Lender's experiences of taking back property from borrower?

Question

Hi,

I was just hoping some experienced lenders could shed some light on their experiences of having to take back a property due to their borrower defaulting on a loan. I am curious of how often you have had to do this, (hopefully never).

Things like: did you finished the intended project yourself, did you have to foreclose on the property, did you take a loss on the project?

Thanks!

Ann Bellamy · Answer

We have foreclosed, mostly during the 2009-10 timeframe when prices were declining quickly. Once we had to start foreclosures, we've unfortunately not had a borrower who was able to catch up and payoff the loan. Since we lend only to companies who are in the business of real estate redeveloping, frequently they company simply lost it all. Prior to the SAFE act, we had a couple of borrowers who bought in their own name and stopped paying and declared BK. In both cases, the BK delay caused additional expense, but did not stop the foreclosure. One of the biggest risks in lending and foreclosure, in my opinion, is delay. At least in the redevelopment space that I work in. While we are waiting for the foreclosure process, which is quick in NH but lengthy in MA, we are probably paying the insurance premiums because the borrower has stopped paying and dropped his insurance. Forced place insurance is very expensive. If the length of the loan was such that tax liens might have accrued, we are paying taxes to keep the municipality from taking the property. Vandalism, frozen pipes, and attorney bills over a longer period of time all add to the cost. If the auction is postponed, then the advertising has to be done over, which adds to the cost. You pay the auctioneer for postponements (for those of you who question this, in both MA and NH foreclosure auctions are conducted at each individual property, not on the court house steps) Yada yada yada, the list goes on and on. Since the SAFE act, we lend only to companies and do only commercial loans, so the personal BK's don't enter into it.

Dave Van Horn · Answer

Hi Taylor, Unfortunately, we do take back properties on occasion. We own several thousand loans and file FC on about half of our portfolio but actually FC on < 10%. We rarely fix them. Most of them we sell as REO's . With 1sts you can also sell with owner financing or rent-to -own. With 2nds, many times we'll get a workout negotiated post FC sale, or we'll just rent it out, with us paying the 1st as a subject-to, or without paying the 1st and keeping the rent until the 1st forecloses, it's a business decision at that point. Best, Dave VH

Ellis San Jose · Answer

@Taylor Green I usually have an attorney appear & motion for a lift of the Automatic Stay. Can't give you legal advice as far as verbiage to use & think you meant to ask " safeguard against the borrower going into bk" All important question to ask before releasing money into the unknown. Great thread.

Taylor Green · Answer

I appreciate it Ellis. @Ellis San Jose With regards to the 'automatic stay', Since I would be a secured lender, I could petition the bankruptcy court to hopefully get the property back so I could recover my investment. They could rule either way though I'm sure, but at least it's an option. Also, what type of language should I tell the attorney to write in the promissory note or deed of trust to safeguard me against the lender going into bankruptcy? The attorney should know the answer to that anyways though... Thanks again.

Ellis San Jose · Answer

@Taylor Green The issues as I see them are unpredictability of possession, control, time, & the expenses associated with those factors. If you can imagine being a lender in a market freefall trying to gain possession to recover your investment. If a borrower defaults, the added costs, time delays, unpredictability of market direction, risk to the asset (vandalism) etc. that must be accounted for before you can actually gain possession and take steps to recover your investment as a lender. There is what is called a "Automatic Stay" in BK. So you should know the remedies as lender to enforce your lien. There are a myriad of issues that could complicate a BK, foreclosure etc., which why it is essential that your the language written in the promissory note and other documents be written clearly & correctly. It would be unwise to assume too much. The question I ask myself is: 1) How can I minimize risk "x" beforehand in my loan documents. Great questions btw.

Taylor Green · Answer

Thanks for answering! Please correct me if I'm wrong... From what I am understanding, if the borrower goes into bankruptcy the foreclosure process would still work the same. The property still goes to the trustee sale/auction, and if the property is bought at the price set (or higher) by the lender, the money owed first goes to the lender, then if there is something left over it would go to the creditors. The biggest risk seems like the delay of getting to the foreclosure. Once the borrower goes to bankruptcy, the court freezes the property to determine if there is equity in the property that could help pay the creditors. Meanwhile, the lender would be paying the holding costs associated so there wouldn't be a tax lien put on the property. Once the court makes a decision, the foreclosure process would then start and work the same way it always does. I am in the ballpark with that? Thanks again...

Don Konipol · Answer

We have made 450+ loans in the last 11 years (all hard money). We went through actual foreclosure on about 9%. We made money on some, lost money on others, overall about the same as if all had paid on time. Borrower filed bankruptcy on 18 of these foreclosure situations. In only three did borrower's filing result in borrower being able to restructure situation, get us paid, and get the property out of bankruptcy. 15 others resulted in borrower's losing property in foreclosure anyway. Some borrower's knew exactly what they were getting into with BK; i.e. that planned to violate court orders and illegally "soak" money out of the property as long as they could. Others had no idea what was in store for them; apparently their attorneys sold them on the idea that BK was a cure all for them, a la the TV commercials played during the small claims court shows!

Bill Gulley · Answer

1st question; I have had to technically take back a few. Only had a hand full fight it to the steps. Usually reasoning prevails, deeds are obtained or more often the deals were restructured to sell them off from that borrower so they would avoid the foreclosure process. That's me, I just wanted to cure the problem. 2nd, you wait until the court rules on the lien. In RE you are a secured creditor, the property may or may not be appraised to see if there is excess equity available for other creditors. I never lost the balance owing but you'll wait for payments in some cases. The reason I was listed as a Creditor's Representative in BK was due to the fact that I serviced notes, and the appraiser appointed by the court never disagreed with me nor did the BK attorney. Now, in some areas it can get nasty, time consuming and if the deal isn't that fair or not in compliance the court can do a cram down, write down the amounts due, so a lender can get tagged. :)

Taylor Green · Answer

I had another question I thought I would ask in this thread because there seems to be a lot of experienced lenders... This might be a bad question, but I am having a hard time scanning through old threads finding answers for it. What happens if you are lending on a property and the borrower files for bankruptcy? Thanks again.

Taylor Green · Answer

Great seeing all the different experiences. Thanks for posting.