April 01, 2014
A Coastal Conundrum
I do some consulting for other companies in the mortgage business from time to time. These are typically entities who are in the business of buying and servicing performing loans. However, their expertise is limited when it comes to dealing with defaulted borrowers and the mess they often leave behind.
One such company had a commercial property on the Oregon coast. The borrowers had abandoned the property and essentially vanished, at least from the perspective of both the note holder and the county. After numerous failed attempts to track down the borrower, the county sent a letter to the note holder informing them, in short, they either needed to clean up the property or be subject to a $500/day fine until the offending mess was remedied.
Now, when I reviewed this letter, an obvious question came to mind: How can the county hold the note holder liable for the upkeep of a property they, the note holder, don't legally own? In a court of law, and with a really good attorney, I'm guessing they can't. However, I'm pretty sure the courts are part of the county, so the odds probably are against you, especially if you're an out-of-state note holder, as is the case here.
So...I set about contacting local companies to evaluate the property and provide a bid to clean the place up. The note holder was in the process of foreclosing, but it was taking a long time despite the fact there was no contesting of it by the borrower/owner.
Three clean-up companies visited the property: Two took one look and immediately said "nope", got back in their cars, and kindly told me "no chance in hell". The estimate from the other company? Almost $13,000. The problem(s)? Hoo boy...occupied by squatters, property in "extremely and excessively deplorable condition, is a sanitation and health hazard, needs to be decontaminated, including removal of a disgusting and huge amount of debris, garbage, bio-hazardous materials (fecal and urine excrement, human and animal), drug paraphernalia, and mountains of used diapers."
This obviously put the note holder in a tough spot. Their feet were being held to the fire to clean up this catastrophe even though they had no legal right to the property. Wanting to do the right thing, they agreed to clean up the property. To make a very, very long story short, the cleanup dragged on for six months, it became crystal clear the cleaning company was ridiculously unqualified to handle the job, and they ended up charging an additional $6,000 for the cleanup. For the sake of our readers, I will refrain from spouting the expletives I did when presented with the extended timeline and over-billing.
Once the cleanup was complete, the county was satisfied with the steps taken, but the property was so severely damaged by the squatters that it will likely take tens of thousands more dollars to get it into a condition satisfactory to a prospective buyer. What's more, even though the foreclosure was finalized in mid-January, the state of Oregon gives a six-month right of redemption, so the note holder (now property owner) cannot list the property for sale until July. This assumes the borrower/former owner doesn't redeem in that time.
I instructed the note holder/new owner to refrain from advancing any more funds to the maintenance/improvement of the property until the right of redemption has passed. Unfortunately, this exposes the property to many risks; vandalism, weathering, and escalation of the damage already done (mold, wood rot, etc.). It really is a no-win situation. The best that can be hoped for is to mitigate the substantial loss this company will take on the eventual sale of this asset.
I glossed over a lot of this story, as a novel could be written about this fiasco. I share this story as a 'heads-up' to you note holders out there. I've said it before and I'll say it again: You must be diligent with regard to the properties you hold notes on. Never assume they are being well maintained...trust but verify! And you absolutely, positively must know the condition of the property if and when any of your borrowers start to have trouble with their payments or stop making them altogether.
If you need help with a situation of your own, or you simply want out from under the hassles and headaches associated with holding your own notes, give us a call.
Make it a great week,
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