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Do you want to broaden your knowledge on the process of note investing? In this episode, Dan Deppen reviews two recent deals that went through the foreclosure process and resulted in the sale of the property. Both were also delayed due to a delaying tactic. Learn how the timeline for nonperforming notes can get longer than you would expect and how to navigate some of the legal hurdles and issues with city code enforcement that can come up in these deals.

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Note Investing Case Studies

I’m going to be going over some note investing case studies. I’ve done a few other episodes on case studies. Some of the most popular ones. It’s been way too long since I’ve done these. I had a couple of note deals that I exited that particularly interesting and unusual for me. I thought it would be a good time to go over these. Before I dive into those, I want to give you a heads up about my webinar. This is on how to get started in note investing. The reason I put this together is I get a lot of questions from people on email and social media.

One of the most common questions I get is, “I looked at some things and I’m interested. How do I approach this?” I thought I would do a webinar and save it as a video and a show where I had a catchall answer to some of these common questions so that when I get these questions from people, I can point them right there and make it a little bit easier. If you’re on the Fusion Notes email list, you’ll get emailed a link to that or you can also check out the Fusion Notes YouTube channel at YouTube.com/fusionnotes where you can either find the video there or the replay for watching it after unless we throw out through YouTube Live. I want to make sure folks were aware of that.

Memphis, Tennessee

Getting into the case studies, I got a couple of them for you. The first one takes place in Memphis, Tennessee, the home of Graceland. This one was a traditional mortgage note. It was a non-performing note. I forget exactly how far it was behind. The borrower was a serial bankruptcy filer. This borrower file bankruptcy at least a few times in the past. I picked this up from a hedge fund that didn’t want to foreclose on it because the lady was a widow. However, if you looked at the history of a loan, previous lenders had bent over backward to try to work something out. In fact, at one point, they had done a HAMP modification and the payment was lowered down to $240,000. This is a property with a BPO value of $140,000. It’s a nice-looking property. It’s definitely nicer than some of the other properties that I’ve worked with.

The unpaid balance was about $130,000. The payoff amount was around $160,000. I picked this note up for $69,500 which was about 53% of UPB. It’s a nice property in a nice part of Memphis, 3-bedroom, 3 bath, 2,400 square feet but very non-performing with a problem borrower. I knew that this borrower had filed a BK multiple times, I assume that she was going to do it again. Before buying the loan, I had a conversation with my attorney in Tennessee to understand if she could file BK again to forestall foreclosure and she could. My game plan here was to buy the loan, start the foreclosure process immediately, trigger the borrower to file another bankruptcy so that we could get that process started. When she doesn’t follow through on the bankruptcy plan, get the bankruptcy dismissed, go ahead and complete the foreclosure.

When borrowers filed for bankruptcy, it can take quite a while. Sometimes several months between when they file bankruptcy to when the bankruptcy plan gets put together to when they don’t follow through on the plan until you get it dismissed and get relief of stay. I was expecting this to take a while. One of the upsides of Tennessee is that it is a fast foreclosure state. Once you can get to the foreclosure part of it, it’s pretty fast. Reinstatement and rehabbing the borrower weren’t coming into play on this one based on some of the histories of the borrower. That seemed like that was not going to happen. The previous lender did the HAMP modification to lower the payment is almost nothing. Her attitude was, “I’m still not going to pay.” There weren’t a lot of scopes to work something out here and because there was so much value in the property, I was mostly interested in completing the foreclosure.

What happened was about the loan, the hello and goodbye letters went out from loan servicers. That’s part of meeting the rest of the requirements. The previous loan servicer will send out a goodbye letter, my servicer allied in this case will send out a hello letter. When those letters went out to the borrower, she’s filed BK 13 right away after I bought the loan. That was great for me because that saves me a little bit of time in the process. I was assuming I was going to have to go through all the foreclosure then have her file BK at the last minute, go through the BK dismissal and back to foreclosure.

I’m going to talk a little bit about how the bankruptcy process works. My attorney on this one was Edward Russell from the SR Law Group. He’s one of the best attorneys I’ve ever worked with. If you have a loan in Tennessee, I can’t recommend him enough. I use Attorney Barile for most of my bankruptcy and foreclosure cases because they cover Michigan, Indiana, Ohio and some other states as well which is where I have most of my things. They don’t cover Tennessee but I was very impressed with Edward from the beginning to the end of this whole process. Once the borrower filed bankruptcy, he helped to get the proof of claim submitted. That’s the first step in the bankruptcy process. What you’re doing is filing something that says it’s the lender, we got this lien on this property and this needs to be considered as part of the bankruptcy plan. The borrower put through a Chapter 13 plan that we approved that basically as part of that plan that says, “We’re going to begin paying off a loan. We’re going to have a plan to also pay off the arrearages.”

Lo and behold, the borrower did not follow through on that plan which I expected. However, they did send in a couple of payments which was surprising but they didn’t send in all the payments and didn’t do everything they were supposed to. They also didn’t send in payments to other lenders as part of that plan as well. They did a little bit here and there but they did not follow through on the plan. Attorney Edward was able to get that bankruptcy dismissed. Once he got it dismissed, we got what’s called relief of stay and we’re able to proceed with the foreclosure. When the borrower files bankruptcy, you can’t have any contact with them. It needs to go through their attorney. There were some discussions between my attorney and their attorney as part of coordinating that BK 13 plan but once they did not follow through in that plan and we got that dismissed, they were no longer technically in bankruptcy then we could have contact with the borrower.

I make contact with the borrower and I try to attempt Cash for Keys. If you can do it, it’s generally better than doing a foreclosure. There were a couple of things I was trying to accomplish here. One, if you can do a short sale with Cash for Keys, that’s more of a retail sale. The property is going to tend to sell more than it would at a foreclosure auction because if you go through foreclosure and someone’s buying in an auction, they can’t see the inside, the borrower might still be there or they might need to evict so you’re going to sell it for less. If you can manage a retail sale and the borrower is cooperating then you can sell it for a higher price which is good for you as the lender. It also gives you the ability to kick some money to the borrower to help with moving expenses and the first month’s rent. It’s a good deal for the borrower as well. I contracted the borrower so we can work out Cash for Keys. She was receptive. I said, “Can you allow my realtor to come into the place and take photos so we can see what we have?” She was cooperative with that as well which was great. I met with my realtor and take all kinds of pictures. It turned out the property was in pretty good shape which was a great surprise. When it comes to these foreclosure properties, you never know what you’re going to run into.

I have had more than one case where when you look at photos of the outside of the property, the property looks like it’s in pretty good shape but when you get inside, there are all kinds of terrible surprises. One of the things I’ve noticed over and over is borrowers who will either ride the ship down in foreclosure or severely delinquent and going to do Cash for Keys, tend to not fall behind or not keep up with their finances and not keep up with a lot of other things in their life as well including the way they take care of their house. There’s a lot of deferred maintenance, often other problems. Sometimes, bad ones on occasion but this one was in pretty good shape which was a nice surprise.

I’m thinking I can give the borrower $3,000. That’ll help them with moving expenses and off to a good start. Unfortunately, I was not able to reach an agreement with the borrower. At one point, the borrower said she wanted $24,000 Cash for Keys. This was after being years behind on the loan, $124,000 to go away. What’s interesting was the financials on this deal were so juicy. I could have afforded to do that but I couldn’t do that and have that be a better deal than going through the foreclosure process. I wasn’t going to do that on general principle anyways. I tried to get the borrower to agree to something that made more sense but we can never get to an agreement. The borrower was very friendly on the phone. We had good conversations and it ended where she said, “Of all the people I’ve dealt with on this loan, you’re the nicest person. I like you. You’re a nice guy but I don’t want to do anything right now.” For the life of me, I couldn’t figure out what she was thinking because if we do Cash for Keys and I give her a few thousand bucks, she gets something. If we go through the foreclosure, she gets zero other than living rent-free for a few more months potentially but I couldn’t figure this out.

If you’re new to note investing, I don’t necessarily recommend reaching out directly to the borrower. Generally, you would want to do these things through your loan servicer or your attorney. I’ve had a lot of experience with these things and I’ve done a bunch. I understand the rules and I’m comfortable with them. It’s a little different scenario. This is a do-as-I-say-not-as-I-do situation. I couldn’t come to an agreement and I couldn’t understand why. What she was doing didn’t make any sense to me. I ended up going through the foreclosure process. One of the great things about Tennessee is it’s a non-foreclosure state. It’s very fast to get to foreclosure.

It ended up taking over 60 days from when I sent the notice of demand to when we got to the foreclosure auction. This is the fastest process that I’ve gone through and even much faster than the contract for deed process in a lot of states. After getting through the foreclosure auction, it was about 60 days to get to that, it took me a few more weeks to get paid. I had a big saga around that. The buyer of the auction made out a cashier’s check to the county, endorsed it to my attorney, my attorney endorsed it to me and my bank didn’t want to cash it. They wanted the cashier’s check to make out directly to me which my attorney was annoyed with. He said, “You should be able to cash that but my bank wouldn’t cash it.” I had to FedEx the check back to my attorney who then deposits it in his bank and then FedEx a check to me. That day, that whole process took a while. It’s one of those million things you run into with notes. You would think the process of receiving a check and getting cash will be pretty darn routine but sometimes these are the hiccups that you run into.

The whole question around where to set my bid for the auction was an interesting one. There’s some strategy. I know it’s going to sell more on a retail sale and sell less than a foreclosure auction. I had my realtor look over it well. The realtor was pretty confident it would sell for $165,000 in a retail sale. I looked at that $165,000 price, I knocked it down to $160,000, nothing ever goes quite the way you expect. I was going to have selling costs, it was going to net between $150,000 and $155,000. The question is I can get this $150,000 to $155,000 if I don’t sell it at auction, however, I might have to wait to do an eviction which was going to take another 2 to 4 months. The eviction was going to have some additional costs. There’s the risk that something happens to the property or there’s damage. The question became what will I accept now versus this $150,000 to $155,000 maybe 2 to 4 months later with some additional risk. I had decided if I could sell it for $130,000 now, I would be happy. It ended up there was one bid at auction. It sold at auction for $130,001. That’s good for me because I got the price that I was happy with and I was done with the deal at that point.

Let’s look at some of the numbers. My cost basis for the note, I paid $69,450. I incurred $6,770 in total holding costs. Some of that was servicing fees, forced place insurance, legal fees which was the vast bulk of that, due diligence expenses, other odds and ends. My total cost basis was a little over $75,000 and I ended up with total auction proceeds of $130,001. This was an outlier deal for me. Not all foreclosure deals work like this. In fact, a certain percentage of them go upside down because you find out the property was not in good shape or you run into other issues. Please, as you go through these numbers, keep in mind your mileage may vary a lot from this. This was one that happened to work out well. I thought it was an interesting one because it was one where the borrower was a serial bankruptcy filer and went through this.

I couldn’t figure out why the borrower was willing to go through foreclosure. The day before the foreclosure auction, she filed bankruptcy again but because she had been through a bankruptcy, she could file bankruptcy again but it wasn’t going to delay a foreclosure auction. What she was thinking was that she could file bankruptcy again and delay the foreclosure auction. I was kicking myself because I was wishing that had I pointed that out to her when I spoke with her like, “You can’t delay this with a bankruptcy. This is going through either way.” Maybe that would have brought her to the table and we could sell it at Cash for Keys. I don’t know but that’s what she was thinking. It was a lesson learned for me.

Back to the numbers. The total dollar profit of $55,000 and change. It was a 70% ROI. The total timeline of the deal took seventeen months. Even though only two months was the foreclosure, there was the other time to get the money and the whole time you to go through the bankruptcy process of her filing bankruptcy again in the BK plan and getting that dismissed. You’ll find that bankruptcy dragged out your timelines. Seventy percent total ROI on an annualized basis because this one is over seventeen months. It was about a 45% return. It’s a home run deal overall.

Pontiac, Michigan

This next one is in Pontiac, Michigan, the former home of the Silverdome and Detroit Lions. This property was pretty scruffy. It was a contract for deed and nonperforming. This was one where I went into this with the intention of trying to rehab the borrower. The first thing that got weird on this deal was the land contract isn’t recorded and the land contract that they sent me in the hard collateral was different than the one that the seller sent me on the soft collateral when I bought the loan. What I found out was there were two open land contracts on this property. There had been a previous borrower where they did Cash for Keys but the seller never terminated the old contract. The first thing that I had to do was get that old land contract taken care of. I had to use a skip tracer and track down the old borrower. He was very cooperative fortunately and was willing to sign off on the cancellation of the contract. I was able to get that done. It could have become a pretty significant issue but I was able to get that worked out. At that point, I was able to deal with the correct borrower.

In the loss mitigation phase, the actual borrower who’s residing in the house was a machinist young guy. I think 24 or 25 when I started. Working as a machinist in Michigan had a pretty good salary. This was what I call a hard case borrower which is rare. I haven’t had too many of these. This was a relatively low BPO house. They’re paying $300 to $350 a month. He made at least $50,000 a year so more than they could easily pay it but he chose not to. He wasn’t interested in doing that at all. I think the unpaid balance was $29,000 or $30,000 at that time. He said, “I’ll give you $5,000 to satisfy the loan.” That was all he would do. That had been offered to him by a previous lender. I have no idea why on earth they would have done that but they did and he didn’t follow through on it and said, “I had this deal before. I’ll just give you $5,000.” It was interesting because he was hard to work with and to get ahold of. I had to start the legal process.

He freaked at one point in the legal process when he thought he might lose the house and he wanted to talk but then he still didn’t want to work anything out. It was difficult. When we got down towards the end of the legal, he filed for bankruptcy. This was another one that ended up in BK 13 which is a restructuring bankruptcy. He did that as a delay tactic which dragging out very significantly. In the middle of that, he had a lot of other people living there. There were weeds and code enforcement issues. Code enforcement also wanted roof repairs and other structural repairs. It was interesting dealing with code enforcement. I explained to them that there’s a borrower in there on a land contract so I can’t go into the property and send contractors. I can’t go in there and do work. He filed for bankruptcy so I can’t even talk to him as the lender. They pretended to not understand that but most code enforcement people do understand land contracts.

My strategy with the code enforcement was to communicate with them. Not blow them off but not sign up to spend money either. They would follow-up with me every few months and this went on and on throughout the BK. Eventually, we got to the point where we could get bankruptcy dismissed because the borrower put together a plan. They were followed through on a plan which is not a big shock. At that point, I could restart the forfeiture process on the land contract. Right about the time, we got that going. It was when COVID hit in March of 2020 which shut down the courts in Michigan. That drag things out as well. After a long time, I was finally able to complete the forfeiture. I was concerned about this deal because the house was rough, to begin with. One of the code enforcement people said he had been to the house and talked to the borrower. He seemed like he was on drugs. He thought he smelled things. I was concerned I could even have a meth lab on my hands or at the minimum a messed-up property. This was one I thought had the potential to get sideways on me. This was a big timeline.

Looking at the review and the timeline of this deal, if you look from month zero, I initially bought the note. Around month four was when I had the loan transferred. I had tracked down the old borrower. I got the cancellation and the land contract signed. In the midst of them on 0 through 4, I was trying to do loss mitigation with the real borrower. He had to give up on that because he wasn’t willing to do anything and I got the legal process going. Month five is when the borrower filed bankruptcy and it took between month 5 and month 19 so about 14 months to get through that bankruptcy process, get that dismissed and the relief of stay which was right about when COVID hit. We had all kinds of delays, courts shutdown with COVID and had to pick up the forfeiture process again. I finally got the forfeiture process completed in month 30. In month 33, I got the sale of the REO complete and got paid. The deal finally worked out in the end.

This is an important deal to highlight because my personal little notes and this mastermind were a part of at the time. That group would say, “Note deals should take 12 to 18 months.” Many of them do but that’s if everything goes smoothly. Non-performing notes can easily take 2 to 3 years depending on how much of a pain the borrower is going to be and what state you’re in if you hit an unusual situation. You should go into nonperforming notes assuming it might take you a pretty good time to get paid.

Let’s take a look at how some of the numbers turned out. The total cost basis that I had was about $24,000 when it was all said and done. I pay $11,234 for the note. The total holding cost before you look at all of the legal fees related to the two forfeitures, getting a cancellation of the old land contract, all the bankruptcy expenses, forced place insurance over three years, delinquent taxes over three years, servicing fees over three years, due diligence costs, everything else that comes up is $12,835. I spent more on expenses on this note than I did on the note itself. Even though this is a contract for deed in Michigan where they can go pretty fast in general, I ended up with some exorbitant expenses. However, I sold the property for right around $50,000. After selling costs and other things in some deductions from the county and code fines, I ended a little over $44,000 in proceeds which is great. I ended up with over $20,000 in profits which made it for an 83% ROI. I didn’t calculate the annualized but if you look at this from a JV perspective so I had a JV on this one. It originally put up $22,000 for funding.

The borrower had sent in a couple of payments at one time so it was $436 interest splits and a little over $10,000 in profit splits. JV return was 47.8%. However, this was over a 33-month timeline. They put in $22,000 in the beginning and in month 33, it got their payout. The annualized return was 15.4% to the JV and others seem to double that if you were doing it with your own money. This was a pretty good deal overall. Definitely a lot of work and headaches. That’s the other rub because I had a lot of time to soak into this. I was very thankful that I didn’t end up upside down at the end of all this which I thought there was a decent chance that I would. I did have some cleanout of expenses as well but overall it was left in reasonable shape. That was good.

What did I learn over these two deals? I like to think of Jerry Springer and his final thought. There’s quite a bit of ending. Number one, when the borrower files bankruptcy, it can take a lot of time and it can be very expensive. Bankruptcies can drag out your timeline for sure. They also will rack up your legal expenses. When you’re going into nonperforming note deals, if somebody tells you to expect 12-to-18-month timelines, understand you’re only getting that if everything goes smoothly and you should not be counting on that. If you’re doing ROI calculations, don’t assume that eighteen months is your worst case. Understand that if this thing drags out for 36 months, what is that going to do with your returns? Are you going to be able to live with that? The third lesson is that the unexpected can happen at any time. When I went into this deal in 2018, I was not thinking that a global pandemic might hit that would shut down the courts for several months and drag out my timeline.

Unknowns can hit you all the time. When you’re dealing with code enforcement, it was my opinion on this one. You do want to communicate with them. You want them to know that you’re not ignoring them and you’re going to be responsive. However, you don’t want to be too responsive and too quick to pay fines or spend money on a property because if you are too quick about it, they might get the impression you’re going to be there as their piggy bank. That’s not a good thing either. That’s a good topic to dig into in more depth on another day. That’s what I got for you in this episode. In the meantime, for more info on note investing, reach out to me. You can find me at FusionNotes.com. Please check out my YouTube channel, YouTube.com/fusionnotes and don’t forget the webinar. Thanks a lot for reading. I appreciate it. I will see you next time.

Important Links:

• webinar – Fusion Notes Webinar
• Note Launch Pad
• YouTube – Fusion Notes
• Edward Russell

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