What repercussions does borrower have if foreclosed on by private
Vancouver · Member since 2013 · 159 posts · 6 votes
What repercussions does borrower have if foreclosed on by private
26 Replies
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
Depends on the state and the details of the loan. These are not normal residential loans. They're commercial loans. Don't assume the same regulations as for a residentail loan.
I have had a borrower default. They peacefully handed back the property via deed and lieu. My partner and I took no further action against them. Had they forced a foreclosure (much more costly) I would have taken further action. If it had gone that far, and I did receive a judgment against them, rest assured I would have made sure it hit their personal credit report.
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes12y
If the foreclosure process were to happen, I know the lender would take control of the property to get his money back.
Well, maybe. The lender would initiate a foreclosure process (judicial or not) and might get the property back if it didn’t sell at auction. Just trying to dispel the myth that the lender automatically gets the property back or might lend for this purpose alone.
However, after that happens, is there anything that would go against the borrower besides his own money he invested in the property?
At closing, you could obtain a personal guarantee from the borrower, which would allow you to go after his or her personal assets in the event foreclosure didn’t make you whole. This would involve a separate lawsuit, judgment, and collection (i.e. a mess) and it might not work.
Depending on the existence or availability of any personal assets, personal guarantees are often not worth the paper they’re printed on. Plus, there are reasons you might not want to ask for a personal guarantee.
You shouldn’t ask for a PG if you loan to retirement plans. Another reason is that sometimes these bother borrowers (or their spouses, we’ve found) and you might choose to avoid them to develop a competitive advantage in your business.
However, after that happens, is there anything that would go against the borrower besides his own money he invested in the property? Since the foreclosure process is non-judical, the process is not the same as a regular loan through a bank
This has nothing to do whether you loan in a judicial or non-judicial state. If you service your notes yourself, you generally can’t report to the credit bureaus. Many/most note servicers will report to the credit bureaus if you want to go that route. Different topic, but many small private lenders, and larger, swear by the convenience of a note servicer. [Why is it that I can see your next post coming, Taylor? :-) ]
Keep in mind that foreclosure, DIL's, or a FICO ding, are not enough to be assured you will be paid back. In my view, the easiest way to avoid this mess is to make sure you know that your borrower is extremely experienced and buys at prices he or she is sure to make money at. Plus, always loan at a low enough LTV that you will always be made whole through foreclosure or a deed in lieu if it came down to that.
Jeff
- Vancouver · Member since 2013 · 159 posts · 6 votes12y
Thanks Jon and Jeff, helpful as always.
If the borrower forces foreclosure of the property, how long does the process take and how much does it cost? Is there a rough estimate you could give or does it just vary too much to even give an answer.
Jeff,
When you say the lender might get the property back if it didn't sell at auction... What would be the alternative? If it sells at auction, the lender should be paid back, correct? If it didn't sell, then shouldn't the lender take control of the property? I am just learning how that process would work so I easily could be wrong, but I thought that's what would happen!
I agree with just making sure the LTV is low enough and finding a good property and avoiding this whole mess... but I figured I better be prepared for worst case scenario.
- CA · Member since 2011 · 762 posts · 182 votes12y
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
If it sells at the auction, the winner of the auction gets the property. Not the lender. The lender normally just sets the opening bid, typically at what they're owed plus costs. If someone else bids, they win and get the property. The lender gets the amount they're owned (i.e., the opening bid amount). The excess, if any, goes to the borrower.
The one time I did have a default, we thought we had a strong value position. However, it was a difficult to comp property (busy street, across from a high school) and by the time the borrower was ready to sell the new comps only supported a much lower price. We finished the rehab and sold it. At a loss pushing $18,000 on the sale itself. Fortunately we had eight months of interest payments, so the actual loss was quite a bit less.
I get the idea you're going to be the lender. Valuation is just as important to you as the rehabber. Do not trust the rehabber's value. Do your own appraisal, with your own lender at the borrower's costs (just like a bank.) Learn values yourself and be sure the value makes sense.
As for cost what I see in Denver county public trustees records is that about $10,000 typically gets tacked onto the balance owed. Thats a combination of late payments, late fees, and the costs of the foreclosure itself.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes12y
If you are going to lend make sure the loan amount for your first one is not a big part of your overall cash position.
This way if it goes south and you take a hit it will not take you under.
If you listen to note owners or other companies they spread out the risk among many notes they own. It's just like bill collectors buying accounts in bulk. Some borrowers will file BK and wipe out what is owed, some will pay, etc.
Overall in the end is your investments on the plus side and how hard did you have to work for that return is key. I looked into buying notes but right now it appears to me those are a job in itself. Especially if you go after the value add seconds to get them performing again.
- Vancouver · Member since 2013 · 159 posts · 6 votes12y
Great information, cleared up a couple of questions I had.
Jon,
If the property doesn't get bought in auction, then the lender would be in control of the property, correct? The lender would then have the option of finishing the rehab or selling as-is and hopefully make up for the foreclosure costs. Is that correct?
I had another question in terms of reviewing the track record of a potential borrower.
The valuation of the property is obviously the most important thing to decide if you are going to lend on it. In terms of reviewing the track record of the borrower I just want to make sure I am not forgetting anything. I have asked the potential borrowers for their profit and loss statements as well as making sure they seem like decently trustworthy people. Anything else I should be looking for besides their profits, and average time it takes to complete a project?
Thanks.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Skimmed comments.
Every county will have a Trustee or Clerk of Court Record, foreclosures are filed as the terms are usually to be sold at the courthouse steps, so they can be found.
Private loans are usually not reported for credit purposes but can be with a servicer.
The other issue is that all lenders will be asking you "in the past three years have you had any foreclosure or given any deed in lieu of foreclosure?" If you say no, and sign that application (it's on the 1003 loan application) and you lied, it's an attempt to obtain a mortgage loan under fraudulent terms/conditions. From that you can have a string of charges. If you lied and slide by and a future incident arises, your file will be examined and you'll get to explain later.
A borrower doesn't determine the type of loan as to commercial or residential as it can be booked by the lender, just because you are a landlord doesn't mean you have a commercial loan. Now, if it's in a business name it will be commercial, if you sell sub-2 you can turn that loan into a residential category for yourself extending financing.
So, with the exception of the credit issue, there is no difference between a private loan or institutional loan, a foreclosure is a foreclosure. :)
- 12yDarrin CareyPro MemberLender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
The lender does not automatically get the property. There can be a sheriff auction and nobody bids, including the lender. The borrower would still own the property, and the lender would still have the mortgage.
When the lender "bids" for the property, they don't actually end up actually paying out of pocket, the bid is offset by the mortgage balance owed.
If the lender buys the property, they become the owner and can do anything with the property an owner can do.
- Vancouver · Member since 2013 · 159 posts · 6 votes12y
Thanks again for the responses Bill and Darrin.
You make a good point about any type of lender asking if the borrower has had a foreclosure in the past 3 years. Am I wrong in thinking that a foreclosure would hurt the borrowers reputation among private lenders? I'm sure if the property was profitable enough and the LTV was low the borrower could still find a lender. However, on marginal deals I'd guess the lenders would hold their money a bit tighter?
- Vancouver · Member since 2013 · 159 posts · 6 votes12y
I have been thinking about your response and I think I might be a bit confused still by it. Please correct me if I'm wrong, because I think I might be...
At the auction, the lender would set the price of the property to at least what he is owed. If somebody buys the property at the auction, the lender gets his money back, if the property sells for more, the lender gets his money back and gives whatever extra to the borrower.
If the property does not sell at auction, wouldn't the property then go to the lender? The lender would then sell the property and keep whatever money the borrower and the lender had invested into it?
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
@Darrin Carey I think you're saying that a lender could foreclose, then decline to make an opening bid. Then, when the sheriff sale occurs if nobody else bids the owner still owns the property. I don't see how that could happen. A lender could decline to foreclose. The owner still owns it and the lender still has a mortgage. But there would be no sheriff sale. The sheriff sale (trustee sale here in CO) only occurs if the lender causes it to occur.
@Taylor Green if nobody bids, yes, the lender gets the property. No money changes hands, other than the fees to all the parties involved. This is now a REO. The lender can do with it as they wish.
I think you're considering being a lender here, not a borrower. If so, I highly encourage you to follow the example of the banks and sell the property as is. We did the fixup in our case. We thought that would be more profitable. In the end I'm almost certain it was not. In hindsight I would have just sold it as is, taken the money and moved on.
- 12yDarrin CareyPro MemberLender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
@Taylor Green This was confusing for me at first too. Think of it this way. Foreclosure is the mortgage holder legally forcing the sheriff to auction the property for sale without the owner's permission to pay the recorded mortgage. Like any other auction, ebay for example, if there is no bidder, there is no sale.
I am most familiar with Ohio, so keep in mind each state may have a slightly different process. I checked a couple places, and it looks like in Arizona, the bank must bid.
So, assuming all the notices etc have been done, and the property is going to auction.
1. An opening or minimum bid is offered. In Ohio, it is 2/3 of the sheriff's drive-by appraisal.
2. The auctioneer asks for bids. In most cases the opening bid will be the bank (95% or so in Ohio). Bidding continues until the highest bidder wins.
- 2a. If there are no bids, there is no sale (like any auction). The owner remains the same. (they are still in default, and the mortgage is still there.)
3. The bidders pays the sheriff 10% down with the balance due in 30 days. If the winning bidder is the bank, no down is required.
4. The bidder brings final payment and the transaction is closed. Funds are given out in order of: Sheriff costs, property taxes, lien holders (mortgages, mechanical, etc) in recorded order, and finally, the owner, if any is left (pretty rare).
5. The deed is recorded, and a new owner is established.
Notice 2a. IF (and it happens) nobody bids, no sale occurs. Just like any other auction.
Now logical person might ask "Why would a bank take a property all the way to sheriff sale and not bid?" Great question. Potential answers: 1. Banks are not logical. 2. The bank didn't want it, but hoped someone else might bid so they could recoup some of the money.
I bought a property this summer where the bank took it to sheriff sale, and didn't bid. The owner had moved out right before the sale date, and didn't know they still owned it until code violation notices started to appear a few years later. A title search showed the bank had simply released the mortgage a couple years after the sheriff sale. Go Figure.
I hope this helps.
- Vancouver · Member since 2013 · 159 posts · 6 votes12y
Thanks for clearing that up Jon. Yes, I am considering being the lender. I will take your recommendation of selling as-is, if this situation is to ever occur.
I had another question you might be able to answer that isn't really related to my original question, but has more to do with structuring partnerships.
If I was to lend on a property at 15% and I was to find a passive investor (family member) who would lend at 12%. The reason for the lower percent would be because he had nothing to do with valuing the property or meeting prospective borrowers.
1) Do you think it is fair give them 12% instead of the 15% that I would be getting?
2) If yes, is there even a way to structure something like that?
- Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes12y
1) If you are providing a value to your investor who is happy with 12% then I see no problem in making a 3% spread.
2) Many ways to structure this, some are only available if you are licensed. Talk to an attorney in your state to help you.
A) Where you own a percentage of the note to get 3% of the 15% interest.
B) You take points up front for placing the loan (licensing issues)
C) Wrap the investors 1st TD
D) Sell your 15% TD to your investor for 12% yield
probably infinite ways to structure this.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
The process varies from state to state. The process you describe, @Darrin Carey is not the process here in CO. The bank must provide a starting bid or else the property isn't in the sale. The bank can start the bidding at whatever they want. If nobody bids, the bank gets it. If anyone else bids, the winner gets it. Cash on the barrelhead. Some counties stop the auction and the winner hands over the money. No money? The bidding restarts. In others you go to the back of the room and pay. Some allow you a couple of hours to get to the bank.
Getting money from your family member and then making the loan is brokering. At least here in Colorado you would need a mortgage brokers license and you would need an extra license (don't recall what this is called) in order to raise and then broker money from individuals. But if you're properly licensed, yes, this is a valid structure.
- 12yDarrin CareyPro MemberLender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
@Jon Holdman As strange as it seems, that is the way it works in Ohio, and it appears to be the same in Arizona, although the timeline is different.
I am a lender foreclosing on a property, and I must bid on the mortgaged property if I want ownership of the property. (well, the attorney will bid on my behalf). If I don't bid, and nobody else does, then I wasted my money filing foreclosure. (No bid, no sale)
- 12yDarrin CareyPro MemberLender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
@Jon Holdman Every state is different. I am not familiar with Colorado. I am all too familiar with Ohio.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes12y
Trustee sales are completely different. I believe AZ (like NC) is a trustee state, so many reading your posts may be confused.
- 12yDarrin CareyPro MemberLender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
@Jon HoldmanIf you are considering being a lender, consulting a local attorney specialized in this topic is an absolute MUST.
Asking questions on the forum is a great start, There are a lot of knowledgeable and experienced people here like @Jon Holdman However, we are not attorneys (unless you are) specialized in your states specific laws and requirements.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes12y
Regarding "This was confusing for me at first too. Think of it this way. Foreclosure is the mortgage holder legally forcing the sheriff to auction the property for sale without the owner's permission to pay the recorded mortgage. Like any other auction, ebay for example, if there is no bidder, there is no sale." This is inconsistent with power of sale elsewhere. Your example is like someone filing eviction but then deciding not to go to court for the case. I guess there may be someone out there who will start foreclosure and decide "I'm not going to bid", but I've never heard of such a thing. In a trustee state, I'm not sure you can find a trustee that would do that. Besides, Trustees want to get their 5%. The sale, after all, is done by the trustee and what you describe would result in the filer incurring a 5% fee anyway. In NC (similar to other states) see § 45-21.15. Trustee's fees. In "modern" D-T practice, "When no sale has actually been held ... the trustee is entitled to such compensation..." by statute.
- 12yDarrin CareyPro MemberLender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
@Chris Martin Obviously foreclosure works very differently in different states, and there are obviously different statutes. I am not familiar with the details in a trustee state. Ohio is a judicial state. Illogical as it may be, banks do take foreclosures up to the sheriff sale and not bid. BTW, I've also seen landlords not show up at the eviction hearing.
For your entertainment look up the case below. A bank took a property to sheriff sale twice, did not bid, and neither did anyone else. The owner later filed a quit claim deed to transfer the property to the bank. The bank successfully sued to undo the quit claim deed, giving ownership back to the borrower.
http://www.clerk.co.montgomery.oh.us/pro/ search on case number
2013 CV 00554
In Ohio, foreclosures are "No bid, No sale", including the bank.
- Real Estate Broker · Columbus, OH · Member since 2013 · 22 posts · 5 votes12y
Right. The bank is just hoping against hope that a third party will show up and bid. Otherwise they will have the Sheriff reappraise it, and put it up for Sheriff's auction again at the newly revised 2/3 minimum bid, until some other bidder shows up. Some banks (wisely perhaps) do not want to take title to certain properties under any circumstances. Also, in Ohio, banks are not permitted to own real estate for longer than 5 years, except for their own banking operations. They just want out, however many times it must be reappraised and readvertised for Sheriff's auction.
Jim
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Originally posted by Taylor Green:
Thanks again for the responses Bill and Darrin.
You make a good point about any type of lender asking if the borrower has had a foreclosure in the past 3 years. Am I wrong in thinking that a foreclosure would hurt the borrowers reputation among private lenders? I'm sure if the property was profitable enough and the LTV was low the borrower could still find a lender. However, on marginal deals I'd guess the lenders would hold their money a bit tighter?
I suppose, depends on the individual, individual private lenders may get involved and they may not. Usually I'd say the won't deal with those that can't perform, why would they, unless the are in a position to win regardless of what you do.....then there is the question, do you really want to deal with them? Common sense really, not so much about finance. :)
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes12y
@Bill Gulley regarding "Usually I'd say the won't deal with those that can't perform ..." I'd have to agree with that.
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