All Forum Posts by: Dion DePaoli

@Anish Patel

Just checked back to see if any additional data was posted on the deal.  I am happy to discuss with you offline about your deal.  My company also offers a due diligence service for these transactions which I can explain if you wish.  PM me for contact information.  Thanks.

Wayne is correct. Randomly discountung UPB is futile and could terminate any potential you have.

What is the aggregate value of the real property?

What is the aggregate cash flow of all the properties?

What state are they located?

Is the seller an actual bank with depositors or some other financial institution?

What????

A land contract/contract for deed/bond for deed is not a mortgage and there for doesn't have PMI.

I have no idea who Tingle is but if he isn't an attorney he can't own or make legal documents.  

How is the Vendee's payment described in the contract?  Payment plus thing on top?  Payment to Vendor only?  

Answer those ideas and I will respond more.

@Aaron Millis

BP has a Forum specifically for notes : https://www.biggerpockets.com/forums/70-tax-liens-...

A newbie private investor buying a loan from a bank is not high probability at all.  Banks have a fiduciary duty to obtain the highest best market price for any asset they need to liquidate.   A private investor likely demands more of a discount than any of them are willing to give up.  Many smaller banks will simply handle the delinquency or default in house if they hold the loan in portfolio.  

I don't understand why that dated barstool banter still exists - "buy direct from a bank" but it hasn't been true for years.  Banks will seek more qualified counterparties.  Those folks are generally investment funds.  Eventually some funds do trade down the street and that is where most of the product comes from.  

In regards to the desired performance status of loans, the matter at hand probably has more to do with what you think you have learned vs reality.  There is in fact 'not' numerous ways to profit on defaulted notes.  

A borrower can only do one of two things:  (a) pay you or (b) not pay you.   As an investor your profit/gain is a function of one of two things (c) principal amount of loan and (d) interest accrued.  A Mortgagee is only due the principal, interest, advances and fees defined by the note.  This leaves us with two true ways a profit occurs (1) you collect from the borrower or (2) you collect from the property.

The one remedy available to a Mortgagee defined by the security instrument and note is foreclosure.  There are alternatives to foreclosure such as a short (pay or sale) and deed in lieu of foreclosure.  

Loans carry risk of loss.  They are not risk free.  Defaulted loans (NPL's) generally carry more risk than a performing loan (PL).  However, there is still risk of loss in a PL.  Just because someone is paying now doesn't mean they will do so into the future.  Nor does it mean they will pay in full.  A NPL carries the idea of more risk as it is the thing of value when a borrower doesn't pay which the Mortgagee doesn't own and can't use to recover from until it is either auctioned or owned.  (the property) The path to that conclusion generally mandates additional capitalization.  

You purchased a loan for $50.  You will need to put $20 into it to sell it for $100 to make $90 and earn $40.  The $20 goes into foreclosure fees, servicing fees, insurance fees, taxes, evictions, bankruptcy defense, repairs, title defects and a couple others.

The additional capital demand is largely determined by time.  The longer you have to work through the asset the more capital it will take.  So I often tell investors their biggest risk is actually time.  

As such, I firmly stand in the camp that newbie investors are better suited with PL's to learn about the industry than NPL's.  A PL will lessen the capital burden and expose you to the ideas you will need to learn.  Trust me, just because it is performing doesn't mean it is without problems.  You are likely not interest in purchase that type of "prime" loan.  They have yields down around 4% and 5%.  So your desired return puts you into riskier loans innately.  

Property taxes have "Super Lien Status" which is unique to only a couple types of liens.  The term means that regardless of the time the lien is filed, which determines the priority in title, they rise to top.  So a tax lien, once filed, automatically becomes the first lien on any property.  Regardless of how many other liens might already be present including a mortgage or deed of trust.  Provided that lien is not itself Super, which would couldn't be jumped over. 

When a property is pledged as collateral, for a Mortgagee to use in the event of default, to recover the sums due under the note, the owner of the property has an automatic equity of redemption.  That is, the owner has a last chance to pay off the debt prior to losing ownership of the property.  This chance is a time period called Redemption.  Foreclosure by definition is the termination of the borrower's equity of redemption.  The redemption period expires either prior to foreclosure auction or post foreclosure auction subject to state law.  Foreclosure is NOT the "taking" of the property.  

That should give you some cannon fodder to search the forums for.  There is a good body of discussion across these ideas and many more.  Additionally, if you post questions to that forum you will get more input from others working with the asset class.  

 Rich,

Loans are sold in three manners:

Par - 100% of the Unpaid Principal Balance (UPB)
Premium - +100% of UPB
Discount - < 100% of UPB

New conventional loan originations are generally sold for Par or Premiums.  So when your buyer goes to a conventional lender or bank, that lender originates the loan and turns to the secondary market to sell the loan generally for 103% to 105% of the UPB.  

Par loans sales will tend to have upfront points on the closing statement which is how that lender will earn money for originating with an intent to sell.  

Discount loans occur when the loan has some type of defect.  Those defect(s) pertain to the paperwork, people or property.  

Most conventional loans are originated with the intent to be sold in the secondary and eventually end up in a loan pool, bundled as a security and sold off as bond investments in capital markets.  Some lenders do hold the loans they make in portfolio.  

@Alicia Ogunmiloro,

As @Wayne Brooks points out, notes are a complicated asset.  It is not really a good suggestion as a starting point with no knowledge of real estate in general.  Knowledge and experience in this asset class takes time.  It is not an overnight - make lots of money type endeavour.  In that regard, not sure why your friend doesn't help or if the conversation is just a mention in passing.  How do they know or are they just speculating on something they heard?

There are tons of threads in the forum with various pieces of information in them.  There are some blogs on the site by members which also have some information in them.  Browse those and continue to learn at your leisure. 

Julia,

I would be willing to take a look at what you have as well.  My email is [email protected]

Thanks

@Kevin B.

Let's square you away with the scenario you inquired about.

We know there are multiple lien holders.  One of which, in first position, is a large financial institution.  You believe you can purchase a junior lien position for around $500.  What does that mean in the scheme of things?

So the first idea that needs to be clarified is what is the lien you are purchasing for $500?  
If that is a tax lien, then tax liens have super lien status and can foreclose out all other interests.  If that lien is not a tax lien then it will be subject to the priority in title based on when it was recorded.  Mind you, not all liens have a power of foreclosure.  Any Tax Lien or Mortgage/Deed of Trust will.  Any creditors judgement will not.  

If the lien you buy is a second mortgage, then the first mortgage remains superior to you.  A junior lien may not foreclose a superior lien position.  This means, the first lien remains in place until they satisfy and release their lien due to payment or foreclose.  

If you purchase said lien and foreclose, the resulting process will send the property itself to foreclosure auction where you will you will define the amount you will take at a minimum to release your lien.  We call this the reserve price.  Some reserve prices are subject to minimal amount requirements.  Moral of the story is, either someone at auction either buys your interest in the property whereby you get paid the reserve upto the total due under the lien or the property does not sell and it reverts to you as an property owner.  

If the property reverts to you, YES, you are now the owner and now liable for the property.  Just like any other owner.  (The former owner no longer owns an interest in the property, you foreclosed them out.) Your ownership is Subject To (read as: Inferior to) the rights held by the first lien holder.  So the first lien holder can foreclose you out.  However, they can only do this once they give you a chance to redeem the property from their debt.  If the property is in distress, they may be willing to short the amount they are owed - taking less than what is totally due.  They don't have to do that though.   They must give anyone with an interest in the property that right but only once that right is established.  In other words, they don't have to tell you anything until such time as you are the owner or lienholder.  Not while you are just an inquisitive party.  

Depending on the geography of the property and municipality, the city can continue to levy fines and lien title for unpaid fines or in some cases cities have pursued civil lawsuits against owners.  If you become the owner, these liabilities will be onto you.  

As others have suggested, if you are just trying to cure a blighted property, best bet is complain to the municipality.  Throwing $500 dollars at this doesn't likely get you much of anything except a waste of money and stepping into a potential hornets nest you don't fully understand.  Just because you think someone else would want to the property to fix up doesn't mean someone else wants the property to fix up.  Only act based on your own interests not speculating on a 3rd party.  Good luck.

@Ivan Lai

I agree with @Guy Olds that we do have to be mindful of the words we use to illustrate our ideas.  Words here do matter and have meanings already assigned to them.

In the United States every borrower who pledges real property as collateral for a loan retains either a right or equity of redemption.  Foreclosure, by definition, is the termination of that right/equity of redemption which is the legal mechanism that allows for the creditor to sell the property in order to recover their funds.  A borrower may not waive that right although in title theory states such as California, where Deeds of Trust is the standard instrument, the borrower can waive their right to a judicial proceeding.  

A Mortgagee can not initiate a Notice of Default until the loan is at least 120 past due.  At that point, notice must be sent.  The borrower must be given time to cure.  THEN the actual foreclosure process can start.  In some states there is mandated mediation, which is the creditor and debtor coming together to see if there is any deal to workout which helps the borrower reinstate the loan and continue to pay.  

Predatory here are practices which, purposely or on accident, rob the borrower of their redemption rights.  That would include buying an NPL and not properly noticing the borrower and giving cure times prior to foreclosure process starting.  Among a couple others.  

A Mortgagee is only entitled to the sums due under the note.  That is all.  Nothing more.  The Mortgagee is not owed the property.  The borrower retains legal ownership of the property when they take out a loan and they grant equitable interests to the lender(s).  To contrast that with a landlord scenario - the landlord retains legal ownership to the property and grants the tenant equity interest (possession).  

Further, I feel like I should add, that a borrower in some instances has a right to reinstate which means pay the amounts past due and the loan must be returned to good standing.  A reinstated loan can not be foreclosed.  A reinstatement right also prevents the Mortgagee from calling the entire balance due.  Reinstatement rights expire at various times after the notice of default and acceleration of the loan.  In other words, just because you accelerated the loan doesn't mean the borrower has to pay it all back.  Many jurisdictions allow the borrower to simply reinstate which de-accelerates the loan, if you will.  

Spend some time on the boards reading through some threads here.  Ask some more questions.  There is much to learn.  Some of which may correct the way you think of this asset.  Good luck.

@Bob Malecki

If the Seller shipped the unrecorded lien leaving you to record the chain along with your purchase AOM the risk is very minimal.  A "broken chain" is when AOM's are missing from file and public record.  You have them, they just need to be recorded.  Not a big deal at all.  

Do not accept AOMs in blank.  That practice for the most part died 8 years ago.  

In practically all states, you will need to prove standing in order to initiate foreclosure.  So, you will have to have them properly recorded to proceed.  

In some cases it makes sense as a Seller to send the whole file and let the buyer record so as to not hold up the trade.  Otherwise, you wait until Seller records everything and it can be seen in the county record.