When a Performing Loan is NOT A Performer #noteduediligence

Foreign.

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.

Good morning, good afternoon, good evening, everybody. Welcome to this episode of the Note Closure show. As always, Scott Carson, Excited to be here with you today. And I wanted to talk. This episode is all about when a performing note is not a performing note. Now, this is an actual. I'm gonna talk about an actual deal that's going on right now. I've got a student of mine, Jessica, who's doing phenomenal things and she's in the process of buying her first couple notes. Okay? Now she's doing great. She's still working full time, doing a great job of marketing. She's freaking phenomenal. She got tape in of assets. She made some offers and she got five offers accepted. Now, these notes were originally listed as performing on the spreadsheet. It said performing loan. It didn't give the last payment date, but it did say the cutoff date was August 31st. So she's been working through this tape for the last couple weeks. And they weren't big balances. I think the most, the biggest balance on it was like 20 grand, I think, or 25 grand, maybe 30 grand, something like that. There's some smaller balances on it. But she liked that because she's like, okay, I can need to be. I can use my own money in my IRA to make this deal happen. And they're performing well, there's all these five notes. It turns out that they're not all performing. Okay. Now they said the last payment date made was like August, you know, and it's not so bad, the tape being cut, the copy being August 31st when it was pulled. But as she's gotten more information from the seller, this has not turned out to be performing notes. Now, the first thing that I'm telling you right now here is you're probably some folks are not going to let me sing this. And the seller, when I've had her push back to the seller, they've gotten a little testing. We're not going to make any names. But they're a little stressed out because I'm hearing things from other people that have bought other assets from them recently. But that's okay. It's what it is. But here's the first and foremost thing, when you look at taxes owed, that should be the first sign that it's not a true performing note. This is any mortgage loan agreement contract, the contract for D, first lien, second lien, whatever the borrower is responsible for paying the taxes and paying insurance. Okay. Now if they're not doing either one of those things, I don't care if they're making their mortgage payment on time, that's great. But they're not paying taxes, insurance and the investor, the note investor has to pay that. That's not a performing note, it's a, it's, it's not really performing. Yes, they're paying a monthly mortgage. P and I pay with that. Paying T and I, that's half of the equation. So what do you have to do? Well if you're making a bid, you have to deduct those costs, whatever it's cost you for insurance, for force place insurance and then whatever the tax is owed on an annual basis, going to deduct that and do not be afraid to push back. Say listen, you're this borrower is not paying these things. How do you ask that? Well you ask the seller to provide a payoff statement from their servicing company. Now if they're not dealing, if they're self servicing, that's another red flag that you need to pull. You know you're not going to make a normal 80, 85% of UPB for a performing note. You're going to deduct it quite a bit because now you're going to pay servicing costs monthly. It needs to be paid. Usually you can't add that into the PITI payment unless it's owner finance that was instructed in the front end side. So you know some of these sellers out there that have owner finance notes, they nickel and dime this stuff but it reduces the value of their paper dramatically because not paying like a third party servicer, 20 to 25 bucks a month to collect the payments, when they originate the note properly, they can put that into the cost that the actual borrower pays. But lo and behold a lot don't do that. So anyway, if taxes aren't being paid now, I'm okay. If there's a year back taxes owed and they paid it or they're on a payment plan, that's fine. But if the borrower has not set up a payment plan or not made a payment, these are things you can call and talk to the county about. That's a non performing note. They'd be on a year those taxes to be paid and you need to deduct those taxes from the amount of your bid because you're going to have to cover that. Make sure that it fits in your roi. It's also very important to ask the county if there's any type of tax certificate or tax sale or foreclosure tax, foreclosure taking place. And that will vary on a state by state basis. Okay. Once again, ask your seller to provide a payoff statement from the servicer showing and making sure that the balance that's owed matches up with what's on the spreadsheet. Now, you may see where the payoff amount is not the same as what they gave you on the spreadsheet. And it could be a variety of reasons. One, maybe the seller's paying extra each month on top of their existing payment. That's a good thing. But you don't make your bid off the X rates off the base P. And I am not, especially if they're in a modification or reinstatement, they're just paying extra. That's great. But you don't calculate that in because it's not contractually obligated for them to keep paying that. So you take a look at that. That extra then may go into an escrow account or holding account and then the servicing company won't credit it towards an extra payment until a full payment is on deposit with them. So you may see where there is an escrow balance sitting there for tax reinsurance. They may also click. I think it's better if the servicing company is doing escrow. I prefer them to do escrow. That way things are on a regular basis. You run in more issues when there's not escrow included. So those are the, you know, those are the first couple of big red flags. Borrowers not paying their taxes on time and they're not paying insurance. That is not a performing note. Then also too, you have to look at when the last paid, when did, where did that payment apply to? And so you have to ask for payment history of where payments. So, like I'll give you an example. Jessica ordered asked where they sent her a spreadsheet. And she can see that the borrowers made a payment last month, but it was not towards August payment or September's payment. It went to March's payment. I'm like, whoa, that's a big red flag. They're six months behind. Technically, yes, they paid. And if we look, you can see, okay, they've only, oh, they were behind by four or five months. Well, they're not making payments on a Regular basis or they miss a month, miss two months, they make three payments. Well that's scratch and dent. That's not technically a performing note. So you should deduct there a true performing note that somebody's paying each month on time. I don't care if they're 10 days later, 15 days late, that's not a big deal as long as they don't get beyond 30 days late. And I don't care if there's it shows on the payment history. They missed a month, they made a double month payment. Sometimes that'll happen. Or they'll pay double payments one month and skip the next month and it credits, that's fine. But when you see somebody who's at least 90 days behind or 60 days behind, that's a no go. All right, we're looking at buying another performing note from investor out of Houston. And this bar had been paying on time for over 18 months. Well, guess what, they went late the month we started looking at a deal, then they went 60 days late. We're like, this is no longer performing. Now we have to deduct our bid, reduce it by 10, 15, 20% or take some of it off because it's no longer performing. And the same thing. Are they paying insurance? Oh no, we're paying force place insurance. Well, guess what, if it's 700 bucks, that's what costs you per year for this asset. We're deducting some hundred from our bid, people. Oh, you can't do that. It's like, yeah, I can because it's now a cost. It's not if I'm getting five grand a year, but now as I'm getting 4300, my profits have gone down because of that. So that's the thing to look at. Look at your payment history, ask for them, hey, what's the payments, where are they at? Because the payment history should show when a payment was made and then show which month that was credited to. Okay, so if there's different circumstances, let's say somebody brought, they were behind by two years, they brought five grand or ten grand to the table and they're still a little behind. That's a different circumstance. But I'm still going to want to see them pay on time. I prefer if the borrowers are set up in ach. Are the bars up in ACH or not? You know, Automatic clearinghouse where that automatically gets deducted. I don't care if they split that payment up and they make a half a payment every two weeks. I'm fine doing that we've done that for a bar as well. But if a bar is making a payment, if they're due for August, that payment needs to be going to August, not going for six months ago that they're behind on. Okay. And you got to push back. Some sellers are going get antsy and get aggravated if the balance is less than what it shows of what the spreadsheet. You have to reduce your bid based on the new balance that you find and the new payoff balance that's less. In some cases it's quite a bit different, several thousand dollars difference. So that's the thing. And push back and don't, don't be bullied by the seller asking for this information. They would ask that they would want the same information to you as a buyer if their foot was, if the shoe was on the other foot. Okay. So keep that in mind. It's okay to push. Hey, I need servicing information and I need what you're paying for fpi. If somebody says well I don't know we're paying well that you're paying for it some way I need to know what I'm going to pay to keep with existing servicer. Okay, great. Is there going to be a cost to transfer then or can you get that cost wave for a new setup? That's important. What else? So we talked about taxes that's not being paid, force place, insurance, the balance, the payoff balance being less. Oh, most recent payment, where did that go to, how many months behind or stuff like that. So those are the things to look at. That's when a performing note should be pristine paper. A re performing note should be pretty close pristine where they paid at least 12 months of on time payments. They're not behind by anything. They are behind and they were back on a mod. Then where are they at in that mod and what's going to happen after that modification or trial payment is done. That's another thing I look at, look at the modification or trial payment plans to make sure there's not some clause in there that's going to get you tripped up. A few minutes ago we had a student of ours, Laura was buying a note. They had a modification agreement. Buried in page two or page three of the modification agreement was the payment plan that the borrower make normal payments for 12 months and then payment from 13 to 36 was $0.01. I'm not joking. 24 months the borrower was only going to make $0.01. That's a big no go there for you. That means you're paying Zero for that note. For the most part too. So keep that in mind. That's really, really important. And stick to your guns. If you feel something's off and something the seller's not providing information or a collateral file. Oh, here's that's another thing. That was what I was thinking about. If they don't have the collateral file, that's a not. I don't care if the borrower's paying on time. That's an issue. If the bar is suddenly unable to pay and you try to go to foreclose and you don't have the documents, the assignments, the lounges or the, you know, copy the original docs, or at least a lost note affidavit, it's not. The value of that asset is less because you don't have the collateral. All right. And you know, we've canceled contracts because collateral isn't available or we cancel our own contracts because we couldn't find the collateral for a couple months. I'm sorry, Mr. Buyer, I don't, I can't find that. The files are missing. I'm going to have to cancel this agreement because I'm not going to sell you something that doesn't make any sense. So make sure it's with a third party servicer. Make sure you find out what the servicing fees are. Not all servicing companies are created equal. And then, and just touch base talk with the servicer. What's the insurance look like? Would it be easier for you if you have five assets or more to get a blanket policy versus individual policy? Sometimes it's a lot cheaper and insurance companies will insure differently when it's like that. So that's my best tip. That's, that's when a performing note is a not. It's not a performing note. These are things to keep in mind. May trip you up if you're a new investor, but it's kind of common sense. But if you don't know what to look for, you don't know what to say, you don't know what to ask. As always, if you have any questions, feel free to drop me an email at scottclosenotes.com or book a call at talkwithscottcarson.com and make sure you follow me on all different social medias. And thank you for listening and don't hesitate guys, reach out. We're here to help you and we want you to take action. Best thing you can do is make offers. And the more offers you make, the better you'll get at looking at things, the better. You get a due diligence and the closer you'll be to the top. So we'll see you guys later. Have a great day. We'll talk to you later, everybody. Bye.

Sam.