The F-Word of Note Investing – Foreclosure

I really like note investing, but it’s important to spend just as much time talking about what happens when things don’t go as planned as when they do.  The obvious “thing that might not go as planned” is that the borrower might just simply stop paying their mortgage.  If you are buying 1st performing notes with a reasonably good payment history, like I am, this is not the norm…but it does happen.  I am currently going through a foreclosure on one of my properties now.  It’s not my preference to kick someone out of their home but ultimately they need to provide proof that they intend to keep up their end of the bargain.

What appears to have happened in this case is a typical scenario.  The couple broke up and the seemingly “responsible” one in the relationship is no longer living at the property.  I gathered this information by a few calls to my note servicer (FCI) a few months ago.  They have gone silent since, and are now at the time of this writing 136 days late.  I initiated foreclosure about 2 weeks ago, as you generally have to wait until the note is past the 120 days late threshold.

It should be noted that many properties that go to foreclosure don’t actually get all the way through the process.  It’s often a wake up call for the borrowers that they are about to loose their home, and they often come running to make-good.

Assuming that doesn’t happen, what happens now?  Every state has vastly different foreclosure laws and timelines unfortunately.  Some states require a time consuming “judicial” foreclosure through the court system which could take many months or even years.  Luckily this property is in Missouri which is a “non-judicial” state which generally has a foreclosure timeline of about 2 months.  I will keep you all updated so we can all see if that timeline is accurate.

I’ll skip some of the legal step-by-step but when the dust clears on any type of foreclosure either the property has been sold for at least the amount owed on the note PLUS YOUR LEGAL FEES, or if that doesn’t happen you, the lender, become the owner of the property.  Some investors actually invest in non-performing notes with the intention to foreclosure…just as a cheap way to acquire a property.

If you get paid out the whole amount owed, that’s great!  You most likely bought the note at a discount and now you’ll get a nice “Kicker” to increase your yield.  If you get the property, you can turn around and sell it on your own or rent it out and earn some profit that way.

 

I’ll continue to keep you all updated as my real life foreclosure plays itself out and we all see what happens.