NPN Story: Mother Bails Out Deadbeat Son

How far would you go to financially support your grown-up child who had a family of his or her own? Would you make some mortgage payments for him or her? Sure, that’s pretty normal. Would you let your son transfer a property to you and take out a loan so that he could avoid paying his creditors? Would you file personal bankruptcy to stall a foreclosure because your son couldn’t pay the rent/mortgage that he was supposed to?

Mother-owner, Son-renter

In 2016, we bought a non-performing note backed by a nice house in southern California. We thought it would be a quick turnaround to liquidation, but we were in for a surprise! The borrower and her son played every trick in the book to stop foreclosure while paying the least amount possible. 

As stressful and crazy as the experience was, I gained a lot of experience in what can go wrong, how to deal with it, and the attitude you need to take towards dealing with this type of situation.

When our bid was accepted on the note, we started our due diligence process, which included getting a title report. On the report, I saw that a son deeded his free and clear property to his mother in 2007. 

She promptly refinanced cash out of the property within a couple of months (this was the loan we were planning to buy). A few months after that, liens started popping up against the property in the son’s name: state income tax, judgments from contractors and vendors, totaling about $145,000.

The property happened to be very close to me, actually, on my way to the office, so I checked it out personally. Perfect lawn, well maintained exterior plus restored, classic Chevy pickup truck in the driveway, speedboat sitting on the front lawn, and an older, clean RV parked on the street outside. 

The borrower (mother) was 8 months late on the note. Obviously, her son was putting money into the house and his hobbies instead of helping her make the mortgage payments.

I like to get an idea of what’s going on with a loan and the borrower before I buy the loan. In this case, it was easy to see that we had an adult son who got in financial trouble, deeded the property to his mom and got her to refinance before the creditors got to him, and didn’t want to give up his toys or lifestyle.

The Delay Tactics Begin

After we bought the loan and transferred it to our note servicer, the borrower was about 12 months behind on her payments. From the start, she used delay tactics to stall collection efforts without making any payments. She requested a loan modification without turning in the package (60 day delay).

She finally sent her first payment to us after about 6 months when we sent a demand letter, which is the start of the foreclosure process. A common tactic for borrowers is to make a single payment after the foreclosure starts but not to follow up with anything more. 

This can cause a delay of a few months, depending on how responsive the lender is. If we accepted the payment, we would have to send out a new demand letter to restart the foreclosure process.

The borrower requested a second loan modification package but turned it in this time. In the application, the borrower showed a financial hardship by earning $10,000 per year. She also owned two additional homes. One was the home that she actually lived in and the second was a vacation home. A vacation home! 

The borrower made $10,000 per year and owned 3 homes and she wanted a break on her mortgage payment? Why not sell the vacation home to help pay your bills and tell your son to make the payments or get out?

They put the house on the market with 30 days left before the foreclosure sale and I got to see pictures of the interior and the landscaping. Now I knew where all the money went that was supposed to go towards the mortgage. Beautiful, modern kitchen, crown moulding, hardwood floors, outdoor entertainment areas. It was nice! (We never got a call regarding a payoff request or short sale so they were never that serious about selling or changed their minds.)

When All Else Fails, File Bankruptcy

At first, I felt sympathy for the mother because she was protecting her son and I saw her as a victim of a spoiled child. After seeing the loan mod request, I came to see her as the source of where the son learned how to behave. Scamming people or the system seemed to be a way of life for both of them. The mother filed a Chapter 13 bankruptcy case on the day of the trustee sale in order to postpone it.

Doesn't Matter if it's not Yours

What came as a surprise a couple of months later was that the bankruptcy judge allowed her to treat the home as owner-occupied. She claimed that she was splitting up from her husband and that she was moving in with her son so that the subject property would be owner occupied.

She told the bankruptcy judge that the house really belonged to her son and that he was supposed to pay her rent so that she could pay the mortgage. The judge didn’t care that the son was not the owner of the house or on the loan. The borrower made two payments on the plan and then stopped. 

Lots of Second Chances

When the borrower was 5 months behind, the judge finally granted our Motion for Relief, which enabled us to foreclose. We immediately proceeded to sale. (Creditors sought MFR’s on her “true” residence and the vacation home, during this time as well, so she was in trouble all the way around.)

The day before the trustee sale, the borrower (mom) deeded the property back to her son. He filed a Chapter 13 bankruptcy case and listed the property. We filed another Motion for Relief, which went in front of the same bankruptcy judge. She granted our motion and this time we had “in rem” and no bankruptcy filings by anyone could stop the sale for 180 days.

But Wait, There’s More!

We’re in the clear, right? We thought so but the judge did not waive the 14 day stay before we could hold the trustee sale. A lot can happen in two weeks….

We had about 5 different third party individuals call us, including an attorney. All of them said that the son could give us “X” amount (which was lower than reinstatement) if we would just do a loan modification and postpone the sale. We said “no.”

The trustee sale was on a Wednesday. The Monday morning before the sale, we got served with a civil lawsuit claiming illegal foreclosure, among a host of other things. It was the full monty of a lawsuit naming everybody and everything and accusing everyone of doing the wrong things. 

Final, Late Minute Try

They requested an “ex parte” (emergency) hearing to stop the trustee sale. The court granted the hearing on Tuesday and I went with trepidation, given my experience with the bankruptcy judge giving the borrower the benefit of the doubt beyond belief. Luckily, the judge denied the injunction motion and allowed the sale to go through. I got at least two more calls from third parties that afternoon.

I attended the trustee sale because I feared that the son would show up and try to stop it somehow. Luckily, he didn’t show up and the sale went smoothly. The property sold to a third party bidder for $392,000. (The flipper sold the property for $500,000 about 6 months later). The son dismissed the civil lawsuit two weeks later and I got a long e-mail from him trying to make his case, but it didn’t matter at all at that point.

Conclusion, Finally!

I’m all for helping a borrower who’s trying to meet me halfway and is legitimately trying to do the right thing and save his or her home. It’s another thing to take as much as you can at the expense of others. I’ve never had someone try this hard to avoid their obligations but something tells me I’ll see more in this business!

Things I learned:

1. It ain’t over till it’s over.

2. Smaller, attentive investors can do battle with and overcome wily, deadbeat borrowers better than big banks can.

3. Don’t be afraid of the threat of a lawsuit when you are in the right and are doing the right things in a legal way. Yes, these things can go against you but it’s part of the business and your fears of what could happen are usually overblown.

4. Bankruptcy judges have a lot of power, tend to give the debtors a LOT of leeway, and expect creditors to take a back seat.

5. When you buy your loan at the right price, you’ll have the ability to weather these occasional storms when they happen and still make a profit

Final Numbers:

Purchase Price: $265,000

Total Cost Basis: $261,906

Net Sales Proceeds: $385,208

Net Profit: $123,303

Days Held: 636

Return on Investment (ROI): 47.1%

Annualized ROI: 27.0%