Breaking Down Two Illinois Sub Performing Notes

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This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property For Panties on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host CEO of We Close Nodes, Scott Carson.

Hey Real estate investors, this is Scott Carson. I'm known across the country as the Note Guy and I've been an active note investor focused primarily on the niche of non performing notes, distressed mortgage notes on residential commercial properties for almost 20 years now. My company is we close notes.com and I know there's a lot of different things when it comes to the note world. Are you buying performing notes? Are you buying owner finance notes? Are you buying institutional debt? Like I would focus on Are you buying first seconds contract for each There's a lot of questions and it can be very confusing about what you can or cannot do. So one of the great things that we've hosted for the last couple of years that we do on just about a regular monthly basis is we host our one day class called Note Weekend. If you go to noteweekend.com you can register for our free three and a half hour class. We'll talk to you and share with you how you find fun and flip non performing notes. 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Love to have you be part of our note family but get signed up today@noteweekend.com thanks and have a great day. Good morning, good afternoon and good evening everybody. Hey, welcome to this episode of the Note Closure show. As always, Scott Carson. Excited to be here with you today. Today's I'm gonna break down two sub performing notes that were sent to me. I don't know about you guys, but I do spend time on Facebook and some of the different groups people will post, hey, I got two notes for sale. Or I got a couple notes who's buying notes? And a lot of time they're crap. I'm just gonna be honest with you. But you do find some decent deals and the only way you know if it's a good deal, a bad deal or a dud is just by breaking the deals down. So I responded to a guy said hey, yeah, it should be over. He asked if anybody was buying notes. He's got two deals. They're in Illinois, which is not my favorite state, but these aren't in Cook county so that's a bonus. And said that, hey, got a friend with two of these notes. They're sub performing. I'll talk about that in a second. But the sellers want about 67 cents on the $.67k combined unpaid balance, about 100. I said, okay, let's take a look at it. Well, the first question, let me answer for you guys and gals out there as we we dive into, you need to know what is a sub performing note? Now what is a sub performing note? Now sub performing note is where somebody has not paid on time. I call it sub performing is different than non performing. There's a big difference here. If somebody's like 30 days behind, 60 days behind I say they're sub performing. You know, they make a payment and there's always like two weeks late or right at 30 days late they're getting caught up. I've had plenty of borrowers that were kind of behind the eight ball a little bit a month to month they're, they're making up before they go late and that's fine. I, you know I'll consider that a performing not almost if they as long as they pay. But in this case on the notes that the guy sent me, he said one is 60 days behind, the other one is 30 days at least behind. So I count them both at 60 days behind is the way I look at it means they're not performing, they haven't made a payment at least 60 days. They're a month away or 30 days away from being in a non performing status of 90 days late. Okay. So you almost have to price another guy. It's pretty honestly pricing at 67k. It's roughly at that point where it's already a non performer for the most part. Not these aren't the, the prettiest of assets. They're also by far not the ugliest of assets. But let's go through the the information provided so you can kind of see what it looks like if you're, if you're listening to this. Thank you, thank you for subscribing listening to the podcast. If you're watching. Hey, make sure you hit the subscribe button now so that you're always up to date when we do these types of videos or types of podcast episodes as well. All right. Because we you know we love to share these everywhere but make sure you subscribe to the channel or my following so that you're up to date on seeing different deals. So anyway, what are these assets look like? So you have a bit of an idea. Well this is in Lewistown, Illinois is the first one Mean it's not bad. It's on pretty decent about a quarter of an acre. This is a photo from two years ago actually this is a photo actually this one is actually sooner. It's about six months ago based on we saw because it's actually when I looked at online photos versus the actual Google the online photos were a little bit older and the property more work. So whoever has bought this this and I'll go through the details actually has started to fix it up. Okay so that's a good thing. There's a lot more photos online of it before it was occupied before it was bought and sold on terms okay. The other one is in Peoria, Illinois. It's not a bad looking little, you know, white house, looks the same. This photo didn't have any interior photos really for the most part, but you can see it's occupied. This is from last year. This note's a little bit more seasoned than the previous one. You know, they got kids because they got this trampoline here. I don't think adults are just jumping on trampolines for the fun of it. But that's okay, you know, not a bad looking little house. Not a bad neighborhood in Illinois either. Like I said, neither one of these are in Cook county. So that's a bonus right off the bat. The fact that they're both occupied is not a bad thing. What will we do to get them back on track? Well, we'll talk about that a little bit later on here for you. So I'll show you. Both of these deals aren't, like I said, they're pretty normal cookie cutter single family homes. We look at the tape. Both are first liens are contract for deeds. They're sold on terms, 20 year terms, single family residences. Both are owner occupied. The seller of these, I'm not giving you the name, I know who they are, have these both at 12% interest, 20 year loans. So the monthly payment's pretty good size. That is actually kind of bit of a red flag based on some news that came out today. And I'll talk about that later on, but it's not anything that's a killer. Okay. Like I said, both are owner occupied, Both are about 60 days late. So consider sub performing. And both of the taxes are paid up to date to mid year. Okay. Second half of the taxes are due and in both situations the borrower put two grand down. Each different bar. It's not the same bar. Okay, but they both put two grand down and that's kind of the seller's M.O. get two grand down, finance them at 10 to 12% for 20 to 30 years. I mean, 20 years. Something wrong is good. It speeds up a little bit. And like I said, seller's looking for around 65, $67,000 for combined, both, not individually, but for both based on what they, they posted. So it could be a, you know, decent deal. So let's look at the Lewiston one or the Lewistown one. Not ton Lewistown. I spelled that wrong. It's a three bedroom, one bath, thousand square foot home built in 1930. It's a 9,000 square foot lot. This is a little brown house. Let's go Back to the house. You can see this is Lewistown. Okay, so that's a 3:1. All right, let's go for here. Boom, boom, boom. Purchase price was 47,604. The current unpaid for this balance is 45, 511. They put 2k down and then made a couple payments. Their market value is around approximately about 50k. All right, it's about 50k. Rent rate's about 1100 month. Now that rent, that fair market value could be higher depending on what type of repairs the borrowers have made. There are more photos of the property prior to being sold on terms. So hopefully the bar has gone in and make some updoor. I know right off the bat that they fixed the screen door because on the photo before screen door is hanging off which is okay. It's got a P and I payment of attractive. Basically 502 14amonth. That's nice. Escrow of tax and insurance is 262amonth. Taxes incurred. Like I mentioned, it's about 1100 dollars, $1300 a year. It was originated just six months ago though. That's the thing. That's kind of a bit of a red flag. Originated in February of this year. They made roughly four months of payments and have fallen two months behind. That's the way to look at it. And that's why that 12% at 20 years. I mean that's great for an investor to get a 500 plus month payment which is great. But it's a little concerning because it may be a little difficult for the borrower. Now I don't know what kind of qualifications the seller put the borrower through. If they may be dot frank compliant. We'll talk more about that later on. Like I said, 60 days late approximately. And like I said, it needs some cosmetic work but it wasn't terrible. I mean it's got the wood, older wood paneling. There might be a basement on this one. I wasn't sure. Carpet's not bad. It's not a bad looking little house. It could be a great little rental. Not bad Part town based on what I could tell everything looked pretty good in the neighborhood. Okay, let's go into Peoria. This was that little white house. It's. It says one bedroom, one bath but at 1496 square feet. I know it's bigger than that. It's a possible duplex because I did see a listing for the address part. You know B, it's actually in one. Zillow says it's one bedroom but it's actually Looks like it's a four bedroom based on other things I found. So they've actually done some work. Was built in 1910. There is a unfinished basement attached to it. Based on the original listing, fair market value is approximately once again around 55k. Wasn't really sure on that. I put that kind of. It might be higher than that too but about 55k. Purchase price when they sold it on terms is 59. 5. So I imagine it's somewhere around that 50 to 60 mark. This one has actually been around a little bit longer. Current UPB is 55 400. The PNI payment of 633 12amonth is extremely nice. Escrow payments of 196 months. Taxes are paid up to date. Rent rate's about a thousand dollars a month on this one. Okay. And it originated back in 2021. October 18th of 2021. So it's been around for 34 months of season. So I like this one a little better. But once again bar is about 60 days late. Okay. Now it's not, you know, it's right on that cusp. Could they get back on track or we're going to go another month late and they're going to be definitely not, you know, in default at 90 days late. Okay. And you point when I see something like that and I look at these things like this, what do I see when it being at a 12% at 20, your mortgage, that 12% rings out. Is there a way, don't be wrong. I like a higher interest rate. And yes you're being the bank when your owner financing these. But is it predatory? Did it put the people. 12% is more like a hard money loan. Okay. And so you got to keep that in mind. So here's when you look at the numbers based on what's been told to me, what I've been stated, they have a combined unpaid principal balance about a hundred thousand. Their fair market value somewhere around 100, 105, who knows. But it's going to be probably at least that. You know, if you add the two P and I payments up it comes to 1135.26amonth. That's a combined annual cash flow of 13,006 23 if they start paying on time again that's the thing. If the seller, like I said looking around 65, 67% if it's. If you pay 67 is about a 20.3% cash and cash ROI. If you're using your own money, that's not a bad day. Right. That's a Pretty good day for anything if you're 65. Now I said they're flexible, you can get at 60, maybe get a little bit, I don't know. I haven't put an official offering on these things, but I'm just going off of what they basically told. So 20% ROI is not too bad. That's if they just start paying. Now if you can get the borrower back on track or get the borrowers back on track, I should say. And they make up those 60 day late payments over time a little bit each month like a forbearance agreement, it could be as high as almost 24%, 23 points. And let's just take in the monthly P and I payments of 14 months, not 12 months over your $67,000 investment. That's first year and then you year two and beyond would be about a 20% of just making the monthly P and I payment. Okay. Now the eviction process, if they don't pay once they get to 90 days, can take you, depending on what's going on, somewhere between three and six months. Now the nice thing is that these are contract for deeds. So it's more of a tenant relationship versus a foreclosure process. Foreclosure could take you six to 12 months. In a lot of cases, six months is usually going to be on the lighter end. You could always do cash for keys for them to walk, you know, say, hey, just walk. If you're not going to be able to pay, we'll let you get out of here. But if you look at the property, what would you do after it? Combined rents is about 20, 20, 100amonth. That's been a little conservative. If that one is a duplex, you can probably get some more, but that's about what my rents are. Fair market values somewhere around 100 to 105, depending on repairs that have been completed. If the one had, if the borrowers have gone in and fixed these up, painted and put some TLC into it, they could be worth 120, 130. But conservatively right now I've been about 105. Okay, so if you do foreclose or evict and turn around, sell these assets, you're not really foreclosing because it's a contract for deed. You could see, you know, some are making around probably 20 to 30,000 after your commissions and closing costs. If you sold about a hundred and you netted 90, you're gonna make somewhere around that, you know, 20 to 30,000 marks somewhere in there. I don't know exactly. I don't have a crystal ball. I've not sent a real drop. But that could be. I mean if you're making 20 grand on a $67,000 investment, that's a pretty good day too, right? 20,000 on 67. Let's look at that. So if you're 20,000 divided by 67,000, that's a 30%, 29.85% cash and cash return. That's pretty good, right? Well, it's not a kid out of the ballpark retire type of deal. It's not so bad. That's not considering if you have to give any cash for keys or stuff like that to help them move. Which is what? You know, if you've got a victim, go the longer route and then go through and fix it up. That's a different story. So we're just going off that. So what would I do? That's always a question people ask me, Scott, what would you do? Well, I want to answer a couple questions answered during my due diligence. Why have the borrowers fallen behind? I'd also want to see, let me see the servicing notes. Have they been responsive to the server? I sure as hell want to make sure that these were a third party servicing company. They're not with a third party servicing company. I'm not going to be paying 67. I'm be paying probably 60. Okay. Because I got to see what's going on, you know, what's going on from the seller. The good thing that I did notice that if they're collecting escrow, taxes, insurance, I did see that the owner of the property, not the borrowers, those have been paid, the taxes have been paid for the first year. So that's, you know, they've got some escrow money in there that's going in towards taxes and insurance. Okay. But I really want to look at the financials. Okay. Can we get the bar back on track? Can they get back on track, have it communicated or do we need to look at an exit strategy besides eviction? Do cash for keys. If not being able to get back on track. And that's the thing, some people just can't afford to get laid off or gone if one's got kids. You know, I want to have a heart, but I also don't run a charity. I donate to charities. I'm not one. Okay, so the possibility here is, you know, looking at the, I wouldn't want to look at the loan package. What can they afford? Is this a predatory loan? You know, is, is what they have coming in on a monthly basis is this monthly P and I the cost for their housing more than 43, 45%. I like to be at 40% or less for somebody. So if it is that, you know, while a 12% interest rate is attractive, it might be a bit extreme. You might need to modify these things because today the Consumer Finance Protection Bureau came out with that. They're wanting to crack down on people who have originated contract for deeds because they call them predatory. It was primarily kind of stuff. What's going on in Minnesota. The article that the CFPB talked about was oh, that investors are targeting these religious beliefs, these Muslims in or immigrants in Minnesota and they're being very aggressive. Higher interest rates and low down payments, they can't really afford it. It was kind of a bullshit article focused on winner. Yes, there are very unscrupulous people who if they do those kind of things are bad. But if you run a borrower through con, you know, a rmlo, obviously you can't get a traditional loan for under a hundred thousand. So that's the flip side of that. People want to get into a house, they can't go get a bank loan for a hundred thousand. Contract for deeds or owner financing is a very possible way. And the reason I would do a contract for deed in Minnesota and Illinois. Minnesota, once you foreclose, it's a one year redemption period. You can't do anything in that property for a year. That's not a good thing. Illinois, once you foreclose, there's no redemption periods. Okay, but the reason they do contract for deeds is an eviction which is much faster than a foreclosure. Okay, so this is why you might need to go back to these borrowers, look at the financial say, what can they afford? Do we need to modify the loan? Do we need to drop it down to 9.9% interest? Do we need to take it from a 20 to a 25 to a 30 year term? You know, what will that do to make sense? And you're going to have to evaluate that. All right. You could run the numbers yourself and figure that put in an amortization table really easy to see if that makes sense for you. Okay, that's, that's the thing to look at. I mean let's do that real fast. Let's just, let's just do it so you guys can kind of see what I'm talking about. Let's go over to our good friends over at Google. So let's just do a 30 year amortization schedule. All right, here we go. Pretty easy. So we did the first one. Come on. There we go. All right, if I look back here, actually, let's just do this. So the combined UPB is 109. 11. Let's just do that. 109 11. We do a 30 year and the interest rate we change this to is 9.9. And the loan start date. Yeah. Okay. So here's what you see. Now their monthly payment drops to 878. Okay. I mean 30 year. 878 right there. If you do a 25 year, I would let you do. If you keep it at a 20 year, it's 967. 967 or 858 or 878. Okay, so let's do. Let's just figure this. So let's say if we take 878 times 12 months, that's 10,005 36. You divide that by 60. Let's just say 67,000. That's still a 15.7% return combined. Okay. It's a little bit different. One's got two more years of seasoning than the other one. That's okay. Hey, we're just going to extend your buff behind. We're just going to extend these to a new 20 year mortgage or a 30 year mortgage. So you can still make a 16% return by dropping it down to 9.9 and keep them 30 year. Now if you do it at a 20 year, 967 times 12 is equal to that is 11,604. Divide that by 67,000. That's a 17.3. So by modifying the terms of the deal, you're going to be making somewhere between a 15 and 15 and 17 cash and cash return by modifying. So that's. That kind of makes sense. It all depends on what they can afford if they're without a job, you know. Now you would want to use an rmlo. There's gonna be some costs associated with doing an RMLO to structure those deals to make sure that they can afford things. But it's pretty simple. Look at what they have. You know, I would probably still do a contract for deed because if it's a mortgage, you got to foreclose. So I still do a contract for D, but I would adjust the terms, modify the terms of the contract for D, extend the years or leave the term. That's the same but drop the interest rate if the bar can get back on track. And that's what I would say. Listen, you're Two months behind. I'll tell you what, if you can start, can you start paying your existing payment? If you pay your existing on time and a little bit extra to catch up on these two months you're behind on. If you do that and you're caught up in six months, we'll drop the interest rate to 10%. We'll drop a 2 percentage point. So they'll make your payment go down to this. You know, that's not hard to do. I mean, that's, that's the thing. Do you want cash flow or do you want the asset? For me, I think the cash flow makes sense. But that's the big thing is if they're not making money, if they're struggling to get by, you might as well just go ahead and cut that limb off and say, listen, you're struggling to get by. I get it. It's more expensive. This is just not going to make sense. I can't give it to you at 6% or 5% because that's more than, you know, you're losing money at that point, especially if you've got money costs. That's the thing to keep in mind. What's your money cost going to be? All right, so that's what I would do. I would review it. If you want to make an offer. Hey, there's some different opportunities there for you guys. As always, you can always reach out to me, you know. You know, that's the big thing look, you know, going back into this. Reach out to me. But why the borrowers fall behind. Review the servicing notes, you know, we go back through. Yeah, exactly. Might need to modify the 1 to 10% interest rate and extent term. What would you do? It's a great return to reinstate a forbearance agreement. There we go. I forgot these things. So like we talked about modifying. Might depend. Might be a good thing to be on term. Exactly. I'd rather have borrowers working at back contract before I modify the loan of my note. Yeah, exactly. Instead of evicting, offer cash for keys to get the properties back. I'll give you two months. I'll give you a down payment back two grand. Or I'll give you 500 bucks to walk outside of evicting. Give you something to move, something to. Be nice. I'd have a heart. All right, that's, that's the biggest thing. Because this seller, I'll tell you right now, it's not the only stuff they have there. Look, this seller's got a bunch in these two counties or two Cities that are noticed that they're structured in this way, they're going to have more non performing stuff and they're kind of primed for being in a bad situation. If they're doing all 12% interest rates and not running them through normal, okay, but if what you do with the property, if you sell them, fine. If you rent them, keep it as a rental, you want to do that, that's fine. Or owner finance the properties, another contract for deep. That's totally up to you. All right, that's totally up to you. What you want to do, what you want to accomplish. Unfortunately, like I said, the value on these assets below the 100,000 or 125,000 point that a bank would come in and get financing on this stuff or they could refinance you out. Just not going to happen for the most part. Now what you could do is see if there are any type of rental assistance programs or you know, down payment assistance programs for borrowers in these areas. Sometimes you'll see that Illinois has had its fair share of those types of programs in the past. Okay, so get more information guys. If you'd like to reach out to me@scottclosenotes.com that's my email direct to me. You can always book a call and Discuss this@talkwithscottcarson.com if you have a deal or two you'd like for me to go through, feel free, email me. We'll be glad to break it down here live on our podcast so that you can learn. But others can learn as well. To get deals like this, join our monthly membership. It's not too difficult at all to do that. Just go to noteumbrella.com get signed up for 97amonth. It gives you weekly coaching calls, access to tapes and other great things. Yes, we do see assets coming in on a regular basis. So as always, thanks for listening and watching. Make sure you hit the subscribe and the follow button. And most importantly, go take some action everybody and we'll see you at the top. Bye, Ram. Sam.