Rolling Along

My funds from the closed loan #13 have been reinvested in a new hard money loan #18. This one is actually a pretty sweet deal for the borrower. The property is a 4 bed, 2.5 bath two story single family home built in 1979. The property was purchased at auction for $105,000. Our loan is for the full amount. The property is currently occupied. The exterior looks to be in fairly good shape - new paint is needed and that's about it. No idea on the inside. Current value is estimated to be $180,000 and after rehab, about $195,000. So our LTV based on the after rehab value is 53%. Using the current value, it's 58%.

What makes this a good deal for the buyer is that it appears some websites might have led people astray. ForeclosureRadar.com, which is a site used by many of the people who buy at these auctions, lists the property as 1,649 square feet. In fact, our borrower was the only one who bid on it at the auction, probably for this reason. But a visit to the property shows it looks bigger. In fact, it turns out the property is about 2,049 square feet - a room was added on above the garage. And the work was done with the proper permits and the larger square footage is reflected in the tax records for the property.

The borrower is a first time customer for us, but he is a licensed Realtor and often buys properties for our biggest borrower, so he knows his stuff. He is also personally guaranteeing the loan. Looks like he did his homework and found a good deal. This is a good example of why I like to use official records when checking out properties.

In other news, the April financials for the Houston apartment complex are in.Occupancy remained stable at 93% and total income was up about $1,000 over March, mainly due to increased collection of late fees. We had another month of positive cash flow - about $4,300. The year to date positive cash flow is about $21,000. Mangement is cautiously optimistic that we will have a strong second half of the year. Some maintenance of the exterior wood will be starting in June, but it shouldn't affect cash flows as it will be paid for from the replacement reserve account that is in escrow with our lender.

Loan Closed And A Possible New Investment

Hard money loan #13 closed today. Not sure how the borrowers made out with this investment. I'm pretty sure they lost money, but don't know how much. Not that it's any of my business. It'll be interesting to see if they ask to borrow from us again. I've got no problem lending to them again - after all, they always paid on time. I'm just curious to see if their loss sours them on flipping or not. My funds are sitting with my partner waiting for the next deal.

The first payment on loan #17 was mailed out today. As usual, this borrower paid early.

I also spoke today with someone over at Rising Sun Capital Group. I came across an article one of the principles wrote on the Bigger Pockets blog. RSG is a company that flips properties locally here in the Phoenix area and I'm thinking about investing some money with them. This is more risky than my hard money lending. If I invested with them, I would be actually owning property and thus taking on the risks that entails. I would be counting on their expertise in evaluating deals and choosing good ones, as well as their rehabbing and resale experience. In my phone conversation, I did find out that they have lost money on some deals in the past. (In comparison, my partner has been a hard money lender since the 90's and has not lost a penny of his or his partner's principle.) Of course, the potential returns are higher too. All my funds are currently tied up in loan rights now, so I have some time to think about this more. (The funds from hml #13 belong to my IRA and are not enough to meet Rising Sun's minimum investment.) When the Houston apartment sells and I get that money back, I may go this route. That likely won't be for at least a year.

I do find it funny that the guy I spoke too wrote an article about wanting to become a hard money lender and here I am, a hard money lender, looking to get into his business. I guess the grass is always greener on the other side!

Bankruptcy Law Allows Home Owners To Dump Second Mortgages

The Mercury News has a story about a legal loophole people in the Bay area in California are using to wipe out the second mortgages from their home through filing for bankruptcy. It works like this: if you want to stay in your home, the law forbids wiping out your first mortgage via bankruptcy. However, if the value of your home has plummeted and you are now under water, your second mortgage now becomes unsecured debt because your house does not have any equity in it to cover the loan. Thus, it is eligible for elimination through bankruptcy proceedings. Once bankruptcy has been declared and the repayment plan completed (which takes about three to five years - during which payments on the second are suspended), the second mortgage is wiped out.

The understatement of the year award goes to this line in the article: "Mortgage bankers don't like the practice."

Hard Money #13 Closing After All

Well, after writing all that up, it would seem the loan is going to close soon. My partner got a call saying we would be paid off in a couple days.

HML #13 Was Due Yesterday

Yesterday was the due date for our note for hard money loan #13. The property has still not been sold and the borrowers would like a three month extension. The borrowers were first time borrowers with us. We haven't had any problems with them - they pay on time through automatic payment with their bank. It seems the problem is that they aren't too knowledgeable about the rehabbing process.

The property has been on the market for 6 months. My partner told them it was priced too high, but they were trying to get a profit out of it. They spent tens of thousands of dollars rehabbing it and staging it (renting furniture and interior decorations so it shows better). They are also trying to sell the place themselves, without an agent to save on commission costs. (The borrowers manage some apartment complexes and have their own website.) That doesn't appear to be going so well for them.

They started off listing the place for $400,000. When we made the loan, we comped it between $350,000 and $420,000. Average days on market a year ago was 4 months, so trying to sell at the top of that range will take longer. The borrowers purchased the property for $321,000 and our loan is for $224,000. They currently have the property listed at $379,000 and they have an offer for $359,000. They countered (I don't know their counter amount) and are currently waiting for a response. They claim they also have another offer on the way and are getting about 20 people per week looking at the property.

The borrowers need to cut their losses with this one. If they bought it for $321,000, put tens of thousands into it, and are selling it for $379,000, they will have a loss. (They've been paying us interest for a year, so that's another $22,400 expense.) Holding costs are killing them - they still have to pay us each month, plus they need to pay the staging company each month for the rented furniture. Yet they are unwilling to cut their losses and move on. My partner notes that this is similar to the mindset that some stock market investors have - they hold on to a falling stock all the way down because somehow, they haven't lost money until they actually sell. Well, in real estate, the dollar amounts are pretty large and holding costs will each your profits up quickly. To be successful, you have to be not only know how to limit your losses, but also be willing to take a loss. Otherwise, you just lose more and more money each day.

I'm not too concerned with the situation. My partner put the matter out to a vote of all the mortgage holders to see what we wanted to do with this - start foreclosure or give them an extension. I voted to give them the 3 month extension. They have always paid on time and this loan is actually earning 1% more than my other loans. Even at the lower sales price of $359,000, we're still at a 62% loan to value ratio (hmm..same ratio as the new loan I wrote about yesterday), so if they do default, we'll be covered. In fact, I have some money available to buy out any of the other investors if they want to get out for any reason.

Another Hard Money Loan Started

After a longer wait than normal, my partner found a new hard money loan to roll over the principal from HML #15 into. The new property is a 3 bed, 1 bath single family home in San Leandro, California, built in 1942. The borrower bought the property at auction for $194,000. Our loan is for $143,700. After fix up value of the property is between $231,000 and $260,000. Using the lower number gives us a LTV of 62%.

The house is on a big lot. The house itself is on the smaller side – about 900 square feet. Inside condition is unknown. Two comps sold recently for $255,000 and $270,000. I’m getting 9%, interest only payments. Note due in one year. The borrower is my partner’s biggest client and always pays his bills early. He does this for a living and has 10 employees or more. He buys about 1 property a day and closes on about 1 a day. He also is personally guaranteeing the loan.