HOLDER contacted me with what to most people would be an
unsolvable dilemma. "Insecure" note behind a
defaulted first loan.
The note holder had a $75K second note behind a first of
about $140K including 18 months back payments and attorney's
The second was created in a do-it-yourself transaction
between the parties. The note was created properly and they
think they created a trust deed to secure it, but no one
recorded it. They recorded the note.
I could only find one investor interested in the note. A
very bright and creative real estate attorney. We lined up the
funding and contacted the owner to help them save the property
and reinstate the first loan, which had an attractive interest
The property owner (payor) was suing the first mortgage
lender and anyone else that came within eyesight. My offer to
help out and reinstate the first loan was rejected up until
the day of the foreclosure. "Don't you dare give them a
penny, I don't owe them anything. They can't foreclose, I'm
filing a Federal law suit."
Well, the attorney for the bank didn't agree and
Options - Different Risks
We were left with three options. The first option
was to advance the funds to reinstate the first and then begin
foreclosure on the second.
The second option was to buy the property at the
sale. The attorney told us his bid price and we didn't feel
many people would be there.
The third option was to negotiate a deal with the
bank after the foreclosure and buy it from them.
The risk of the first option is the very high potential of
a truckload of legal headaches fighting for the title via
foreclosure of this litigious payor. Didn't sound like fun.
The risk of the second option is the same as with the
The risk of the third option was to lose the property to
someone else. Given the condition of the property and the
legal problems, that risk seemed remote.
Security in the REO Department
We waited to let the bank foreclose and straighten out the
problems. About five months later, I wrote them an offer. It
took one month even to get a flat rejection from them. I've
never seen such incredibly poor response from a bank REO
Their job is to liquidate the properties, but few would put
up with the attitude of this lender. Tenacity pays well.
Dose of Reality
I guess they couldn't understand how a 6500 sq. ft.
property in a prime area could be worth so little. I let them
face reality for a couple months and then hit them with a
higher offer. I knew their costs from the foreclosure attorney
and structured the deal so they would see little loss - $134,560.
At about the same time as my second offer, it probably
helped that the rats and chest high weeds caused one of the
neighbors to threaten the city, who then threatened the
lender. I didn't orchestrate that, but it sure worked well.
An appraiser had valued the property at $154,000. He
was appalled by the condition of the property and suggested to
the lender that they would probably be better off to knock it
down and sell two lots.
The appraisal and the fact that the property was in the
process of being "remodeled" scared conventional
lenders away. To get the REO department's attention, we had
put down a massive amount of earnest money, so to be caught
without financing wasn't too attractive.
My options ended up being a construction loan or private
money. Neither sounded fun, so I called in the appraiser and
had him detail what it would take to upgrade the property to
the point where he would not call it a "remodel."
It was even a struggle to get the bank (seller) to agree to
let us pour money into their property before we closed on it. $15,000
later we closed on one of the most difficult and challenging
first mortgage loans I'd ever done. ($114k).
Rats This Time
The appraiser came back and was stunned. His entirely new
appraisal came back at $260,000. It's amazing that the
new lender had such a hard time with that new appraisal. They
just couldn't understand or believe that someone could make
such a good deal. A purchase price of just over 50% of
We were able to take the same loan package and within a few
weeks we closed on a $75k home equity line of credit -
in a second position.
So, how does it all end up?
Much more work has been done since the appraiser came
through and a fence line boundary agreement has been put in
place to solve lot line problems. The value may be over $300k
at this point.
"Nasty Notes" can be real nice As you can
see, there can be incredible profits in buying, fixing or
improving "BAD" paper. One of the most profitable
strategies in the note business is dealing with "Troubled
About the Author . . .
John D. Behle is one of the foremost educators and
practitioners in the field of discounted paper investment. His
innovative strategies and techniques have shaped the industry.
With over two decades in the industry and an extensive
background in real estate and finance, John Behle adds a
wealth of knowledge and experience to his creative
John holds an National Council of Exchangors "Gold
Card" and an EMS designation. He is also listed in Who's
Who In Creative Real Estate. John Behle is the author of
several hundred articles published in national magazines and
newsletters and of several ground-breaking real estate paper
* The Paper Game Trilogy
* The Paper Game 5-Day Video Training
* Millions Of Mortgages In Minutes