NPN Story: Deed It Back
Not all of our notes end up in foreclosure. Sometimes (rarely), we get a borrower that’s actively trying to figure out a solution to their situation. If someone reaches out to us in a good faith attempt, we will meet them halfway and there’s almost always something that we can do that’s a “win-win” for their particular situation. This non-performing note was our first foray into judicial foreclosures and was a great learning experience even if we didn’t make it all the way to foreclosure, which isn’t a bad thing!
Town on the Outskirts of Chicago, Illinois
In order to expand our ability to pick from more loans, we decided to look at buying notes in judicial foreclosure states. Illinois is one such state. The timelines for foreclosure tend to be a lot longer in judicial versus non judicial foreclosure states. (See the Fannie Mae guidelines.) The upside is that a lot of investors don’t want to deal with the longer timelines and the more complicated foreclosure process so these sell for a greater discount than more desirable states.
We were looking at a purchase price of just under a hundred grand with a market value of $180,000. We didn’t see anything of concern, it passed our due diligence process, and we bought the loan.
Initiating Judicial Foreclosure
For non-judical foreclosures, I call or e-mail my trustee and they get the process going. The process follows state and federal laws but does not involve going directly to court. Trustees can be attorneys but don’t have to be.
In a judicial foreclosure state, you call up your attorney because foreclosing on a borrower involves filing a lawsuit against them. I used the attorney firm that the seller of the note was using just because of continuity and convenience and I got a first row seat to see the process from the very beginning. I learn something new every day in this business and always look forward to getting more experience under my belt.
We waited for the servicing transfer, sent out a demand letter, and filed the complaint. The borrower/defendant gets 30–60 days to answer the complaint, depending on the local rules. Our defendant represented herself and filed an answer. Because it was not a proper response, our attorney made a motion to deem it a non-answer so we could move forward to the summary judgment hearing.
We obtained a judgment for foreclosure and the defendant did not show up or contest the proceedings. For judicial foreclosure states, getting the judgment takes the most work and is the hardest part. In this case, we didn’t have to work hard at all but, in general, the pre-judgment period is where defendants and their attorneys put up the biggest fight.
After getting judgment, you wait for the pre-sale redemption period to expire (3 months in Illinois) and then go to Sheriff or Judicial Sale.
We have note servicers do the servicing for our notes. There are so many rules and regulations to stay current on that it makes more sense to outsource compliance risk to an outside company. The best note servicers have online investor logins so that you can check on the status of your loans. We check the servicing comments on our loans twice a week or more if it’s necessary.
We noticed that our borrower kept calling the servicer wanting to talk to someone. She then started asking for reinstatement figures (the minimum amount necessary to make the loan current). She then asked for a payoff (the amount to completely pay the debt off). This struck us as unusual because most of the delinquent borrowers that ask for these numbers do this in preparation for filing bankruptcy. Most of the ones that file bankruptcy do so on the day of the foreclosure sale and ask for those figures a few weeks but not 3 months before hand, like this borrower was.
We were frustrated with our servicer because there was a lot of phone tag and it was difficult for the borrower to reach the right person. We instructed the loan specialist to try to contact the borrower to find out what her intentions were. Another few weeks passed before we finally got word that she was interested in doing a short sale.
That was good news for us and we tried to communicate with the borrower through our servicer. This was an exercise in frustration. They never got the message right, they never tried that hard to get a hold of the borrower, and they didn’t seem to care that much.
From their point of view, a loan specialist handles 200–300 loans and they’re just trying to get through their day. From our point of view, why were we paying extra for “specialty” collections to a servicer who can’t get the job done?
Contacting the Borrower Directly
We had never contacted a borrower directly but were thinking that this would be our best option to quickly find out what was going on. One of the loan specialists told us that we should absolutely not call the borrower directly. After our own independent research, we concluded that we were definitely allowed to contact the borrower on one of our own loans. Further, since it was our loan, we were not subject to the Fair Debt Collection Protections Act because we were not collecting a debt on someone else’s behalf. (We still abide by most of its provisions since they involve common sense; treat borrowers fairly, don’t hound them or be disrespectful.)
We called the borrower and found someone who was in over her head and trying to figure a way out. “Donna” (not her real name) was elderly, living in a 2000 square foot home by herself, and was having problems maintaining it and the mortgage payments, too. She suggested that she could short sale the property to an investor acquaintance of hers. We tried that route for a week but it didn’t pan out.
When the short sale option didn’t work, we suggested that Donna Deed the property back to us in exchange for forgiveness of the debt as well as a cash payment that would help her with moving costs. She agreed that it was the best option. After we were well down this path, Donna told me that getting out of this situation was making it possible for her to move to Arizona, where she had wanted to move back to for over a decade. She was cooperative, thankful and appreciative all the way to the end.
Donna Deeded the property to us, avoided a foreclosure on her credit, received cash, and was able to move on with her life without the uncertainty of what that crushing debt would do to her. The servicer bumbled around for 6 weeks without getting any answers. By contacting the borrower directly, we were able to come to an agreement within a few days and then quickly adjust when things changed.
Once the borrower moved out and deeded the property to us, it became an REO as if we had foreclosed on it and no one bid on the property at sale. A huge difference to be aware of is that foreclosures wipe out junior liens. Money judgments and state and federal income tax liens drop off the property, too, but continue to attach to the debtor personally. Make sure to get a title report to make sure there aren’t any other liens before doing a Deed in Lieu.
Dealing with a Smaller Town
One thing that kept coming up was the question of whether the house was a single family residence or a duplex. The short answer was that the property had been converted into a duplex but without the proper permits.
We got some lessons in how this small town on the outskirts of Chicago worked. To complete the Deed in Lieu process we faced very high transfer taxes and had difficulties getting the right “stamps” due to an inefficient bureaucracy. Once the property became vacant, we had to get a town inspection before we could proceed with the rehab. The town inspector pointed out all the things that had to be fixed and in the next breath mentioned that he had a contracting company that could take care of all of the issues he had just pointed out. W-w-w-hat? That’s crazy! A government employee with the power to complicate the rehab of our property just offered his services in the course of his duties? I didn’t think that was still happening in America….
No Duplex or Fancy Renovations, Just “As is”
To get the property permitted as a duplex would be a lengthy, time consuming ordeal with no clear chance of success. Too bad since a duplex would’ve sold for $260,000. Considering the issues, potential difficulties, and high carrying costs in the form of ongoing property taxes, we decided to sell the property “as is” and let a local investor deal with the headaches of the rehab.
We got lots of offers and sold the property quickly. Although the profits weren’t as high on this one and it took a lot longer to liquidate, it was a solid “base hit.”
Things I learned:
When you sense that a borrower is trying to reach you in a good faith attempt to solve their problem, you’re better off contacting them directly instead of through your servicer. You cut down the barriers to communication and have a much better ability to reach a “win-win” resolution.
If you can get an understanding of the judicial foreclosure process, you can learn how to reduce timelines and get access to more loans that will be profitable for you because others don’t want them.
Judicial foreclosures are more time consuming and expensive (because of higher legal fees). Compensate by making sure you have higher margins than you do for non-judicial foreclosure states.
By the time we actually were Deeded the property, we could have gone to foreclosure sale so the Deed in Lieu didn’t end up saving us any time. However, it’s almost always better to have a cooperative borrower that will help you get things done and won’t damage the property. Plus, when someone’s trying to do right by me, I’d rather do right by them, even if it means losing a little bit of time.
Be aware that some smaller town governments are stuck in the past with inefficiencies and employees with questionable ethics. Be flexible in making the best decisions to solve your problems and liquidate quickly.
Purchase Price: $98,500
Total Cost Basis: $129,882
Net Sales Price: $147,739
Net Profit: $17,857
Days Held: 460
Return on Investment (ROI): 13.7%
Annualized ROI: 10.9%