All Forum Posts by: Mike Hartzog

@Andy Mirza

You are correct.  I misstated that point in my response.  I guess I should proof read my posts more carefully.  Thanks for the correction.

I think it would work the same in a DOT state. Outside of a super lien state the HOA would be just like any other junior lienholder. If the 1st position lien forecloses, the HOA lien would be wiped. If the HOA lien is foreclosed and sold at auction, the 1st position lienholder is paid out of proceeds first before junior lien holders. If the property does not sell at the auction and the HOA takes deed, the property is still encumbered by the 1st lien and any other liens which are senior to the HOA lien which was foreclosed. The recourse for the 1st would be to foreclose or negotiate a DIL with the HOA.

I think there is a distinct difference between a performing note that has been performing from the beginning and a re-performing note, i.e., an NPN which was worked out to be performing again. IMO, the latter has a far greater risk of default, and the level of risk is highly dependent on the quality of underwriting done for the workout. It's relatively easy to get a borrower in default who wants to keep their home to agree to a workout they really can't afford over the long term.

I have done quite a few workouts which usually include a loan modification, and I am very careful to ensure that the borrower can afford the modification terms I am proposing.  I also take steps to make staying on track easier, like requiring ACH payments (sometimes bi-monthly) and establishing tax escrows in some cases.  I also make sure the borrower has some skin in the game.  Sometimes this involves some payment of arrears, possibly a short payoff.  I always have the borrower pay the loan modification fee.   Because of this, my rate of default on my re-performing loans is very low, somewhere in the 1-2% range.

If you are thinking about buying a performing loans, my advice would be to find loans which have a good payment history from the beginning with no defaults.  If you are buying re-performing loans, you should be looking carefully at the underwriting work associated with the mod, for example, there should be a income and expense statement provided by the borrower.  The payment history and seasoning time are also important here.  If you are working out NPNs, do a good job of underwriting to ensure that the borrower can afford the payments over the long term.

As far as strategies for getting a borrower to re-perform, it really depends on the situation.  The loan is in default and you have the full breadth of options available.  I would be very reluctant to mod a loan a second time,  I would be more inclined to take re-defaults down the foreclosure/DIL path.

Hi Sandy - Sometimes this type of information is provided by the county website, but for final DD I typically I use the low tech approach of calling the county tax office and asking them directly.  Sometimes taxes paid via lien are called out as "Paid" on these sites.  So specifically asking for the total due and whether or not there are any unredeemed liens get me the information I am looking for.  It is helpful if you can provide a parcel ID or tax account ID, but if you don't have that, they can look it up via address. 

I think Bob nailed it.  Note buyers are looking for a particular yield, not a particular discount amount or percentage. 

One other thing to consider.  If you know some other people with self directed retirement accounts, you can partner with them to fund a larger loan.  This type of partnering does not create UBIT.

@Jim Brown

I agree with your assessment.  Sounds like you don't have enough to lend 1st position purchase money in your area.  Lending 2nd position rehab money can be quite risky, depending on who you are working with.  You might consider simply buying a small 1st position note.  There are lots of them available at that price point.

Mike

@Bob Malecki

Hey Bob,

I was giving your situation some additional thought.  One thing you might try prior to engaging the police is to send a door knock out.  After all, you are just a guy on the phone claiming to be the lienholder on the property.  The door knock might be a gentler way to get communications started.

Mike

Hey Bob,

I will bet you a beer that your occupants were scammed themselves and are paying rent to someone else.  A real squatter would not behave like they have a right to be there.  It seems there is no end to the weird situations one can encounter in this business.  Will make a great war story once you get it worked out...  :-)

Mike 

Fractional note contracts have been around for many years and many (including myself) use them successfully without issue.  Most of the major funding companies I am aware of, who make a business out of buying owner finance paper, use partials on a large percentage of their purchases.

Dion makes a point that a fractional note sale can be considered a non-exempt security if the buyer's interest is not secured by real estate.  Darren makes a point about complete assignment.  I won't dispute these assertions one way or the other, but I will say that the contract used to implement the strategy is the key element here.  Generally speaking, contracts for buying and selling subset of the remaining payments due under a note and security instrument do not remove the collateral security.  Also, every front-end partial contract I have reviewed calls for the note to be assigned in its entirety to the buyer, who agrees to assign it back to the seller again once the payments due under the contract have been paid.  It is important to understand that the underlying note and security instrument does not change at all with a fractional purchase contract.

There are provisions in the contract for dealing with scenarios like early payoff, default, foreclosure, etc.  The terms of the contact related to these scenarios are important and tend to vary contract to contract. They can be biased to the benefit of the buyer or the seller, and because of this it is important to review and understand how things will play out should one of these scenarios arise. 

Dion's point about partials not being suitable for newbie investors is a good one.  They add a layer of complication on top of something which can be complicated enough as it is.  On the other hand, buying and selling of partials is an important and valid strategy which can make many deals possible which would not be possible otherwise.  I would recommend legal review of the contact if you are unsure.