Jun242014

What can you learn from a default and subsequent REO?

 

I am more bullish on Trust Deed Investing than ever!  I just experienced how equity protection, capital preservation and oversized risk adjusted returns are all very real and alive in the world of Trust Deed Investments.
After almost 3 years, one of Mortgage Vintage, Inc.’s 1st Trust Deeds, turned REO just sold.  The original borrower committed fraud, sued all parties involved, filed bankruptcy, extorted funds from the lenders and generally was a bad guy.  The investors hung in there, contributed on capital calls for the litigation, foreclosure and rehab costs and through all these trials ended up with a 10.50% annual yield!
I heard a quote recently that resonated: “The trials that you go through and the blessings that you receive are the exact same thing”.  While I would not wish this “loan gone bad” experience on anyone, we learned through the entire process and will be a better Hard Money Lender as a result.  Here are a few lessons learned from this Trust Deed Investment:

Origination:

  • Verify the Zoning of a Property on the Property Profile.  Make sure that an SFR is zoned an SFR, Duplex is zoned a Duplex and a Tri-Plex zoned as a Triplex.  Make sure the Appraisal/BPO values the property as Zoned.
  • Borrower needs a separate source of income besides rental income on a cash-out loan
  • Avoid litigious people.  If they have sued once, they will sue again.
  • Make sure the loan documentation is in order.  Occupancy, Loan Type, Disclosures, Business Purpose documentation

Servicing, Foreclosure, Bankruptcy and the Trustee Sale:

  • Use a qualified and experienced Foreclosure specialist
  • Bid less than what you are owed at the Trustee Sale
  • Hire an Attorney that knows the intricacies of the hard money lending industry

Rehab and REO Sale:

  • Rehab and repair the high impact items related to the resale value
  • Pick a licensed General Contractor and check references
  • Review the major Sub-Contractors and their qualifications and references
  • More visits to the property the better to keep the project on track
  • Visit the Comps and adjust sales price accordingly
  • Be careful not to guarantee Section 1 Termite clearance to the prospective buyer
  • Don’t stage the property until all the permits and construction is complete

Mortgage Vintage, Inc. fights for the return and high yield for our Lenders.  We strive to provide smart passive income while keeping capital preservation paramount.  What have you learned in your Trust Deed investing?