- August 22, 2019
- Posted by: august19
- Category: Podcast
When buying a portfolio of assets, many instances a hedge fund will come and say they’re closing out a fund and need to get rid of some assets. What happens along the way is all the good ones get cherry-picked and all that’s left at the end are the bad ones. When they get to a certain point where there’s a limited number of good ones, they usually sell the good ones at a heavy discount along with the bad ones. In this episode, Chris Seveney goes over some toxic assets. He educates us on what a toxic or a bad asset can look like, the things to look for when buying a porfolio, and some possible strategies to employ when all seems lost.
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Identifying Toxic Assets: Things To Look Out For When Buying A Portfolio
The purpose now is to talk about these toxic assets and give everybody a little background before we roll into this and goes along with buying a portfolio of assets. Many instances a hedge fund will come and say that closing out a fund or something and I need to get rid of these assets. What happens along the way is all the good ones get cherry-picked and people leave the bad ones until the end. Once they get to a certain point where there’s a limited number of good ones, what they’ll do is they will sell the good ones at a heavy discount if you take on the bad ones as well. When we say take on the bad ones, many of them you’re not paying big money for them. You’re paying a small fee for the transfer and stuff because you’re getting the decent assets as such a heavy discount.
If you add that in, you’re still getting it at a significant discount, which if the market’s saying $0.55, you may buy those at $0.25 to $0.30 knowing that you’re taking on additional assets that bring you to back up to maybe $0.45. You’re still getting a $0.10 discount essentially. As people get more experienced, it’s something I’ll definitely look into because one of the things that sometimes can differentiate people is being able to take someone’s pain point and take it away from them. It was fun trying to close out, get their money off the books and stuff. You’re solving a problem for them. When you can solve problems for people in this business, it can go a long way. We’re going to start off with two assets. If we have time, we can hit on more assets to go through as well. I want to go through and show people sometimes what a toxic or a bad asset can look like and things to look for when you’re reviewing collateral. It’s going to be educational.
One of the most important things that I’ll mention before we get going is reviewing the servicing comments. We can find a load of information from them. That’s something I would always recommend people do. One last thing with these assets, we haven’t given up hope and one of the things I want to instill in people is there’s also possible other strategies you can have when all seems lost. I’d like to get input from those out there, questions or things like, “What if you did this or that?” Let’s get rolling.
The 1030 Asset
The first asset, 1030, is what we’ll call this asset. This is an asset that within the collateral that we’ve received from the seller. We received the payment history, which shows the borrower where the borrower is living. You had that information which shows that they’re not living in the property. It shows the final tallies of total amounts due and so forth. We had collateral as well, which shows the assignments and so forth and so on.
It’s not much at that point to go off of. One thing it does note is the borrower is unmarried at the time when they signed this back in 2015. Those are some of the things also to look into. One thing that I picked up on in DataTree, which is what I use. When I ran the property detail report, you notice it’s a different owner name. That usually is a red flag for things of something happened. This individual here ER acquired this property, doesn’t say when, but it still shows the lien from the original mortgage on there. That’s the first red flag when I run these reports through DataTree that show different names. It gets you wondering and thinking, “What is that?” When I started to run through the service and comments, so that’s the next thing I do. When I analyze things, the first thing I always do is I go on DataTree and run a property detail report. I also run a transaction report. It gives you an idea of sometimes property values and things along those lines as well.
The servicing comments are gold. It’s funny because the servicer was also using DataTree as well. In regards to the seller trying to get the property short sales from that. They do talk about taxes and other things. What we end up finding is that the property is being divested from a borrower by court order for doing quit taxes. All proceeds with the exception of $9.70 will be disbursed to all senior debt holders. That was in 2017. That’s one thing that somebody mentioned was about calling to see if there are funds from the sale because it does say what the final bid of the property was and what were the taxes at that time? It says, “Exception of $9.70 will be disbursed all senior debt holders.” That makes it sound that there is some money there to be dispersed on. Does everyone else read it that way?
The other question I want to put out there to people is, what are the options would you have if you thought of anything to collect? Is there anything that you can think of? What about deficiency judgment? Do people know what a deficiency judgment is? Overages, that’s one of the things that still need to be done. Call the county and see, “This is sold. It appears to have sold at tax sale. Confirm it has. It looks like there’s a new buyer. Is there any money from your overages? I am the lender on the property.” That’s one. Do people know what a deficiency judgment is? A deficiency judgment is if a borrower owns $50,000 on a property and it sells for $20,000, there’s that $30,000 delta. In many states, you can seek a judgment for that delta. That’s called the deficiency judgment, meaning the funds that are deficient that you could go through and attempt to get those. That’s another option.When you can solve problems for people in this business, it can go a long way. Click To Tweet
The thing that I usually will look at is, “What is this person’s condition?” You have the option. What’s the best way to find whether somebody has assets or what their status is? Do a credit check on the borrower and see what they have. Do they have other mortgages? Do they have other things out there? This individual owns that house. It’s the same address of where she lives. When was this property acquired? That is important. This appears to have been acquired in 2010. In certain states, if they would’ve gotten married and she would have been on this deed. Technically, I could go after this property. If they’re on the other property, most likely getting married on this property. This isn’t something I would seek a deficiency judgment for. It depends on your business structure.
Rarely would I ever consider one. It would have to be something like gross negligence. If somebody has a house that they’re using as a rental and they’re collecting all the rent payments but not paying the mortgage on it. In that instance, maybe, that’s a situation where I would go after someone for deficiency. If it’s a borrower in a property that loses the property for whatever reason I’m not going to rub salt in the wounds. I’ve never gone after a borrower on a deficiency that lost their primary residence. It’s not business that I do. I do look at that to make sure that is the case. I’ve had a borrower who had fifteen houses that used them as rentals. I’m in the process of foreclosing on and the borrower has like nine foreclosures. What this guy does is buys and gets some mortgages, turns around and clicks all the rent payments until people foreclose.
Two good questions came through that I’ll ask is how do we know the previous lender hasn’t already collected the amount since 2017? They could have, they may have collected it. If they did, they collected it. If they didn’t, there could be some money sitting there for me. That honestly is unexpected because this was one that was a throwing. This wasn’t an asset that I paid. The UPB was $17,000. It’s not like I paid $3,000 to $5,000 for this. When you do acquire a pool and they throw assets in, it has to have value. The value should be $100. Give people an idea. Next question, the note was never signed by the husband. Can you go after the husband for the community property state? I don’t know the answer to that. It’s something to look into. In this instance, we’re talking about $17,000 honestly to go after somebody for $17,000 and chase them after they’ve lost a house and even spending attorney’s fees to look at it, it’s not worth it in my mind. In this instance, the best play is to call the county, see if the taxes have been redeemed. If they’re not, collect the check and go from there.
A lot of times, what you can do too is put everything in the file because there is a statute of limitations in different states and based on certain things. I file this thing and I saw this borrower, the name popped up on the screen that I saw somebody hit Powerball. Statute of limitations hasn’t expired, maybe that’s a reason that you could maybe collect your money back in that sense. That chance is 1 in 400 million or whatever it is. On this first asset bringing everything full circle and going through the process, rewinding it again, get the information, go into DataTree, saw that the names didn’t match, a red flag goes up. It also has the servicing notes. It says in there about something with the tax sale. From that point, call a tax office, see what you can do. Do a little background digging or research, but even in this one, I wouldn’t even honestly want to run a credit report.
From that standpoint because like I said, “I’m not going to chase somebody who lost their primary residence down.” I like the train of thought. It‘s always something to consider especially down the road when you need to go down that path. Two things, one, can you claim the $17,000 as a loss in taxes? No, you can’t. What I could do is I could 1099 the borrower and she would have to pay taxes on that as if it was income, but I’m not going to. Does the tax wipe out the note? It doesn’t wipe out the borrower’s obligation to pay that debt. I want to remind people, there are a note and a mortgage. You have to remember the note is a promise that I’m going to pay you this much on this date every so often. The mortgage is the chain that ties the house to the note. If they stop paying that note, the mortgage is what allows you to take that house.
At a tax sale, what happens is the mortgage gets wiped. The note is still out there floating. They still owe it, but it’s now unsecured. The mortgage, that chain is gone is what happens. This was a first. Since it was sold to tax, are you then off to hook for all future taxes and liabilities? Yes. This is a note. The lenders technically are never responsible for future taxes. The borrower is always responsible for taxes and liabilities. In instances, the note holder would want to make sure the taxes get paid so they don’t lose it. How did you find out what the proceeds were from tax sale? That was in the servicing notes. When we get back to the collection notes, the property being divested from borrowed by court order dated 4/2017 for delinquent taxes. All proceeds will be dispersed to all senior debt holders. The court date doesn’t want to sign anything and the borrower had gone through Chapter 7 had been discharged.
That’s another component to this Chapter 7. Back to when I was talking about the note and the mortgage, in Chapter 7, the note gets wiped. The tax sale wipes the mortgage. Chapter 7 wipes the note. This borrower is free and clear. This is an example of one that there is nothing left. The only thing you can still do is see if there are any funds from the tax sale. Other than that, forget it and move on to the next one. Any other questions? There are some good questions that came out there from that. I noticed that in DataTree, it did not look like the house possibly was there. The tax sale doesn’t wipe the note. If you lose a house at a tax sale, that lender can still go after you for that money. It will change ownership, but you still owe that lender that money if a house gets lost at tax sale.
They don’t get to keep the house free and clear. Chapter 7 and tax sale confuses things. In Chapter 7, somebody one at the time may get into a lot of debt. Let’s say they have $100,000 in debt and a $50,000 mortgage. They can’t afford their bills and they want a complete wipeout. In Chapter 7, what happens is all their debts are wiped. The note does get wiped in Chapter 7, but the mortgage is still there. If the people want to stay in Chapter 7, they still have to pay because even though they have no duty to pay you, you can foreclose on the house. The only way for them to not have you foreclose is to keep the note out of the bankruptcy or we work a new deal based on what they still owe you.
It’s two components is what happened in this one. Chapter 7 wiped out the borrower from owing the note holder any money, no holder could still foreclose on the property and take the property via the mortgage. The mortgage got wiped out at the tax sale. The question, if you wanted to donate appropriate charity, would you have first all close on the property before being empathetic? Unfortunately, yes. I’ve talked with several jurisdictions about trying to see if there are ways around it. Because one of the properties will go through in one of these instances is a property that I wouldn’t mind donating it either to charity or back to the jurisdiction for affordable housing or to a veteran or something along those lines.Getting a property fixed up is very challenging and takes a lot of work, but you can make some money on them. Click To Tweet
I’ve looked into that. One of them is in Pennsylvania where it’s going to cost $6,000 to $8,000 to foreclose. I believe the borrower is deceased and everything else. It’s like, “We‘re going to spend $8,000 that we could put into this house.” It’s unfortunate in that sense. Could you have redeemed it at a tax sale? Yes. Now here’s a crazy thing that our audience to think, “How can a lender let a house go at a tax sale and not notice that it’s being sold at a tax sale?” It happens. A lot of these funds, what happens is they have hundreds or thousands of assets. Once an asset has a value $20,000 to $40,000 that goes off in a bucket that it’s like, “Don’t even bother with this because it’s not worth our time, effort or money.“ A lot of times they’ll let it go.
If they get more money at the tax sale for it as an overage, great. If not, they write it off on their books. They’ve got hundreds of thousands of assets or you may have five, ten or 100 and you can maintain and watch all of those. They’ve got that many. They have four or five people working these things. Once they get to a certain point, they’ll put it in a non–recoverable bucket and let it go. These funds, they’ll try and get rid of them somehow, someway, some fashion. That’s what they’ll do sometimes is they’ll sell them off to an individual investor who can take it and throw it in the drawer and not have to do anything with it. I’m doing it in this one.
Any way to get a charity to help you show some foreclosure costs we can go to or is that simply in practical amount advisable? You could. One thing that I’ll mention is those costs would be technically tax–deductible because you’re going to take a loss on the property. Your expenses when you close out that deal or go on your profit loss statement. That transaction most likely will be a loss. You get that benefit on it if you have a lot of profits coming in on your piano. I’ve never reached out to a charity to help with foreclosure costs. Most charities won’t because you got to remember why the charity is helping you foreclose on somebody. Even though the person may have vacated whatever it may be, charities don’t want to be in the business of paying somebody to be foreclosed upon whom you think of it from that perspective.
The Half A Throne
Let’s roll to the next one. This one took a lot of brainpower in a sense. We did have an investor who lives in the area. I went and took photos of this property. This one did pay some money for. I was half–a–throne is what I’ll call it. This one was looking at possibly selling this one off to some investors. What happened was we got the collateral file. The collateral file essentially consisted of nothing. We had zero in the collateral file. There was no note. There was no documentation. There was nothing, zero, zilch, nada. That happened. I’m like, “I’m not going to be selling this one.” We did go through the servicing notes. Back in 2015, they were possibly looking to short sell a property. There was some BPOs done on the property at the time. We didn’t get those.
Another thing in servicing notes, agent’s name. You pick up the phone and call this person, even though it was a few years ago. They may be able to give you an idea of property condition and things like that. Another big benefit and servicing notes, check to see property preservation companies preserved as well as see some of the realtors in here. Here’s where she’s upset because they were calling through Facebook and other means. It’s probably not a good way to reach out to somebody honestly in 2015 wanting to work something out and had been laid off. I mentioned the divorce, also went through the divorce, set him back and the property.
Some delinquent taxes at the time, which there are still some delinquent taxes on this property. It’s $3,000 or $4,000 in delinquent taxes on here. It would talk about a tax deed if the taxes were sold. I called the county and taxes are still recoverable. This has not gone to sale. The property is occupied in this instance. The only collateral we have is from the O&E report. Does anyone have any idea what would be something that you could do to try and retrace the steps on this? It also has a quitclaim deed where she quitclaimed it back to him. That’s one of the things it does help. When you go through a collateral file on a deed, what you’ll see is on any type of document is after recording who to mail the instrument to. This one there wasn’t a lot of information.
One of the things that I looked at was this is in Winnebago County, the deeds and so forth. It was a foreclosure previously that they were looking to foreclose on him. The plaintiff was US Bank who is the mortgage, their attorney. If an attorney was going to file for closure back in 2011, do you think they would have had the collateral to foreclose on people? I picked up a phone, called this attorney. I gave him the case number, emailed them and also left a message on the phone to let them know I was the new owner of the note. I sent him the assignment and launch and said, “This is all I have. I’m hoping you have something.” There are not even copies of anything. I hope you have something.” He goes, “Yeah, I still have a copy of the file. Why? What do you need?“ I said, “I need to foreclose on this borrower.” He’s like, “Good, tell me when to go and I will get the ball rolling on that.“
This is like a detective work that I don’t think anybody out there teaches you or shows you what to do or how to do. I had absolutely nothing to start, no collateral, nothing. I didn‘t know there was no collateral in the file because it was missing. He said he had something and he’d send it to me. He‘s a guy I bought a lot of assets for in the past. He didn’t send it and he offered to buy it back. I said, “No, don’t worry about it. I’ll deal with it.” Anyways, it’s something that you start with nothing. Even if you haven’t bought anything, when somebody says, “I’ve lost the collateral.” A lot of people are like, “I’m not going to buy that.“ If all of a sudden someone says he lost because they only give you $500 for it. Because on the flip side, you may have gone up, looked and you may have found something like this or this information, why you’re doing the due diligence, pick up the phone and say, “I’m looking possibly to buy this. I know you can’t talk to me yourself,“ but I’m like, “Do you have anything on it?” They may say, “Yes, I do,” and so forth. All of a sudden something that we thought, this note has a pretty decent balance.
The house is worth in the low $20,000. The note is probably worth $7,000 to $10,000. If somebody didn’t do any research where I got nothing and I’m going to walk away from this. Doing a little research on the county and so forth and a little bit of digging, you’re able to find everything. Now one thing that’s interesting is, we have the title report here. This is one of the things with ProTitle that sometimes you love then but drives me nuts is they don’t put related documents on here. I’m surprised they didn’t put on here the foreclosure. That’s one thing they miss a lot of is foreclosures. If foreclosures were filed and that can get harried because in certain states if you start a foreclosure and don’t finish it, your statute of limitations can run–up.
The question, would anyone have thought of that? Does that help? Does that give some people some ideas on certain things on paths and ways to move down the chain on things as you start to look at things? A lot of times when you’ll see who this is prepared by on the deeds, there are usually three major players who prepare this stuff. You’ll see Orion, which is MetaSource, which is who I use. You’ll see a company called KC Wilson, who is another one who does a lot of collateral reviews as well. Somebody also, if you need a collateral review, possibly a recommendation as well. They’re a great company. Richmond Monroe is the third. I don’t see their name tossed around a lot anymore, but a lot of times you’ll see prepared by or after recording to send by one of those major firms that do this nationwide for everyone.
One of the reasons why I also like to use Orion is because if there’s a document missing like I was missing an assignment of land contract on a file. I reached out to them. It was before I bought the asset. They did the collateral review and said, “You’re missing this.” I said, “What’s interesting is you prepared the deed, where’s the assignment land contract? If you’ve prepared a deed, a great company like yourself should have the assignment land contract.” They’re like, “No, we created it. I’m sure it probably got lost in the shuffle somewhere.” I said, “Can you recreate one?” They said, “Let us confirm the seller.” That’s one thing also always to check is if the seller still around because certain sellers may no longer be all around.
There’s one that I was looking up called the Stewardship Fund, which is around from 2009 to 2013 roughly. I’m not sure what happened to the guy who runs it. He was running a Ponzi scheme and got arrested. SEC came in, shut them down. You can’t get documents signed by them anymore. A lot of these other entities, most of them are still around, your Harbors or Window Rocks, your Vision, which goes under 27 different names called Mom Haven, all these. A lot of times if you need a document, you can get done. A lot of those firms don’t do it in–house. They use the same thing. They use a KC Wilson or Orion. When you see that it’s sometimes beneficial to pick up the phone and say, “I’m trying to find somebody from this entity to sign this document. I see it was prepared by you. It got lost in the shuffle, can you recreate it?” I’d say my success rate is probably about 90% in getting those documents like that.Assets that are dirt cheap have some real issues. Click To Tweet
A lot of times, people will either discount or toss aside an asset because something like that is missing. When you’re doing due diligence call and say, “Can I get you to create this if I buy this asset?” They say, “Yes.” You’ve reduced a lot of the risks that you’ve had. Is foreclosure always be listed as a civil court case? Yes. It is civil, it’s not criminal so it would fall under the civil. It’s a matter of not everyone’s online or all jurisdictions aren’t online. It’s an email that sent off to ProTitle is how come they don’t put those civil judgments on there? A lot of times when you run an O&E, they‘ll show active judgments and liens. They show judgments against them, but if their foreclosure doesn’t end up in a judgment, it’s closed. They don’t show it. It’s something that I’ve talked to them about. I’m still trying to get them to see if there’s a way.
Good investigative research was the best place to find these types of deals when they’ve given up. I reached out to note investors, some funds and stuff and say, “If you’re closing anything up and you’ve got assets that are in your non–recoverable that you’re looking to move for short money.” From this one that I got where they threw in fifteen of them, they have another 30 or 40 that I know they would sell for almost nothing. I don’t want to have to take them along. If you’re interested, send me an email and I can send you the list and so forth. A lot of them have extremely high taxes a lot of times, especially when you’re in high tax states like Ohio, Pennsylvania, New Jersey, New York. Your taxes up there are $2,000, $3,000, $4,000 a year for a $30,000 property. People won’t pay after a few years. All of a sudden, you’ve got $10,000 with penalties on a property that might be worth $10,000 to $15,000. It’s almost not worth it now. There are still avenues you could work. Maybe you can work out a deal with the county to get on a payment plan. All of a sudden turnaround and get that thing fixed up into a rental or whatnot. It’s more challenging. Those take a lot of work, but you can make some money on them.
There are some assets at one point in time that Gail and I bought dirt cheap that had some real issues. These were issues like going back, finding borrowers to sign off on documents and stuff. We hunted them down, found them and ended up getting it done. I’ll tell you it was a lot of elbow grease and hard work, but it paid off. Crook County, $10,000 for $200,000 or $300,000 on a house. Ohio is the same thing. These houses a lot of times are $30,000 to $50,000 houses that might have $25,000 in taxes on them. At that point in time, it’s not worth it. Did I get O&E reports after you see that? What I did on this group was based on the servicing notes, doing some research online and the collateral. I had a good idea of which ones were deadbeats in the sense that there was pretty much no reason to run an O&E.Even good notes can turn to the dark side on you. Click To Tweet
The first one we looked at knowing it was sold at tax sale. I’m not going to spend $150 running an O&E when there’s nothing to gain except maybe calling the tax office to see. This one, I did run an O&E. I called the tax department. It hadn’t gone at tax sale yet. We’re still in our statute of limitations on things. I didn’t have any collateral so I wanted to at least see the chain of title to see if it was something to pursue. Of the eighteen assets, I probably ordered maybe five O&E reports on them. One of them I think was a dud that we did order an O&E on. It’s still very questionable. We’re still researching it. Everyone is always trained that you want to get an asset at a certain price point, in a certain location at a certain thing. That’s always great, but if someone’s going to toss you a dozen assets that aren’t costing you. It cost you $1,200 on top of a deal.
This was probably the best asset in this group. This is a contract for deed that it’s now off–market. The pay off on this is about half of this number and see what they do with this place. Wainscoting, missed paint, carpet to stair, redid the kitchen. Essentially, in a nutshell, buying this one asset, it’s a price point we did. It was discounted even if we threw on those $1,200, whatever flows out of the twelve assets. My point I was trying to make on here was that sometimes you get these hairy, dirty things that you can get thrown in, you take from somebody and it doesn’t mean you have to do anything with them. I know a lot of people do them, stick them in a file and throw it away. In the past, I found some that could recover a few thousand bucks from them and it was great. You do a little research, but I’m also not going to sit here and go through ordering O&Es and BPOs and everything else. Usually, what I’ll do is I’ll have somebody buy a property, see if it’s still standing, see what could be done with it and go from there.
I can do my own BPOs. I can run an AVM to give me a value. I can run the transaction history and property details. It shows you everything about the property owner name, mailing address, last transfers, characteristics of the property, size square-footage. It’s got links for Zillow, Trulia and Realtor. I can put in notes. You can almost look and see, create your own BPO or an idea for value. The other thing that I like is it will show if somebody owns multiple properties. If you got a borrower who’s isn’t paying, you can look up and see this person owns five other properties, what’s going on with that? That gives you something that they’ve got some potential assets behind them to try. You do have to foreclose to recoup any losses. This FC started in 2011. Case number 2011 is when that started and it was dismissed. When I talked with the attorney, he said, “No, you’re still good.” Those are two I want to start to go through.
Here’s where I wanted to kick this off with is I’ve loaded the collateral on a bunch of the other ones. We could either do a call or have a discussion and talk about now several other ones. What I want to do as part of providing this as an educational lesson for people is pick one or two people to come on and talk about the asset and their opinions, what they found in some of the things that they did. Try and get people to learn some of these investigative tactics because even on good notes, this isn’t something on a crappy note. You may think it’s a good note. You need to learn to find whether there are problems and sometimes you have good notes that it comes out to be good. Sometimes you think they are good notes that turn to the dark side on you.
It’s beneficial and it helps everybody. I’ll help you as well learn some of these little tactics that people can try and focus on and think the steps of the problem solving because every note is going to have its own problems. This one didn’t have any collateral. The other one had tax issues. You’ve got some with deceased borrowers that are in a whole another animal. I want to thank everyone for joining us on this episode of the show. As always, please if you could leave us a review on iTunes, Stitcher or Google Play and join us on our Notes and Bolts Facebook group where we’ve got a lot of great content going on as well. Lastly, we always love for people to share their stories with us. Go out and do some good deeds.
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