I need advice on buying a note where the payor is in bankruptcy - Posted by Jason B.

Posted by Jason B. on June 14, 2000 at 21:11:14:

Sorry If I didnt make myself clear. I would get a loan for the 71k as I dont have the cash to buy it.
The owner will DIE before he sells his house. That is the reason I feel he will use every available option to save his house and delay my payments.

I need advice on buying a note where the payor is in bankruptcy - Posted by Jason B.

Posted by Jason B. on June 14, 2000 at 01:14:08:

I am new to the world of notes and need some advice from the veterans. I was working with someone in Alabama who was trying to save his home from foreclosure. He had been in bankrupcty and it was dismissed NOT DISCHARGED. His original loan amount was 73k and his payoff was 87k after all late fees, etc. were added. Our agreement was that I would get him financed at at least 87k and could keep any discount from the lender. I immediately requested a short sale. Unlike most lenders who require lots of paperwork, this lender accepted my offer of 71k the next day! The owner’s credit was too bad to refinance so I arranged for his brother to buy the house. He would buy the house for 87k and I would get the 16k difference. However, the day before closing, his brother was arrested!! The owner was then able to get his bankruptcy reinstated to buy him some more time. He says he no longer needs me because he can now refinance at 71k and not have to pay me. All of my hard work would get me nothing. I called the mortgage company and they are willing to sell me the note for the same 71k. However, I am worried about buying a note where the payor is in bankruptcy. The home is in excellent shape in an emerging area. The FMV is $125k. My plan would be to buy the note for 71k and wait for him to cash me out at 90k+. If he didnt pay I would get an $125k house for 71k. I am looking for advice on how to proceed with this deal. All advice is appreciated.


Note in default - NOT so fast…Caution ahead - Posted by Michael Morrongiello

Posted by Michael Morrongiello on June 14, 2000 at 19:59:38:

It is unlikely that most funders will loan you funds to purchase a deliqnuent non performing mortgage especially where the payor is in active bankrupcty. This is VERY speculative. Don’t get me wrong, there is some opportunity for profit on these types of deals but it has to be measured by the risk involved.

You need to either have the cash yourself or a line of credit to raise the cash or partner up with another investor who does have the cash and is willing to “weather the storm”.

If you purchase this mortgage and note, it MUST be in 1st lien position. If it is not then I would pass. Do a quick title search see if taxes are current,if they are not, then you have to factor that expense into the transaction.

I would also see what other liens may be juinor to this mortgage. These lienholder may be allies for you later on.

Another consideration is that your payor may elect to convert his/her chapter 7 bankruptcy filing to a chapter 13 creditor repayment plan. ( I just had to wait over 18 months before the debtor in this type of bankrupcty filing exited this plan). This could mean that as long as he makes his payments under the creditor repayment plan approved by the bankrputcy court, you CANNOT Foreclose.

Another area of concern is what is known as “redemptive rights or rights of redemption” that the property owner may have in order to redeem his /her property AFTER a foreclosure sale takes place. My recollection of Alabama is that it may be up to a FULL YEAR that a debtor has to redeem this property for the foreclose amount pluse arreages. This then may tie you up from doing anything with this property in the event you did acquire it through foreclosure. (the stiff drink known as the “Alabama Slammer” was arrived at from this ruling- just kidding)

Buying defaulted notes is NOT for the faint of heart. There is a lot of potential $$$ to be made, however you need to evaluate the transaction from the worst possible scenario and then add unknown expenses to that as well. That is how you would figure what is a good price to pay and part with YOUR Cash for this headache.

It may very well be that the $71K Cash offer to buy this mortgage is not enough of a discount given the battle to be wage ahead and the uncertain and uncharted waters that one must sail through to make a profit.

Best of luck my friend,

Michael Morrongiello

Run don’t walk… - Posted by Sean

Posted by Sean on June 14, 2000 at 07:09:24:

…and buy that note for $71k. If the FMV is as you say then your position is very safe.

Re: Note in default - NOT so fast…Caution ahead - Posted by Jason B.

Posted by Jason B. on June 14, 2000 at 21:06:26:


Thanks for the response. I had arranged for the sale of this property so the title work is done. This is a first lien with no seconds and minimal tax payoff. THe owner had been in Chap. 13 for a year, it got dismissed and then he reinstated it.

Re: Run don’t walk… - Posted by Jason B.

Posted by Jason B. on June 14, 2000 at 10:07:31:


Thanks for the reply. I have 2 problems.

#1, I focus totally on real estate and dont know how to arrange funding on a note purchase.

#2 Since the payor is in bankrupcty, how do I pay the underlying loan is he is not paying. He had not made payments to the bankrupcty court in over 1 year before it was dismissed and they STILL LET HIM REINSTATE. If I had to pay on the loan for a year, it would totally destroy my profit.

Where do I go to find funding for this note and how to I ensure that the payor will pay?

Thanks for your response.

What underlying loan? - Posted by Sean

Posted by Sean on June 14, 2000 at 18:33:38:

He only has one mortgage on the property, right?

Anyway, I thought you had $71k cash available. Sorry I misunderstood.

I’d try to lock the bank in for that $71k deal with an option agreement. Perhaps you could get a 90-day option to purchase for $71k and offer to buy the house off the guy for $120k.

If he agrees just get a new loan for 85% of 120k (102,000) and use $71,000 to exercise your option to buy the first, give the seller the balance ($31,000) and he has his $120,000 asking price – $89,000 mortgage paid and $31,000 cash.