NPN Story: Worst House on the Block in North Carolina
When we first looked into this non performing note in Durham, North Carolina, we knew it would be a good one for our portfolio. It was a vacant house that was the “worst” one on the block in a really nice neighborhood. Familiar with the upset bidding process in North Carolina? If not, we’ll tell you how our experience went!
During due diligence, we saw that the servicing comments indicated that the house was vacant. To us, vacant houses mean that the borrower has given up on the property and has decided to move on with his or her life. Occupants can choose to fight the foreclosure process. Vacant houses won’t.
The comments also indicated that the borrower was deceased. This may or may not make it easier to foreclose and depends on how the state handles probate and noticing the heirs. In North Carolina, we found that the process was relatively easy. Other states, not so much. Encountering deceased borrowers is going to happen when you buy enough notes and death is just a fact of life. Each situation can be complicated and I believe that it slows things down for the big banks as their bureaucracies try to figure out the correct process to proceed with a foreclosure. This is an opportunity for the smaller note investor who can move much more quickly and sort out a complicated probate more easily.
Worst House on the Block
When using our favorite tool, Google Maps, we could see that the property was the most run down, ugly house on the block in a very nice neighborhood. Perfect! Those are the types that investors love to buy. Easy to add value and attract retail buyers.
Worst House on the Block
The “as is” value showed that we had a large equity cushion that would ensure that we could collect the entire debt owed on the note. The After Repaired Value (“ARV”) showed that there was a lot of potential upside for whoever ended up buying the property at auction. The note passed our due diligence, performance and valuation tests so we bought it.
Quick Foreclosure Process
North Carolina has a quick foreclosure process that’s almost a hybrid of judicial and non-judicial, in my mind, because some of the process is handled by a court clerk.
Our attorney made sure that we attempted to locate potential heirs and we found one. We gave her proper notice and she decided not to try to sell the property. She would be content to let it go to sale and collect the excess proceeds.
Since there was so much equity, it was extremely unlikely that we’d get this property back as an REO. As a lender, we are only entitled to recover the Total Amount Owed. Anything beyond that goes to junior lienholders. Anything beyond that goes to the property owner or, in this case, the heir.
It took about three months from when we bought the non performing note to the actual foreclosure sale date.
Be Careful about Opening Bid
North Carolina has been the only state where we’ve encountered this: your opening bid is all that you’re entitled to collect, even if the bidding goes higher. In every other state in which we’ve foreclosed, the opening bid is just a starting point and you can collect on a higher winning bid up to the Total Debt owed. Here, it was different. Your opening bid had to be the number that was acceptable to you. No setting low opening bids to gather interest and attract additional bidders here!
Since there was so much equity, this part was easy for us. We set the opening bid for the Total Debt, which was the maximum that we could collect.
Another new thing for us was the Upset bid. We’re used to foreclosure sales that start and finish within a few minutes. The auctioneer announces the opening bid, bidders get a chance to bid, and the sale is concluded when the highest bid is announced and the auctioneer verifies that no one wants to bid higher. In some states, payment needs to made immediately. In others, the bidder makes a deposit and has a certain amount of time to come up with the rest.
We were confused because our foreclosure sale resulted in zero bidders. How can that happen with so much equity? We learned that this was common. Potential bidders had 10 days after the sale to put in upset bids. Upset bids had to be at least 10% higher than the previous bid. Once an upset bid was made, potential bidders had another 10 days to make a subsequent upset bid. If no further bids were made, the last bid was final and that bidder had 30 days to come up with the funds to buy the property. Interesting way of doing things, yes?
What Ended up Happening
We received the first upset bid 6 days after the sale for about $110,000. Good, we were in the money. We would collect the entire amount owed. This re-started the clock and there were 10 more days for additional upset bids. Six days later, we received a second upset bid for $140,000. (Our “as is” value came in at $135,000 so this turned out to be remarkably accurate.) No other bids came in. The winning bidder had 30 days to pay and ended up performing.
The process seemed overly long to us since we were used to immediate foreclosure sales but was interesting and something you’d have to understand and get used to if you bought North Carolina notes. We got a full payoff, which was an excellent return, especially since we held the non performing note for only 4 months! Plus, the heir was able to collect the excess proceeds without lifting a finger.
Things I learned:
1. Look for vacant houses when buying NPNs. There’s nobody left that will fight you.
2. Be aware of the state specific issues related to the non performing notes involving deceased borrowers. Complicated probates or court involvement can be opportunities.
3. Properties that are the worst ones on the block are a good thing when you’re buying. Fix and flip buyers want those properties and will bid on them.
4. When buying non performing notes in North Carolina, be aware of the rules on setting opening bids and the upset bidding process when determining your liquidation strategy.
Purchase Price: $59,368 Total Cost Basis: $62,243 Save & Add To Library Net Sales Price: $89,264 Net Profit: $27,021 Days Held: 134 Return on Investment (ROI): 43.4% Annualized ROI: 118.3%