Posted by David Butler America’s Note Network on February 15, 2000 at 19:19:12:
Hard to really do justice to your question. A very meaningful answer would virtually require a “short course” to cover adequately.
However, a few simple points can be covered easily enough. First, any contemplated note purchase should always include a clear knowledge of the exact rate, terms, balance and how the note was created.
Second, knowledge of the Payor at the time note was created (i.e. credit qualifications at time of note creation) is always critical.
Third, knowledge of the property value at the time the note was created, and currently, is an absolute as well.
A foreclosure does present some different points to be investigated and considered. First, if the property value is sufficient to include a substantial profit on its face, you may immediately try to cut a deal with the noteholder to buy the note at an additional discount. On a foreclosure, I do this as a matter of course. You are looking at a maximum 70% ITV (investment to value) to finish with… so you start out trying to get more, and hope to gather some gravy in the process.
You also want to investigate to make sure the Payor has no defenses against the noteholder that might create a liability to you.
The idea is to go into the deal buying the note under the assumption that what you are really doing is purchasing a foreclosure property.
Now it may be that the best exit strategy is to renegotiate the terms of the note with the Payor, and that is part of your investigation up front. There will be a lot of analysis on your part to determine which is the best way for YOU to go, subject to the market in your area, your investment objectives, your cash reserves, your risk aversion level, and so on.
By the way, the balloon payment is obviously irrelevant with regard to your negotiations with the noteholder. As in all note transactions, a primary consideration is learning the motivation of the seller.
This will give you a framework for structuring the most profitable transaction from your side of the fence.
If the noteholder is afraid of loss, or averse to the foreclosure process, you might very well be able to pick up the note for 40 cents to 50 cents on the dollar! In such a case, you would then have an increased set of options for possible profits. Once such option may very well include the possibility of cutting a deal with the Payor to sign over a deed in lieu so you can take immediate possession.
This would allow you to flip the property quickly, and give the Payor a nice chunk of change for cooperating with your efforts. I have used this option several times to achieve a quick juicy profit, while giving the Payor a significant benefit as well. If you choose this option, I do recommend that you become familiar with your state’s law on the matter, or use legal counsel to assist you in completing the deal.
Hope this helps, and good luck.
David P. Butler Vice President, Broker Relations