Buying Defaulted Paper: What about Deficiencies? - Posted by DougO(NM)

Posted by phil fernandez on July 13, 2001 at 16:53:13:

Hi Doug,

I like your idea. Go gettem.

Buying Defaulted Paper: What about Deficiencies? - Posted by DougO(NM)

Posted by DougO(NM) on July 11, 2001 at 20:12:29:

I am considering offering to buy a defaulted note/mortgage from a National Lender in order to get the property. Don’t know if they will play or not, but assuming that they will: If we buy the note and mortgage, and if we are able to buy it for less than the current balance and accrued interest, etc., can the lender then go after the debtor for a deficiency, or does that right go away when they sell the note and mortgage?



Shortstops! - Posted by David Butler

Posted by David Butler on July 12, 2001 at 15:53:14:

Hey Lobo-Man,

Don’t have the time to research the absolute of it… but, I’m certain in my own mind that the note seller (lender in this case), sells ALL of his rights in that paper to the buyer…

You might note by the way, that at this point, the Payor has not yet been taken out of the picture, so there is no deficiency on his part, as of yet. If you get him back on a performing basis, there will be no deficiency.

A somewhat similar preclusion of deficiency occurs when a lender accepts a deed-in-lieu of foreclosure.

In California, a deficiency judgement is only possible if there is a judicial foreclosure (as opposed to “trustee’s sale” under the “power of sale” clause found in deeds of trust, a.k.a. trust deeds), and usually only if the fair market value of the property is less than the loan amount (including foreclosure costs, etc), which generally isn’t determined until a resale of the property establishes the loss.

Also, no deficiency judgement is allowed if the loan was a purchase-money mortgage used to finance the purchase of the Payor’s personal residence.

As always… I AM NOT AN ATTORNEY - just sharing my opinion as to what I believe to be the case, based on the situation you described here… (how’s that for sneaking out the back door?!)

But, hope it helps, and don’t get lost out there on the Santa Fe trail :wink:

David P. Butler

Whose on 1st? - Posted by DougO(NM)

Posted by DougO(NM) on July 13, 2001 at 09:12:30:

I was thinking that when we find distressed paper, that if we could get the current holder to play and buy it at a discount, we could then make an arrangement with the payor to vacate the property and since we are such nice folks, they could give us a deed in lieu and we wouldn’t come after them for any deficiencies!


Doug on the trail…

Pinch Hitting! - Posted by David Butler

Posted by David Butler on July 16, 2001 at 10:31:16:

Hey Santa Fe,

Oh yeah… that can be a very lucrative approach to CREI. I’ve relayed in several discussions over the years in the various forums here at CREO - perhaps my favorite all time deal structure - and it was done just that way.

In our case, we purchased a defaulted 2nd for about 48 cents on the dollar, ON TERMS…, paid the foreclosing 1st lender up to stop the trustee sale, and cut a “deed-in-lieu” deal with property owner.

California is very tough on foreclosure investors, so we step very carefully. In this case, we establised an excellent relationship with the owner, and he was on our team from the outset. He owed more than the property was worth, so we were safe on the equity issue, and our profit all came from the payoff of the 2nd note we purchased.

Gave the owner a contract to make the cosmetic improvements needed to “spiff” up the home for sale, gave him three month’s free rent or until the home sold (whichever was less - worth $1,100 p/m at that time); and a $5,000 bonus when the resale of the property was completed. We netted out approx. $42,000 on that little “gem of a deal” :wink: and everybody won (yep … even the 2nd noteholder - long story, but he was one happy clam as well).

Sure wish I could have one like that (everybody Happy Dappy), two or three times a year!

Best of luck on this one!

David P. Butler