September 11, 2012
A repeat customer of ours called me up a few weeks ago looking to sell a non-performing note he holds. The reason for default is a convoluted story of poor health, death, and absentee ownership involving the payor and his offspring. Suffice it to say the property was the least of their concerns, and considering they lived a thousand miles from the property, they let it fall into disrepair through sheer neglect.
Despite the fact the payors only recently defaulted on the note, the property had been vacant for some time. The county took notice and began issuing citations for things that needed the payors' attention. Because the note was effectively current during this time, the note holder was unaware of the deterioration of the property and the subsequent violations.
When I received the note holder's call, he said we basically had a house that needed major repair in a very nice neighborhood, and that with the proper rehab, could be an attractive investment for the right buyer. As it stood, he had neither the patience or the desire to foreclosure on the payors himself.
We negotiated a price for the note, and I set about to do my due diligence. Since the copy of the Mortgage the seller sent me was unrecorded, I decided to try and save some time and attempted to pull a recorded copy off the County Recorder's website. What i found there, however, was far more than I had bargained for.
In addition to the recorded Mortgage, four subsequent documents had been filed of record, all liens with the county as the payee. In total, we had amounts owed in excess of $30,000, or just slightly more than the principal balance owed on the note. Problem? Umm...yeah...BIG problem. Between the unpaid balance and the liens, more is owed on the property than it's currently worth.
As I write this, the note holder is trying to determine what (if anything) the county will do to alleviate the burden on this property. It will ultimately come down to whether the county is actively attempting to capture properties via these code violations, or if they will be reasonable with the note holder. Keep in mind code violations take precedence over my seller's lien; they are what are called "super liens". In essence, monies owed to government entities can supersede a previously recorded lien, and the original lienholder can be left holding a big sack of nothing.
There's not an easy answer to avoid falling victim to something similar if you hold a note that may, at some point, go into default. Obviously, living in the same area as the property is a benefit, as you can occasionally drive by to make sure all is well. (i.e. verify the property is occupied or if not, that it is still being relatively well maintained) Keep in mind your Security Instrument (Mortgage or Deed of Trust) likely spells out the borrowers' responsibility to keep the property maintained and in good condition; if so, you have every right to enforce that provision.
As I've written before, what you don't know CAN hurt you. Stay attuned to the goings-on with not only the properties, but also the borrowers who pay you every month. If they fall behind, make no assumptions and take no assurances from the borrowers that all is well with the property - VERIFY yourself. Trust me when I say your borrowers are not looking out for your best interests...you will need to take immediate action to safeguard your ass(et).
Make it a great week.
Our efforts stay focused on note holders. If you are a note finder, a note
broker, or anyone other than the actual note holder, please do not contact