HML default / foreclosing

10 Replies

One of my hard money borrower has stop payment on his loan. I offered to buy the property for more then the loan amount but he wants to keep the house.

this is the first time I am going thru this.

Is there a way for me to get the house without going through the auction/sale process?

The loan is for 225K the house should sell for 525K when remodeled. I offered 315K.

I flip homes and could do good on the property.

It's either deed in lieu or foreclose. You aren' t getting title without either the current owner's signature OR the full foreclosure process outlined in your security instrument. Time to hire a foreclosure attorney unless the trustee named in your DoT can do this. Once the foreclosure process starts your owner will start thinking clearer about offers.

David,

I agree with Tom. Unless you can get the borrower to start paying again,  or get a DIL, you're forced to go after them. 

Typically, you have a interest rate bump in your acceleration clause,  18+%, plus fees etc. So long as it's not usury in the state you are in. Crank up the rate as high as you can and make their equity disappear. 

If you end up with a shortfall at the end, you can always go after them for the difference. 

You can also report them to the credit companies. 

I wouldn't be shy about letting them know that you can and will do everything to protect your investment.

Then see if they are more amenable to paying or giving a DIL

It's not a time to be wishy washy. Take firm action straight away. 

This assumes that you have already exhausted all other avenues, and you know that the borrower has the ability to pay. If they can't pay  (in over their head),  then maybe a modification is in order.  If they won't see the light at all, then it's hammer time.

You could also sell the note as non-performing and break even or make a bit. Some HML I know will finance NPN pools as part of their lending strategy. It might be an avenue where you turn a non-performing asset into a perfoming one.

Hope that helps. 

Good luck, 

Jim 

If the borrower is refusing to pay and refusing to hand it over foreclosure is your only choice.  Given your numbers it seems likely the foreclosure auction will draw bidders, so the borrower will get some money out of the deal.  You'll need an attorney.  They can advise you if you're allowed to bid competitively or only allowed to set the opening bid.  I'm not sure how that works.  When I was in your shoes the borrower did a deed in lieu.  The number were not nearly as good as your deal.

Originally posted by @James C. :

David,

I agree with Tom. Unless you can get the borrower to start paying again,  or get a DIL, you're forced to go after them. 

Typically, you have a interest rate bump in your acceleration clause,  18+%, plus fees etc. So long as it's not usury in the state you are in. Crank up the rate as high as you can and make their equity disappear. 

If you end up with a shortfall at the end, you can always go after them for the difference. 

You can also report them to the credit companies. 

I wouldn't be shy about letting them know that you can and will do everything to protect your investment.

Then see if they are more amenable to paying or giving a DIL

It's not a time to be wishy washy. Take firm action straight away. 

This assumes that you have already exhausted all other avenues, and you know that the borrower has the ability to pay. If they can't pay  (in over their head),  then maybe a modification is in order.  If they won't see the light at all, then it's hammer time.

You could also sell the note as non-performing and break even or make a bit. Some HML I know will finance NPN pools as part of their lending strategy. It might be an avenue where you turn a non-performing asset into a perfoming one.

Hope that helps. 

Good luck, 

Jim 

Not saying it isn't so but, I typically only see default rate provisions in commercial or business banking loans. Default rates on consumer real estate would be frowned upon by regulators...for the exact reason you stated...jacking up the rate so that interest eats up equity. Granted, as an individual investor, you would more than likely not be subject to regulators reviewing your practices.

Also, be careful to read the rules regarding deficiency. Depending on the foreclosure route you take, deficiency pursuit may be prohibited.

Finally, one doesn't just "Report to the bureaus". You have to be a creditor with the credentials and authorization to do so. It's not as easy as just "setting up an account with the bureaus and reporting someone to them". Typically, individual investors don't go through the gauntlet of compliance and certifications necessary to be an original creditor. Instead though, you could assign the debt to a collector that would be able to report to the bureaus and accomplish the same objective. Be careful on this though because while you may not be a big willey style creditor, you could still be subject to both FDCPA and FCRA regulations. Threatening to report someone to the bureaus without the actual intent or ability to do so could put you in the crosshairs of someone with a clip-on tie and a black suit.

I like the note sale idea you posed. 

Originally posted by @Jon Holdman :

If the borrower is refusing to pay and refusing to hand it over foreclosure is your only choice.  Given your numbers it seems likely the foreclosure auction will draw bidders, so the borrower will get some money out of the deal.  You'll need an attorney.  They can advise you if you're allowed to bid competitively or only allowed to set the opening bid.  I'm not sure how that works.  When I was in your shoes the borrower did a deed in lieu.  The number were not nearly as good as your deal.

You can set the opening bid or bid competitively in either case but you can only "recover" your total debt as the foreclosing entity. If your objective is to be made whole, great. If your objective is to receive the property, it's just as great with the only caveat that anything above total debt will go to satisfy any other lien holders (If applicable) and then back to the foreclosed...and not to you.

If it's worth $500M and your debt is $250M (All in, including fees, as an example) and no one bids, you get the property back with your credit bid f $250M. If someone bids $250M and $1 dollar, they get the property, you get the $250, the borrower gets the $1. If someone bids $250M and $1 dollar, sure, you can bid $250M and $2 dollars and if no one else bids, you get the property and the borrower gets $2...and so on.

@Wayne Brooks

You can’t set the reserve for more than you are owed. You can Bid more than you are owed, but you’ll be paying the difference in cash.

that's how I though it worked.  

@David Besins earlier said:

The loan is for 225K the house should sell for 525K when remodeled. I offered 315K.

So, at the auction, he could bid up to whatever price he wanted.  The reserve (or opening bid, which I think is how it works around here) would be set at $225K plus foreclosure costs.  If David were to end up the winner at $315K, $225K would come to him, he's paid $10K or whatever in costs to the appropriate parties and the remaining $80K or so would go to the borrower and he would get the property. If someone else wins, he would still get the $225K he's owed, but not the property.

A quick update. The broker with whom I work on a few project referred me to the title agency that handled all of our closings that has a "foreclosure" department.

I have starte the paperwork, release etc.

The title agency employee mentioned that we would set the starting bid based on everything that is owed to me and that of course I was free to bid on the property. But I could not come up with an opening bid or a reserve... :(

On the other hand I received an up to date "due" from the payment servicing company and the late fees and default interest really added to a lot already (almost 7K VS a monthly PMT of just 2.4K) he only missed one pMT so far (coming on 2). But his unwillingness to work on a reasonble solution is what bothered me.

I can see how a realistic 95-100 days until foreclosure fees can end up adding to quite a bit.

We shall see, I hope the owner will start to realize it is best for everyone to sell me the property at a fair price.

When my agent visited the place prior to making an offer he saw that obviously someone was living in the house. The borrower signed a document with the loan packet saying that this was an investment property and that they would not live in the house.

We are moving forward with the foreclosure, and the guy is starting to say he will take this to the press(???) he owes me around 7K so far with late payment etc.

I wonder if there is anything I can should do about them living in the house?

Thank you