Second position hard money loan gone bad. What do I do?

Question

I've written this thing off so long ago that I haven't even given thought toward posting about it on here, but maybe someone might have an answer to this nightmare. Here goes.

In 2005 at the age of 18 I tragically lost my dad and he left me with a small sum of money. Nothing major, but if I had it today with the (mediocre compared to most on here) knowledge and experience I now have I can't help but sit here looking at my 4 day old daughter and wonder what I could've turned that into.

NUTSHELL: I loaned $40k of what was left to me from my dad to a guy who stopped paying me. Even though I was in second position behind a (roughly) $150k loan held by Wells Fargo I was advised to foreclose which I did and have been the owner of the property ever since. I've recooped a decent portion of my losses by renting the place out and essentially pocketing the entire rent amount, less maintenance and management fees. Heck, Wells Fargo still pays the taxes on the place. I paid insurance on it for a little bit basically just to protect myself from the renters, not for a loss of the actual property.

The last tenants trashed the place several years back and I had no desire to fix it back up. A little due to the fact it's a manufactured home in bum-f**k nowhere and a little due to the fact that it was still a reminder of what I did with pops' money he left me. My question has always been, "How can I get money out of this place?" I firmly believe the only reason I was able to secure tenants in there in the first place was that they were a retired couple who rented sight-unseen from Michigan. It would take thousands to get it back into decent shape and I don't know that I would be able to secure another tenant to be honest.

Property Info:

1.25 acres of land

5BR/3BA manufactured home

Something like 2,400sf if I remember correctly

Any help with my options on this would be greatly appreciated. I've always felt like I just tossed his money out the window and it sickens me to think about it which is why I'm just now posting this on here.

Anyways, thanks in advance to anyone who might be able to help.

Ned Carey · Answer

@Patrick McCandless are you currently paying the first mortgage? banks often pay taxes for years because the servicing company just pays them. The right hand (foreclosure side) of the bank often doesn't know what the left hand (servicing side) is doing.

If it has been years since payments have been  made they may have just written it off as not worth the trouble. Or maybe they have so many foreclosures this one is low priority and hasn't made it to the top of the list yet.

The proper way to approach this and just any similar situation is realize the money you spent is a sunk cost. The decision you have today is; "What can I do or invest today, that will give me a return on the money or time I am investing today?"

Let's presume you are not and do not intend to pay the first mortgage. How much would it cost to fix up the property in order to be able to rent? What would the return on that money be, given the risk? What risk - that the bank wakes up and forecloses, or that a new tenant trashes the place again.

If you can put in $5K in and rent for $10K a year, it may be worth doing. If it is going to take 20K to renovate and you would get $8k a year it is probably not worth doing.

The money you have already spent cannot be considered part of this calculation.

I am in a very similar situation right now. I have been collecting close to $20K per year in rents and the bank has been paying the taxes. They started and then stopped foreclosure 6 years ago. I have been collecting rents for 4 years. The Bank finally woke up and now wants to foreclose. It was worth it for me to make the repairs and then collect the rent for 4+ years. (there is an old thread here about it where I got a lot of grief that I was doing something unethical.)

Patrick McCandless · Answer

@Spencer Stensrude that has always been a question of mine, but title companies have told me that since I was in the second position the first still remains. If they were to foreclose, however, I would be wiped out. At least that's my understanding.

Ned Carey · Answer

Well you can quitclaim anything if someone will take it.  But given that it has a loan against it I doubt anyone would want it. That is worth a try. Eventually the 1st lien will expire.But if it was a 30 year note that is a long time to wait.

The neighbor may be the best bet. He may want it as a garden. You have nothing to lose by selling it over time to him since at this point any money is found money

Patrick McCandless · Answer

@Ned Carey so do I just continue to do nothing? Wait until maybe the value of the home gets back up to where I actually CAN sell it, pay off the 1st, and get something out of it? Is it something I can quit claim to someone for say $5,000 if they are willing to spend another $5,000 to fix it up and rent it out themselves? Maybe contact the neighbor who shares the well with me? Spitballing...

Ned Carey · Answer

@Patrick McCandless well is sounds like your only profit will be the lessons learned.

Patrick McCandless · Answer

Thanks for the response @Ned Carey. No I'm not paying the first and don't intend to. If this home was in a more desirable area I would hands down fix it up and rent it back out. Unfortunately, it's a manufactured home in the middle of nowhere amongst only about 6 other homes and gravel road access. Just not your ideal rental property. Again, I honestly feel the only reason I was able to rent it out in the first place was that the previous renters pulled the trigger sight unseen from Michigan. They complained several times about it not being what they thought it was. I'm just afraid of putting a bunch of money into it and not being able to rent it out at all. I'm at the point where I don't want the headache and would rather offload it, but not if I'm not going to get anything out of it anyways.

Brett Goldsmith · Answer

Check if foreclosure proceedings have begun with the 1st. What state is this property in? If foreclosure was initiated you should of received notice as you are a lien holder.

If it is not in foreclosure it may be worth looking into renting it out, but I know you've mentioned you are concerned that it would not rent. Maybe you can get someone in their now for dirt cheap rent so at least you can collect something until it is presumably foreclosed on by the 1st. As Ned stated, the servicing company will keep up property taxes the majority of the time and just tack it onto their payoff, many times this is that a property tax lien will take senior position.

You won't be able to speak to the 1st as you're not on the loan. The borrower would need to provide authorization. In 2nd position, with no equity, with an undesirable property, it could be a lost cause to milk it much further to recoup losses.

Patrick McCandless · Answer

@Patrick Liska Totally my thoughts. I just don't get it. Will see what the title search turns up.

Patrick Liska · Answer

If it is them paying the taxes, as you said, seems like it may have slipped through the cracks. i don't think a bank would want to hold on to the property for years and not try to sell it to recover their money, they wouldn't want to keep pouring money into it.

Second position hard money loan gone bad. What do I do?

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