor, so our goals are always in line. It seems to work very well for all involved. We also are able to manage multiple notes in the sale LLC and then we can pour the proceeds from sales (along with profits) back in to compound yields.

I know there are many ways to do it, but I hope this helps you with at least how we manage things. The note management business is a bit different than real estate flipping, but the base principles are the same. Let me know if you need further help. I'm always happy to answer questions.

Jeff,
We see this a lot. We buy mortgage notes from larger servicers and, for reasons passing understanding, they will take the foreclosure process right up to the sale and then they will cancel the sale. The first thing I would do is to call the county and ask what is owed in taxes. If he's not paying the mortgage, he probably isn't paying the taxes either. Don't forget to clarify if the tax certificates have been sold. Sometimes when you call or go on line to look up the tax situation, they will not include tax certificates that have been sold and must be redeemed. That can make a HUGE difference in what you will end up paying. If you do a short sale, the bank makes sure the taxes are paid and you get clear title...unless there are subordinate liens. You'll have to look at that too.

If this is your first transaction, I would be careful of simply quit claiming the deed over to you without addressing the mortgage or subordinate debt. We recently had someone do that in the Midwest on one of our deals. It didn't end well for him as he lost the money he paid to the borrower and we got the house.

Some institutions are great to work with. Chase is not, however, likely to work with you. If they will let you buy the mortgage note from them and the underlying collateral is worth $140ish with a payoff of $125Kish, I wouldn't pay more than $80K or so for the note. Chase sells notes, but they sell them in pools to investors. If you approach them to buy a specific note, the price goes way up to close to par value.

You will probably have to short-sale the house, but don't go under contract without doing a title search and a tax search. Good luck.

Since we only buy mortgages that are distressed, our process is a bit different, but there are going to be similarities that might help. I am happy to help, but need to understand what you are trying to buy; a mortgage, a property at a foreclosure sale, REO from a bank/lender, etc. If you can clarify a bit, I would be happy to help in any way I can.