It can be quite difficult to foreclose a property, but sometimes, you just have to do it. When a borrower has seized making payments, the lender must take some actions before things get worse. In this foreclosure journal, Keith talks about foreclosing on an owner-financed note. He talks about what you need to know with foreclosure as he shares his own personal experience of dealing with a client in this situation, including the difficulties in contact as well as the effects of natural disasters to the property. He walks you each step of the foreclosure process, highlighting his motto of having insurance. Furthermore, he covers the difference between an owner occupant and an investor, and then letting you in on his exit strategy.
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The Foreclosure Journal – Part 1: Foreclosing On An Owner Financed Note
This is episode number 42. I just want to let you know that I appreciate sharing with me your most valuable asset, and that is your time. I hope I can make everything worth your while. It is my goal to provide private lenders just like you and me with help in mitigating risks and increasing our yields and opening doors for bigger and brighter possibilities, bigger and brighter yields and return on investment as well. Our topic is foreclosure and I have started the foreclosure process or moving towards starting the foreclosure process. My goal is to walk you through each step of the way and share with you what’s happened, how we got here and share my thoughts. Maybe I’ll share my feelings too because this is where the healing begins.
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Let’s start with the nitty-gritty, foreclosure. What happened? We started actively seeking distressed owners. We found one for a house that was in Port Arthur. It’s very much an industrial town, part of the Golden Triangle, east of Houston. It’s along the coast and very close to the border of Louisiana, the Sabine River. It’s the hometown of a lot of people, Janis Joplin for one and many others. The Golden Triangle is home to a lot of famous athletes and even some actors as well. We found this house and we were able to negotiate the purchase of the house that was in a very bad shape and had a lot of back taxes owed up on it. We negotiated with the owner to purchase it for what was owed in taxes. He was also getting tired of getting citations from the City of Port Arthur when they would come and cut the grass for him. He was happy to get rid of it. What we did, because it was in such bad shape, rather than going in and spending a lot of money and doing a fix and flip on the rehab, we decided, “Let’s go ahead and just try to owner finance this.” We paid cash for the house and ended up selling it last August of 2017 for $30,000 owner finance at 10% interest and we put it out over to ten years.If you don't do everything by the letter of the law, it can really hurt you. Click To Tweet
Everything closed, everything went fine because the person who was buying the house was not an investor but rather was going to be the owner-occupant. We went through a residential mortgage loan originator who vetted our potential buyer/borrower. Once they did their magic and they crunched the numbers, we figured out that we can’t get rent for what we were charging a month on the note. He closed, he moved in and then a little thing called Hurricane Harvey happened. We kept our communication up with the owner saying, “Don’t worry about paying. We’ll do a little forbearance. Just get on your feet.” The house did flood and one of my biggest mistakes there was I did not demand flood insurance. Harass me, email me, call me, text me, call me out on social media, it was definitely a mistake that I made when you have a property that’s close to the water. Even though it’s not in the floodplain, common sense should tell you, you get a big enough storm surge and you’re going to take on some water.
This house is actually pretty close to the coast, about a block or two away so it took on water. We told the buyer, “Stay in it. Don’t worry about paying us right now. Just get it cleaned out, do what you’ve got to do so that you can live in it and we’ll work something out later on down the line.” He made one payment after Harvey and then half a payment. We told him, “Get on a good foundation, get on your feet again financially and we’ll talk about the payments later. The house is still yours, it’s not going anywhere.” What we wanted was him to stay in it and to occupy it so it keeps the likelihood of vandalism down but also to keep him in it, so he could repair it and fix it up. Long story short, after reaching out to him and letting him stay in, he has now abandoned the property and hasn’t made a payment in over eight months. Even though we were trying to keep him in and give him as much leeway as possible because that’s just crappy timing to buy a house and then two weeks later, three weeks later, you get flooded out by a hurricane, one of the biggest natural disasters that this part of the country had seen in a very long time.
In order to sell the property again, legally we have to foreclose on it. My company is just the lien holder. Our borrower is still the owner of the record, although he’s gone, so now the foreclosure process begins. Like many of you, I’ve got a full-time job. I don’t need to be messing around with attorneys. My partner and I do have an attorney picked out and I have emailed the said attorney and laid out the situation and said this is what we need. We need to follow all of the state foreclosure laws to the tee because this is an owner-occupant. If this was an investor, the laws would not protect that investor as much as they do a consumer owner-occupant. In the interest of keeping everything above board, everything legitimate, we’ve decided to engage an attorney.
Knowing what was needed, I just introduced myself, “What do you need from me just to get the ball rolling?” That’s the level that we’re at. Here’s what the attorney needs in order to process a foreclosure or at least to send the notice of default, letting the borrower know they have twenty days to cure the default and bring the loan current. If they fail to do that, then we go to the courthouse steps and the property is auctioned. If nobody bids high enough, then the property will go back to my company, my LLC that purchased the property and then sold it with owner finance. You definitely need a few things. You need the actual promissory note that the borrower signed or at least a good copy of it, a good scan to send over to the attorney. You also need the deed of trust, all the paperwork that the borrower signed at closing you’re going to need copies of.
The deed of trust is what puts the property up for as collateral. That’s how the lien is secured or the lien is placed against that property, securing the lender, my position in this case. I need all the paperwork on that from that transaction of closing. Then we need an arrear statement, which is essentially an amortizations table. It’s when did the loan start? What payments have been made? How much were those payments? When were they made? How much interest was reduced and how much principal was reduced? The attorneys are going to need to see all of that before they can even write the letter and send it to the bar or letting them know, “We’re calling the note due and you need to pay up or we’re going to foreclose on you.”
On the arrear statement, you break down the principal and the interest. Here’s something that’s also very important, late charges. In that promissory note, in those documents, your lawyer should have outlined what the penalty is, how many days until the payment is late. In this case, there’s a big grace period because it’s an end consumer owner-occupant in there, but there’s a late charge if they don’t pay on time, so those are going to add up. Any escrow fees, and by that, that’s your loan servicing fees that your borrower has to pay also taxes, insurance, any HOA or any other fees that your loan servicer will collect on your behalf every month and then pay for you on an annual basis. Then you need any prior unpaid costs of collections. If we’d already sent a couple of a certified mail return receipt letters to the owner, we will put those costs in as well.When that owner finance borrower is an owner occupant, he's no longer considered a business; he's considered a consumer. Click To Tweet
That brings you up to speed to where we are. All of this has started. I’ve gone back and pulled all the documents. I did all this and emailed that over to the law firm, to the attorney and await his communication with me to let us know where we go from there. What’s also going to happen is before he even starts anything, I’m going to have to pay him some money. In addition to all of that fun stuff, this is probably going to end up running about $1,200 all said and done. There will be a few hundred dollars for the letter and then several hundred dollars for the actual foreclosure. He’ll get it listed down at the County Clerk’s office and all that fun stuff, while I sit back and do my job and my normal day-to-day.
You could ask the question, “Why don’t you just do this? Can’t you do this yourself?” A lot of it you can, but here’s the thing. If you botch a foreclosure, it can come back and haunt you. If you don’t do everything by the letter of the law, dot your i’s, cross your t’s, it can hurt you. That’s to an investor because if you’re selling owner finance to an investor, you’re giving them a lot of leverage. When that owner finance borrower is an owner-occupant, he’s no longer considered a business. He’s considered a consumer and consumers are afforded much more protection under State and Federal law no matter where you live than an investor, a business deal. For me, do I want to pull $1,200 out of my pocket to pay this attorney? No. Am I going to do it? I am because he knows the process. He knows the law. He knows how to do what needs to be done. I write the check, I provide the information. I wait for him to let me know when the house is mine again, so I can put it back on the market and sell it. I need to go look at the property to see it. The last time I saw it, it was not in good condition. My exit strategy with this is to go ahead, take back the property, wipe out the original loan and then resell it to either an investor or an owner-occupant.
This time I’m going to go with an investor, but I won’t shun away or turn away an owner-occupant with money and have a decent job. I don’t hold any hard feelings against this guy because he bought a house and then it got flooded by Harvey. It’s just some bad luck. Selfishly, I want him to take care of the property but more importantly, I don’t like doing the foreclosure. I’d rather get my monthly payment every first of the month, get my mailbox money than have to go through all this hassle. We tried to do a deed in lieu of foreclosure, which means he would sign the paperwork and give the house back to us, which would avoid the whole foreclosure process. We would file that paperwork with the County Clerk. That would show he purchased the house, but he has the deed of the house back over to us, so now my company, my LLC is the owner of the record and has legal authority to go back out and market and sell that property.
A couple of things to take away. Number one, I don’t regret making this deal at all. It was a good deal and I’ll make it again tomorrow. It’s unfortunate that we have to foreclose and I do feel bad for the borrower. After a year’s time, we also owe back taxes. In order to take the house back, it’s going to take a couple of grand, maybe $2,000 to $3,000 to get it back. There is that cost that I do definitely want to recoup, but I do feel for the borrower and his family and I wish them all the best. At the same time, this is my business. I want to take the house back, which I rightfully can do, legally can do, will do and put it back on the market. We’ll see if we can get it sold again. I do like originating owner finance notes that if you do it right, if you put enough spread in it, it’s going to be very lucrative. I can later on sell that note even at a discount and still make money. That’s where things are. I do definitely now require flood insurance within 50 miles of the coast. It’s a huge broad brush, but if I’m going to invest in properties along the Texas Gulf Coast, it’s inevitable a hurricane will come through at some point.
We also have tremendous spring and summer thunderstorms and with all that moist air coming off the gulf, you just never know what’s going to happen. We also get some tornadoes and whatnot. Flood insurance is something that I require now on all my loans and if somebody complains to me that they can’t afford $400 a year for the FEMA National Flood Insurance Program, then I walk away because then they don’t have a deal. It’s plain and simple. That’s a cost of doing business. Unfortunately, it is but I’d rather have the borrower pay $400 a year to keep my investment protected than me having to pay $1,200 to foreclose. Do the math. I know they get stuck in the long run paying more, but they’re protecting their property and my asset or the asset that’s backing my investment. Moving forward, I always have flood insurance. That’s my motto and it’s angering a lot of people, but it’s my money. I’m going to invest it the way I want to invest it.
That’s going to do it for the installment one of the foreclosure process, the Port Arthur house saga. I want to thank you for reading and I want to bring a couple of things to your attention. Number one, sometime in November, I will be participating in an online summit. Go to PrivateLenderPodcast.com/events for more information on that. Nothing’s been solidified yet. We’re still trying to work the dates. There’s going to be an online summit and it’s going to be a ton of good information on it. It’s going to be a three-day seminar. The cost is much less than a three or four-day seminar that I’ve been to that can run as much as $500 to $1,000. Just for a few hundred bucks, I think it’s about $300, you get three days of content from people. Some people will be selling but there are a lot of great programs out there. That’s number one.When you do it right as an owner finance notes and put enough spread in it, it's going to be very lucrative. Click To Tweet
Number two, about a week after the summit, you’re going to get replays of everybody’s presentation from beginning to the end. That’s three days’ worth. It’s a lot of content, a lot of great ideas. Even if you don’t pursue any one person’s content or coaching or education, just jotting down the notes and connecting the dots alone is going to be worth your time and your money. Please stay tuned for more information about that online summit. Also, it’s time for me to grovel and beg, please go to iTunes, leave a rating and review, an honest one. I would love five stars, but if you don’t honestly feel that I deserve it, give me what you feel like I do deserve. I greatly appreciate it. Even a lower star review is still a review. It puts this podcast up in the iTunes algorithm so that more and more people will be exposed to it when they go on to iTunes. The more people exposed to it, the bigger the reach, the broader the reach, the more people, so on and so forth.
My goal is to reach as many people and let them know that you can be a private lender. It’s legal and it can be lucrative. If you want a Ferrari and girls in bikinis, then don’t listen to this, but if you want old school proven techniques and mindset and actions to take to increase wealth little by little, one win at a time, then this is for you. Don’t forget while you’re leaving that rating and review, go ahead and promote your business, put your webpage out there, put your phone number, your email address. Let us know who you are and what you do and please spread the word. Please connect with me on social media. You can find me on Facebook, Instagram, Twitter, LinkedIn, BiggerPockets and at PrivateLenderPodcast.com. I want to thank you again. I hope everyone’s Q4 is rolling on for a very happy and successful end of the year. I wish you all happy and prosperous lending and investing. I’ll see you in the next episode.