Payoff at $88k on a note I bought for $52k, with a tax certificate almost eating it

Closing this one out at month 11 because the payoff funded last week and I want the numbers down while they're accurate.

The file. 2004 origination, note rate 5.25%, unpaid balance $141,200, last payment 27 months before I bought. 1,400 square foot three bed in a small southeast market with a working local rental base. Drive-by value $186,000, interior unknown, borrower occupied. I paid $52,000, so 37 percent of balance and 28 percent of value.

I priced three recovery paths before bidding, and this is the part I'd keep. Modification to a payment the borrower's documented income supported, which valued the file around $95,000 of present value at a 14 percent discount rate but only if he performed. Discounted payoff somewhere between $85,000 and $98,000, on the theory that a borrower with $45,000 of equity has a refinance motive. Foreclosure to REO, which I modeled at 15 months in that state, $19,000 of legal and carry, and a $158,000 net sale, so around $139,000 gross recovery at a duration that killed the annualized number. The foreclosure case was my floor, and the floor is what let me bid.

What happened. Servicer made contact, borrower's stated goal was to refinance and stay. I filed anyway and kept the case moving in parallel while we negotiated, which in that state you can do, though procedure and any stay effects differ by state and my attorney drove all of it.

Month four, the title update showed a tax certificate had been sold on the prior year's delinquency and the redemption window closed in nine days. I wired $5,600 to redeem, which is recoverable at payoff but was not in my model as a lump sum on a deadline. If that update had come 10 days later I'd have been litigating a certificate holder's position instead of collecting.

Month nine, his refinance appraisal came in at $171,000, not $186,000, and his lender's proceeds wouldn't cover the $95,000 I'd asked. I took $88,000 with a hard 30-day expiration in the agreement.

Out: $52,000 purchase, $4,200 legal, $3,700 servicing, $1,450 force-placed insurance, $5,600 tax redemption. $66,950. In: $88,000 payoff plus $5,600 recovered advance. $93,600. Net $26,650 in 11 months.

What I'd keep: pricing the foreclosure case as the floor rather than the upside, and ordering title updates every 90 days instead of at purchase only. What I'd change: I'd hold a reserve equal to two years of taxes on every file from day one instead of finding the money in a week.

2 replies

2dmitri_v6CapitalPRO6

The 30-day expiration is the clause I want to hear more about. On a payoff where the borrower's money is coming from a new lender, whose schedule actually controls? I've seen a DPO agreement expire because a title company sat on a payoff demand for three weeks, and the note holder had to re-paper the whole thing at a worse number.

Two other things I'd have in that agreement. First, the release and the note endorsement go out only against funds, and the recording of the satisfaction is handled by a party you name, since satisfaction and release recording practice varies state to state. Second, language that says the discount is void if the payoff funds late, which sounds harsh until a borrower's lender treats your deadline as a suggestion.

Did your $88,000 include the $5,600 redemption as a separate reimbursable line, or did you net it inside the payoff figure? Asking because if it's inside, your discount was really $8,000 deeper than the number reads, and anyone modeling from your post should see that.

4tonyv88SO4CPRO6

The force-placed insurance at $1,450 for 11 months on a borrower-occupied house looks light to me, and I manage in that kind of market. Was that a lender-placed hazard policy with no contents and a high deductible? That's usually what it is, and it covers your collateral position rather than making anyone whole.

The thing I'd add from the management side is inspection cadence. You had a title update every 90 days and I'd want an exterior with photos on the same schedule, sooner if the tax delinquency says the household is out of money. A roof that fails in month seven changes the appraisal your borrower's lender orders in month nine, and your $88,000 becomes $74,000 for reasons that have nothing to do with your negotiation. Sounds like you got a house that was being maintained. Worth saying that was partly luck.

Payoff at $88k on a note I bought for $52k, with a tax certificate almost eating it

2 replies