Notice of Forfeiture

[Rob Cee]

Has anyone had to deal with receiving a "Notice of Forfeiture In Rem" letter from the Dept. of Justice for a property they hold a note against?  This can happen if the owner of the property is using the property for illegal activities and the Gov wants to seize the property owners assets.  The note holders (and anyone with an interest in the property) have to file a claim with the DOJ to protect their interests in their lien.  Has anyone here gone though this process?  Does the note holder need to pay an attorney to file this claim with the DOJ and deal with this?  Or can they do it on their own?  Attorney costs could be significant.  

[Rob Cee]

I agree with a lot of what you say Jay.  It is definitely better to know who you are lending to, I also think it helps to be local so you can better value properties and scrutinize appraisals & BPO's.

I don't think I will lose money on this, but after all the legal fees I may not get all my back interest owed to me. And it is too close then I like. One issue with this particular loan was I didn't scrutinize the appraisal thoroughly enough, I think the appraisal was a little inflated leaving me with less equity then I thought. I think when the HM broker orders the appraisal, it is not always totally un-biased. That appraiser wants to make the deal work, they are not always the most conservative on value. The subject property is a fixer. The appraiser used all comps that were at least somewhat fixed up and would sell to a retail FHA or VA first time buyer. The subject would only seller to a landlord or flipper. The appraiser IMO did not adjust down enough for the house I lent on being a fixer.

Appraisals and valuations are more complex then most people think. If you get a crappy appraiser, they can really over-value a property. There are so many details...neighborhoods and vary wildly from block to block and you can get a dumb appraiser who uses comps from the good block to value properties on the bad block. I looked at an appraisal for a hard money loan I turned down a while back where the appraiser did not check to see if the bed/bath count & square footage was all permitted on the subject. So he used ALL 3/2 1,300sf comps for a property that was physically 3/2 1,300, but the public records had it as a 2/1 900sf. So he gave that illegal square footage value as if it was permitted! If the trust deed investor had to take that property back they would have had a much lower LTV than they were led to believe. Because if they had to sell that to a retail buyer, FHA, VA, conventional appraisers WOULD NOT count that non-permitted square footage in their appraisal. Therefore it would sell for much less than the comps that were all legal 3/2 1,300 sf. This is a great example of a detail on a appraisal that could be easily overlooked by a non-experienced trust deed investor. In addition, all the comps used on this appraisal were in the middle of nice cul de sacs when this house sat on a busy street close to commercial, and the appraiser did not not adjust down enough for that. So many small details on appraisals!

I do think you can successfully buy notes and lend hard money to people you do not know and in areas you do not know, there are plenty of people doing this on BP successfully.   I just think you need to have to have extra precautionary measures in place.  For example I have some very experienced appraisers (that are also investors) that I am going to have do appraisal reviews for me for properties I lend on out of my area.

For me the #1 key in HML's is nailing the appraisal. If you have enough equity you can usually worst case get made whole even if a lot goes wrong. This loan that I'm dealing with right now, a ton has gone wrong with the borrower, the appraisal was bad, yet I still will probably not lose any money and may even make money.

One rule I personally follow with HML is I only lend on properties that would cash flow as rentals if I have to take it back and rent it. So worst case if all hell broke loose and I couldn't sell this house I'm foreclosing on, it would make a great rental. It would be a cash flow rental with a nice return in a major metro area of very expensive state, rare indeed. If I went section 8 it would be huge cash flow. It would also work as a flip if I had to rehab it and go there. So many exit strategies worst case. This is what I like about lending and notes. If you are at a low enough LTV there are a lot of options even if the borrower doesn't pay.