May 25, 2011
What Happens When Your Borrowers Stop Paying?
When a note goes from 'performing' to 'non-performing', rest assured that transition will cost you as a note holder PLENTY. Why? Well, let's break this down using a real-world example.
In October of 2010, we purchased a non-performing note from a bank. The property in question was located in Florida, a state hit notoriously hard by foreclosures over the last five years. The borrower owed just over $40,000 when she defaulted on the note. The property appraised for around $45,000 during our due diligence process, and we paid $18,000 for the defaulted note.
We contacted the borrower, and she agreed to a short sale. She no longer lived in the property, and just wanted to be done with it. Granted, this was not an overnight resolution; it took us a long time to track her down and get her to agree to the short sale. Nonetheless, we have other non-performing notes that are far more time-consuming with totally unpredictable outcomes.
After several price drops, we finally found a buyer for the property at $34,000. Of course, we had to offer an incentive for the Realtor, so our commission cost was higher than normal. We also had to pay a "courtesy fee" of $250 to our buyer (yes, you read that correctly - the woman who defaulted) in order to ensure her compliance with signing documents, etc. But we were just getting started...
The title company uncovered an unpaid city code enforcement lien of $7,400, a delinquent tax bill from 2010 of $1,208, and an unpaid water assessment bill of $1,243. On top of all that, we had to pay 2011's prorated taxes, recording fees, documentation tax stamps, a title search fee, title insurance premium, and closing fees!
After all that, guess how much we cleared at the closing table? $425! Of course, that doesn't take into account the insurance policy we took out on the house to protect it while it was vacant. Thankfully, our Realtor was able to get the city to reduce the code enforcement lien to $1,800 (this fee had been withheld from our proceeds by the title company until after the hearing), and was the only reason we made any money on this transaction.
Now, some of these notes work out better than this one did, and almost as many turn out worse. How do you like your chances if your borrower were to default? Are you confident the value of the property is sufficient to cover all your expenses? As you can see from our example above, things have a way of coming out of the woodwork when things go south.
If you are currently holding a non-performing note and don't know where to turn, give us a call. Keep in mind the tax-man doesn't turn off his meter when the borrower stops paying, nor do the homeowner associations or city code enforcement teams. Instead, you'll be the one stuck paying for everything should you take the property through the foreclosure process yourself. Oh, and be prepared to spend several thousand dollars on an attorney if the borrower won't cooperate on a short sale - at least we dodged that bullet in this example.
Proficient buys non-performing notes because we have decades of experience dealing with their resolution. As the example above illustrates, is this really something you want to tackle yourself? If you want to cash out and be rid of a non-performing note, please contact us; you'll avoid countless hours of frustration and won't need all that Tylenol...
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