The LOC isn’t eactly secured by the note… You could pledge it as collateral, or the Bank could even require you sign assignment forms to them for the note and mtg, but this would be their call, and somewhat based on their confidence level in your ability and your financial situation.
The Bank wouldn’t actually be in 2nd position, as there will be only one mtg on the property, which is the one that you are intending to buy. No other mtg’s will be placed on the property unless the owner secures such a mtg, and this might be doubtful.
Depending on how the Bank requires you to assign or collateralize the note and mtg, would determine what they could/would do in the event of your default. If the note and mtg are not performing, then either the bank or yourself could seek the full collection remedy under the law to accelerate. This usually means foreclosure or Trustee Sale.
How you would be affected if the Debtor declared BK is you are put on notice and will need to repsond to the Fed’l lawsuit of BK filing to protect your position. Having a mtg on property makes you a secured creditor, which may enhance your position to collect. The only problem here is that some Debtors who may less than forthright, can yank you around for a pretty good while, under the guise of federal law, before you can cut them off at the pass… and collect the funds. If they do not attempt to make it a lifelong game, then you can usually collect within 6 to 12 months, plus the time to finish the foreclosure. However, there are those folks who write new rules to being a deadbeat, and take seriously the ability to use BK laws to continue to possess proeprty, meerly as a time management technique, instead of a means of restructuring and repaying Debt. If you run into a NutCase like this, you may wish you had stayed out of the Note and Mtg business. Not saying it will happen, but it can… and it is best to know this in advance of buying debt intruments.
OK guys, see if this is doable. I have a Line of Credit with a bank that will loan me 100% of purchase with the LTV 75% or less. Guy is getting foreclosed on and i am thinking of buying the note from the bank. There are good pictures of lots of nasty stuff i sent to the bank to motivate them. They are interested but i haven’t made the offer yet.
Short sale is out, the guy is NUTS. As in i think literally NUTS.
Is there any way to use my LOC to buy the note and foreclose? (usual money guy tapped out).
Any advice or cautions here? I don’t think the guy will make up the payments. He’s way behind and moved out.
As long as your lender on the LOC is OK with the note and mtg as security, there is not reason why you can’t use the funds for that purpose. This is really a question to ask your lender. Depending of their udnerstanding of the process of foreclosure and non-performing paper assets, and your ability to capitalize on the opportunity, should answer this question on their part.
What is your ability to hang in their with a mtg in default in the event that this thing drags on for YEARS…? Yes, years. I have seen foreclosure cases go on for years, and maybe this case won’t due to the debtor vacating the premises, but it can and does happen. I have seen a fairly regular mtg foreclosure drap on for over 7 years, and some tax deed foreclosures drag on for over 13 years…
The only caustion is that you know the landscape and handle the terrain if it gets pretty rough…
Thanks JT. See if i got this right. I use the LOC which would be secured by the note and deed of trust i buy. Thus if uncle BOB gives this guy 10K to make up payments somehow, i would collect the 1k note and pay 500 for the LOC? From the banks point of view, this would put them in a 2nd position, but not so bad as they are secured by the property AND the first note and deed of trust? So if i default on the LOC, they can take the note i bought. Then if its not performing, take the whole house at 50%LTV?
How would this affect me from a lenders stand point (the first i would own) if he declares bankruptcy? Other than having to keep up the 500/month LOC payments?
I would examine the terms of that LOC very carefully – most require you to take the balance down to zero (or very close to it) within a fairly short period of time (1 yr is pretty typical); and many LOC’s are worded in such a way that you are in effect, signing an unconditional guarantee and pledging all your assets, allowing the lender rights of offset, etc.
In short, I would discuss these points (and more) with your banker. Sometimes, you can negotiate (some of) the terms of the LOC – substitutional of collateral, timing of releases (freeing up any collateral the bank have a claim on), etc.
Remember that banks have a business model that allows them to handle these problems (at least a reasonable number of them) without much of a hiccup. Defaults and BKs are an expected (and very normal) part of doing business. Simple as that.
The real question is – what provisions have you made to deal with those same circumstances?