Here was a note holder who seemed to have an un-solvable note dilemma.
It was a "Insecure" note that was behind, a defaulted first loan!
The first note was for $140K with a second note of $75K behind it with 18 months of unpaid payments and attorney fees. The second was kind of a do it yourself transaction between the note holder and payor.
The note was done correctly and they thought they had created a trust deed to secure it, but it never got recorded. When they did record it, only one investor was interested. He was a very bright, creative real estate attorney. The funding was lined up and the owner was contacted to help save the property and re-instate the first loan which had a very attractive interest rate.
From Suits to Slander.
The owner of the property, the payor, not the note holder was suing the first mortgage lender and anyone else they could name. The payor rejected the offer to help out and re-instate the first loan, up and until the day of the foreclosure. The payor was quoted "don't you dare give them a cent, I owe them nothing. I'm filing a Federal law suit, so they can't foreclose."
Long story short the bank attorney didn't quite see it that way and he foreclosed. This presented three options and three risks. The three options ...
#1. Advance the funds to re-instate the first and then foreclose on the second.
#2. Buy the property at auction. The attorney had his bid price in mind and didn't think there would be many people in attendance.
#3. Find out if the bank was willing to a deal after the foreclosure and buy it from them before it went to auction.
Risks VS Rewards.
The risks that were associated with option # 1. was the very high potential, I mean bucket loads of legal headaches to fight for the title via the foreclosure of this deadbeat payor. This didn't sound like a walk in the park or any fun at all.
#2. option had the risk the same as the first.
The risk of the #3 option the property be purchased by someone else, but condition of the property and it's legal entanglements made this one seem remote.
Job Security in the R.E.O. Department.
The bank foreclosed which straightened out a multitude of problems. Five months later a letter was sent with an offer. It took a whole month to get a flat rejection letter back from the bank. It was incredible for a response to take that long and pointed out a poorly run R.E.O. department
.
The R.E.O. departments job was to liquidate properties. But with this lender, only a few could handle the attitude. Sometimes tenacity pays off well, along with a check into reality. It was hard for them to understand how this 6500 sq. ft. prime property was worth so little.
With patience, they faced reality and then they were hit with a higher offer. It was figured that their would be the costs from the foreclosure attorney that structured the deal, so that they would see an expected loss of- $134,560. Bing go! They accepted the offer. The rats in the chest high weeds, that went to visit the neighbors, who in turn threaten the lender didn't hurt.
The property was appraised at $154,00. It was in appalling condition and the appraiser made the suggestion to knock it down and sell it as two lots.
A Lender Running Scared.
The appraisal and the fact the property was in the process of being "remodeled" scared away any conventional lenders. In order to get the banks R.E.O. departments attention, a massive amount of earnest money was put down. The idea to "not finance" would be a negligent choice.
The options were either a construction loan or private money. Both were not appealing so another appraiser was called in that made in detail what it would take to upgrade the property to the point where it could be called a remodel.
Let's Raise the Risk!
It was a struggle to get the bank (the seller of the property) to agree to put more money into the property before it closed. A total of $15,000 later it closed. Truly one of the most difficult and challenging first mortgage loans. A total of $114K.
Rats Be Gone!
The appraiser came back and was astounded. He reappraised the property at $260,000, The new lender had such a hard time with this new appraisal. They didn't understand or believe in such a good deal. A purchase price just over 50% of appraisal price. The same loan package happened within a few weeks and closed with a $75K home equity line of credit in the second position.
The End Up?
$134,560 Purchase price, $ 15,000 Fix up costs, $149,560 Total price, $260,000 Value, $110,440 Equity / Profit
A lot more work has been put into the property since the appraisal with a fence line boundary agreement set it place to solve any lot line problems. The estimated value of the property as it stands, may be over $300k.
You can see how a "Nasty Note" can sometimes be real nice. There can be incredible profits in buying, fixing or improving a "BAD" note.
"Troubled Trust Deeds" can be a real challenge, but one that can be very profitable.
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