1st trust deed question

8 Replies

I just purchased a 1st trust deed in CA for the 1st time where the borrower had already gone MIA from the start to where his phone number was no longer in service and there was no way to contact him other than an address listed in Idaho.  Long story short I ended tracking him down at the property that was covering the loan.  The loan application said it was being used as a rental property.  I know, shame on me for not doing my due diligence so I am learning the hard way on this one, but am hoping to get some advice here.

He was about two weeks late on his first payment when I talked to him and he said he didn't have the funds at the time but would send it in the next couple days as he was waiting on a check.  I did get a phone number from him that is still working though.

I have sent a certified letter requesting payment, is there anything else I should do at this point if he doesn't pay up other than wait?  And is there going to be any added complications since he is living at the property?  

I would suggest boarding the loan to a servicer and letting them deal with the notifications, payment and late fee collections, etc.  It's important to stay compliant with RESPA and other regulations and that's part of the servicers job.  If the loan defaults, you can move to foreclose on it of course.

Medium sure dark blue   dark grayMike Hartzog, SureMark Capital Group

Robert, 

The story here is a little confusing and missing some background details.  Mike is right, you really should board this loan with a servicer.  That said, since we are here, let's sort out some of this better for your understanding.  

There is a mention of shame on you for not doing due diligence, not sure what you are really meaning there.  It is difficult to tell how new or seasoned the loan is and how the loan was performing prior to your purchase.  You use the word "first" payment, which I am inclined to think you mean the first payment to you as opposed to his first scheduled loan payment (also meaning the loan was just made).

The Borrower's delinquency for the account, not just your ownership period is really what we should be talking about.  A Borrower's payment is usually given a grace period of 10 to 15 days past the payment due date each month.  A Borrower's payment is not "missed" unless a payment is not received and the period is over, the period must lapse to miss it.  Mortgage payments are not like rent.  If the Borrower is only 2 weeks delinquent on the account, I suggest you slow down a little bit.  As a Mortgagee you can't be hassling (yes hassling) him for payment at such a early time in his tardiness.  A loan is not considered in default until after 90 days past due.  That doesn't mean you can not actively manage, it just means from 0 to 90 days past due you should be mindful in the manner in which you treat the delinquency and borrower.  A Mortgagee can be too aggressive and step over the allowed collection activities which in turn can afford the Borrower some defenses to enforcement of the loan.

The context here to what the rest of the account looks like is missing.  A part of me reads what was posted and believes you are talking about a loan that at the time of your purchase was current and paid on time.  If that is the case, like I said, slow down a little bit.  Not sure what you put in your certified letter but you can not treat him like he is defaulted.  He has not. 

However, if this loan is defaulted, then the picture changes and you should be doing other steps above simply sending the letter and calling.  Defaulted borrowers tend to miss insurance and tax payments and the Mortgagee may need to advance for such things.  A defaulted loan changes the approach you should have and you have to be careful you are not dual tracking the Borrower.  If you purchased a defaulted loan, is/was the loan already in a foreclosure or forbearance?  

I have concerns about a guy living in Idaho buying investment property in California.  I notate the story may not have illustrated how that all came to be in real life but that is not a common way for that loan to be made.  Folks in California may have investment property in Idaho usually because it's less capital intense in Idaho opposed to California.  For some reason, the general details about the loan and the borrower whereabouts and contact information have me concerned about the Seller and origination of this loan. 

If you post some more details we can give you some more feedback.

Thanks for that thorough response.  I originally decided to self-service this loan but will take Mike's and your advice and move this over to a collector before anything.  

Here are the details you are asking for-

By shame on me I mean with a little more digging I would have seen more red flags in the borrower rather than being more weighted in analyzing the value of the property and  LTV ratio.  

This is a new private loan set up through a broker that the borrower took out to pay off an existing tax lien and was supposedly going to use the rest of the funds to make improvements to the property.  As far as I know it was a house that was inherited.

Part of the instructions that the broker sent out asked that the borrower contact me by phone for further payment instructions as it was information I did not want to send through mail.   After the payment due date passed I never heard from him so I tried contacting him and found that his number had gone out of service.    I was aware of the 10 day grace period but also aware that he would not be able to make his first payment until I talked with him.


Originally posted by @Dion DePaoli:

Robert, 

The story here is a little confusing and missing some background details.  Mike is right, you really should board this loan with a servicer.  That said, since we are here, let's sort out some of this better for your understanding.  

There is a mention of shame on you for not doing due diligence, not sure what you are really meaning there.  It is difficult to tell how new or seasoned the loan is and how the loan was performing prior to your purchase.  You use the word "first" payment, which I am inclined to think you mean the first payment to you as opposed to his first scheduled loan payment (also meaning the loan was just made).

The Borrower's delinquency for the account, not just your ownership period is really what we should be talking about.  A Borrower's payment is usually given a grace period of 10 to 15 days past the payment due date each month.  A Borrower's payment is not "missed" unless a payment is not received and the period is over, the period must lapse to miss it.  Mortgage payments are not like rent.  If the Borrower is only 2 weeks delinquent on the account, I suggest you slow down a little bit.  As a Mortgagee you can't be hassling (yes hassling) him for payment at such a early time in his tardiness.  A loan is not considered in default until after 90 days past due.  That doesn't mean you can not actively manage, it just means from 0 to 90 days past due you should be mindful in the manner in which you treat the delinquency and borrower.  A Mortgagee can be too aggressive and step over the allowed collection activities which in turn can afford the Borrower some defenses to enforcement of the loan.

The context here to what the rest of the account looks like is missing.  A part of me reads what was posted and believes you are talking about a loan that at the time of your purchase was current and paid on time.  If that is the case, like I said, slow down a little bit.  Not sure what you put in your certified letter but you can not treat him like he is defaulted.  He has not. 

However, if this loan is defaulted, then the picture changes and you should be doing other steps above simply sending the letter and calling.  Defaulted borrowers tend to miss insurance and tax payments and the Mortgagee may need to advance for such things.  A defaulted loan changes the approach you should have and you have to be careful you are not dual tracking the Borrower.  If you purchased a defaulted loan, is/was the loan already in a foreclosure or forbearance?  

I have concerns about a guy living in Idaho buying investment property in California.  I notate the story may not have illustrated how that all came to be in real life but that is not a common way for that loan to be made.  Folks in California may have investment property in Idaho usually because it's less capital intense in Idaho opposed to California.  For some reason, the general details about the loan and the borrower whereabouts and contact information have me concerned about the Seller and origination of this loan. 

If you post some more details we can give you some more feedback.

Oh man, not a good loan here.  Not a good loan broker either, IMHO.

Do you have a buyback clause with the broker?  If so, I would trigger it and get out of this thing.  This could and probably does have all sorts of issues. 

Get the loan to a servicer will be a step in the right direction.  However, if there are defects in the origination, which sounds like there probably are, you could have an uphill battle.  Refinancing to pay off a tax bill, in other words borrow tens or hundreds of thousands of dollars to come up with thousands of dollars....that's an issue.  

This guy is broke, has no job and sounds like he pocketed your money and spent it already.  If you funded rehab funds and he missed the first payment already....it's likely your rehab funds are gone.  Not the way the broker should have protected your money.

I am scared to ask, but do you even know if you have a first lien on this asset?  Is this a wrap or sub2?  

The couple of red flags on this look more like a red fireworks display with this little extra insight.  If you want to contact me and have a brief discussion about what is happening and what some other steps might be to do, feel free to PM me.  Posting some of this to fish it all out would be daunting, so it would be better to have a verbal conversation.  Either way not where you want to be and good luck.

@Dion DePaoli  

@Robert H.  

Dion based on the information provided I agree with you.. worse case scenario our investors is dealing with a loan that the broker did little or no due diligence on before marketing it or its was one of those late night note brokers. this loan looks like it was  sale of a derelict property to an unsuspecting Note buyer.  Of course there is not enough information to go on but its a classic set up..

Robert if you can post some relative Numbers between Mark and Dion they could give you very good opinion of your collateral and the loan in general.

1. how much did you pay for the loan

2. Did you get a title commitment before you bought it showing lien position to assure you were buying a first. And an assignment with an and or assigns mortgagee clause along with the original note and an Alonge if needed? Were you provided Insurance binder with you as named additional insured , these are just basic things you need.

3. How much was used to pay tax's and how much was given to the owner for rehab.

4. what do you feel the property is worth  either as is with no rehab  ( because the borrower very likely just ran off with your rehab funds) and what is it worth fixed up.

Now if you paid   say 40k for a 1st and gave 10k in rehab funds  and you know wholesale value to a flipper is 50 or 60k your probably OK... But if the numbers are backwards or you don't know the true condition of the home you may have a bummer here.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Thanks again for all the replies on this.   I just wanted to update that after two bankruptcy claims a foreclosure sale finally went through and everything was paid off.   I was a little nervous for a while but I had a good lawyer on the case and everything worked out.  It was a good learning experience and I am now looking to buy more 1st's, of course with better due dilligence this time :)

Did you make any profit on the deal? 

Yes, the LTV from the beginning was 60% and the property appreciated about 25% so it was no problem meeting the terms of the loan (11.5%) and covering all the extra expenses.