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As an entrepreneur constantly on the lookout to invest in, buy, broker, or
sell Real Estate secured Loans, Notes, or "paper". I tend to focus on what is
commonly referred to as "performing paper". The loan and its repayment are
satisfactory with no current collection problems associated with the Note. An
investment in this type of Note produces a secure predictable rate of return
as the payments come in month after month. However there are other types of
Notes that often are referred to as "sub performing" or "non performing"
paper. These loans usually have some type of problem associated with them.
Recognizing and dealing with some of these problems can create wonderful
opportunities. These opportunities can often be profitably acted upon
especially if you are acquiring the Note instrument at a discount.
Types of Problems
Delinquencies involving the non payment of taxes, lack of existing hazard
insurance coverage, go hand in hand with the typical non payment of required
installments that are to be repaid and due and can be grounds for a default
to exist. Additionally, you might see deals that were put together with
deficient documentation or other so called paperwork "quirks" that might
exist. Let's take a look at some typical problematic Note situations. This
short list is by no means limited to what can go wrong with Note instruments.
Cause, Effect, & Possible Remedies
1) Slow payments
Many times a creditor who is receiving payments on this type of account grows
weary of having to constantly exert collection efforts month in and month out
to get the payors to make their required installment payment. Often these
accounts are referred to as "high maintenance" collection accounts. They
require a lot of time, headaches, and heartaches each month to cajole the
payors into making sure their payments are made.
If you acquire this type of an account at a large enough discount, then your
exposure into
the property has been significantly lessened. The slow payment Note payor is
not aware of what you have invested to acquire the Note they are paying on,
as this figure is usually unclear to them. They figure they can continue in
their tardy payment ways.
Since you have far less money at risk, you might threaten an acceleration of
the entire
Note balance due and begin foreclosure as a means of getting the borrowers
immediate attention and to firmly establish that this type of future payment
performance will simply not be tolerated.
2) Non Payment
Loans often enter into a default phase, which is typically when there
have been no payments on the Note tendered by the payor for a 30-day
period of time (or as determined by the actual legal language referencing
default in the instrument). Defaulted Past Due Payments is a very common
form of problem; the Note is not performing at all and payments are not
coming in. Foreclosure is only one option to consider; here are some
others:
A) Provide for a period of time where an abatement of the payments takes
place that will allow the payor to get caught up and then begin making
payments again.
B) Reach an agreement to add the past due payments to the "back end" of
the outstanding Note balance due. This temporary "forgiveness" allows the
payor to now get caught up starting with the next installment due.
C) Initiate foreclosure proceedings so that all parties are served and /
or given formal notice that
legal action to collect has begun. Now once you've gotten the debtors
attention, have opened
a dialogue with the debtor to determine whether or not they can favorably
repay the debt, you
can elect to suspend the legal action by having the debtor enter into
formal "forbearance
agreement" which requires the payor to abide by certain stipulated
conditions. Included in this
agreement you and the debtor can waive the requirements of having to file
another foreclosure
suit. If the conditions of the Forbearance agreement are not met, you can
now proceed right to
a summary judgement hearing in the foreclosure action. This saves you
tremendous time and
the further expense of having to file another protracted foreclosure
suit.
D) Request a deed back to you from the defaulted payor in lieu of
foreclosure. In some instances it may make sense to actually pay (yes
pay) the payor to relinquish their ownership of the property and vacate.
This can save the payors credit, save the creditor time, and expense, and
often lead to a profitable resale of the property. This is often called a
"back door" approach to acquiring property.
3) Unpaid Insurance or Taxes
Unpaid Real Property County and Municipal taxes are always superior to
the Mortgage lien. After prolong periods of time, if the taxes remain
unpaid, there are usually procedures that allow for the tax collector to
attempt to force the sale of the property to satisfied the unpaid taxes.
Unpaid taxes can seriously jeopardize even a 1st lien Mortgage holder. A
Mortgage instrument typically requires as one of its conditions that the
property taxes are paid and current. Unpaid taxes are also usually
grounds for a default or acceleration of the entire Note balance due to
take effect.
A lapse in Hazard insurance coverage creates potential liability to the
Note holder (lender). If the property is burns is destroyed or damaged
then the actual collateral serving as security for repayment of the
Mortgage has been impaired. Making sure insurance coverage is maintained
where the Mortgagee creditor is named as the "loss payee" protects the
mortgagee in the event there is a serious casualty claim and / or damage
to the property.
Either non-payment of taxes or a lapse in hazard insurance coverage is
usually grounds for default or acceleration of the Note. While you can
elect to foreclose, some other options to protect you mortgage would be
to place forced place insurance coverage against the property, or if you
have surplus funds, pay the back taxes on behalf of the payor and then
add these funds advanced to the outstanding mortgage balance due.
4) Deterioration and / or waste of the Property
The subject property that is secured by the mortgage is suffering from
waste or neglect. The concern here is that the property that serves as
collateral for repayment of your mortgage Note is becoming impaired
because of deferred maintenance.
Consult with the debtor and find out what the problems are. Why is the
property not being maintained? Kept clean? Or presentable?, etc. Often
the reason upkeep and maintenance is not being done is because of a
general lack of funds to do so. If the situation allows and the payors
have been consistent with their payments, consider altering the mortgage
and entering into a "Future advance" of additional funds to the payor so
that the needed work is done either by them or competent tradesmen. A
future advance of additional funds allows them to simply increase the
amount of their payment to you to offset the funds used to upgrade or
properly maintain the property. Note: whenever altering the mortgage
terms or amount of debt through the use of a future advance, be sure to
have a title search done of the property to determine whether any
inferior lien holders might be affected by additional funds to be
advanced.
5) A Bankruptcy Filing by the Payor
A payor on a Note can typically file either a Chapter 7 liquidation or
Chapter 13 repayment plan type Bankruptcy. When a Bankruptcy is initially
filed, there is an automatic stay that takes place and prevents any
creditors from enforcing attempts to collect on their obligations. When
this occurs, a Bankruptcy Trustee oversees the Bankruptcy estate of the
debtor. Under the Chapter 7 plan, the debtor is able to rid themselves of
unsecured debts or obligations. Often under a Chapter 7 plan, the debtor
is able to retain their personal residence as long as their secured
mortgage debts are current. A Chapter 13 plan allows for a debtor to
formulate a repayment plan with its creditors to repay these debts and
obligations over time, typically (3) three years or less.
Clearly a Bankruptcy filing by a debtor is an indication that the debtor
is overextended. They are having trouble meeting their repayment
obligations and may have become overwhelmed. This does not bode well for
either secured creditors or unsecured creditors.
A Real Estate secured Note obligation is not going to be forgiven or
wiped out by the Bankruptcy court, however most other obligations will
become extinguished. Often the end result is beneficial for the secured
Note holder once the debtor emerges from the Bankruptcy, their situation
is improved and they are better able to make their payments.
If a Note is acquired at a significant discount where the debtor is
involved in an active bankruptcy filing, that Note or its repayment terms
can often be favorably restructured so that they benefit the debtor.
Since the Note was acquired at far less than its face value, the
flexibility exists to re-amortize the Note, alter the interest rate, etc.
so that the debtor can more readily afford to meet their obligation.
Remember at some future point in time, the debtor will have their
Bankruptcy "discharge" and it will end. If they have been performing
during and after the Bankruptcy, the stigma associated with the
Bankruptcy filing isn't as damaging as many people think.
Conclusion
Keep you eyes and ears wide open for problematic "paper" opportunities as
they are often considered "damaged goods" by their Note holders. However
they can many times be profitably remedied through some of the above
techniques.
Michael T. Morrongiello is an active investor who
specializes in Real Estate & Real Estate "Paper" investments. He has
bought, sold or held for investment multiple properties in several states
and thousands of Real Estate secured Mortgages securing all types of
residential properties, apartments, mobile home parks, office buildings,
development land, businesses, commercial property, in every state in the
Union from Alaska to Hawaii and Florida to California. His tips, tricks,
and traps articles appear in industry publications like the American Cash
Flow Journal, the Paper Source, Noteworthy Newsletter, Real Estate Link,
and Creative Real Estate, and he has also appeared in the Wall Street
Journal.
His family and he recently re-located to the "Valley of the Moon" wine
country region of Sonoma, CA and the greater San Francisco Bay Area which
generally is considered one of the most expensive housing regions in the
nation. He continues to implement creative money making techniques even
in this region.
Having run a mortgage lending operation in the past, along with dealing
in both Real Estate and Mortgage investments, he strongly believes in the
powerful Unity that exists which allows solutions to be generated when
Real Estate opportunities are creatively coupled with "paper". His firm
Sunvest (www.sunvestinc.com)
would like to purchase some "paper" from you and can be reached at #
707-939-9450 or via e-mail to
MikeM@sunvestinc.com
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