HML actions in case of default

[Mitch Kronowit]

Originally posted by Jon Holdman:

I'm taking back a house this week because the borrower hasn't been able to sell it.

Jon, sorry for the thread drift, but I've been wondering, when the lender (you, in this case) forecloses on a house, are you required to auction it off? Or can you just take the house (and turn into a rental, a vacation home, storage for your hub cap collection, etc.)? Thanks.

[Jon Holdman]

Split from this thread.

Thought this would be better to be in a separate thread.

There are two courses of action you can take when a borrower defaults. Strictly speaking, this is no different that any other pre-foreclosure deal, just that I (and my business partner, in this case) are the bank. So, deed-in-lieu, foreclosure, a short sale, or findinging a buyer and maybe having the borrower bring money to the table at all options.

In my case that's coming to a head as we speak, deed-in-lieu or a foreclosure are the best options. The fix and flipper/borrower had a buyer on the hook, but that deal fell apart. As we've all been noting, the new appraisal was WAAY below the original estimated ARV. I think the new appraiser is low, but there turned out to be permit issues and I think that had an effect. Original ARV, based on an appraisal was $213K, new one is $166K.

Now, some of the work wasn't the best, and some work was done without proper permits. We met with the city and some GCs last week and have an understanding of what needs to be done. I expect to start seeing bids this week and choose a contractor.

The borrower has offered to give it back deed-in-lieu. Taking it to auction is an option, but we're not required to do that, nor does it seem the best choice. We could move ahead with filing the notice, wait the mandatory time period, and the take it to the sheriffs sale. But that's almost five months and several grand in fees, and the most likely outcome is we get it back. So, that doesn't seem like the best choice.

Once we take possession, its ours to do with as we wish. In this particular case, resolving the permit issues, doing a bit more fixup and selling it seems like the best choice. Its entirely possible at this point we will end up with a loss when you compare the sales proceeds after all costs to what we will have invested into it. We did get eight months interest, so we don't think it will be a net loss. But certainly the returns will be less than we expected.

I'm sure we could rent it, but we will end up with about $160K into this deal and I doubt we would get much more than $1000-1100 in rent. As a fix and flip, this works. As a rental, its bad. We were fully aware of that going in, but did not expect this low value. Hopefully we can resolve the issues with the city and make the place nice and come out OK on the sale.

Sometimes posters ask why are HMLs such a bunch of jerks and want to see good credit, cash in the bank, and only 65-70% LTV. Well, here's why.