The note was secured by two rental units. The Payor had made a good ($100,000 or 20%) down payment and there was a good (six month) payment record. The buyers FICO score was above 650. Everything looked good so the note buyer ordered an appraisal.
The appraiser found the buyer was renovating both units, both were vacant, and there was no completion date scheduled. That was the end of that deal.
This is one of those cases where the note holder probably didn’t have any idea of what was going on. As long as the payments came in on time why should he worry? The problem is this is no longer income property. The payments will continue as long as the buyer can afford to make them. The renovation will continue as long as the buyer can afford to buy supplies and/or hire or provide labor.
If the rental market drops the buyer may decide a profit is no longer possible and walk away. If the buyer looses his job or some other event reduces his income, he may no longer be able to feed the property.
In our current economic situation, depending on the location of this property, the value of the property could have declined by more than 20% since the purchase. Many places in the country have had property value declines greater than 20% which would mean the buyer is actually under water.
If the payments stop and the note buyer has to foreclose they will be getting a property with no income, which will take time and money to get back into shape. No investor I have ever heard of looks forward to completing a rehab project long distance. They are hard enough to manage when they are right in your own back yard.
What’s the note holder to do in this situation? It will come down to how badly & quickly he needs cash for his note.
If he can afford to wait a couple of years the buyer may get the renovation done and the property rented again. Once there is an established post-renovation rental history the note may be marketable.
If the need for cash is more urgent the note holder may want to have a talk with the buyer and see if the buyer could pay him off with a heavy discount. If the buyer has family or friends with money in low income CD’s or savings they might be willing to use some of it to buy the note at a discount.
It is also possible a local investor with rehab experience would be interested although a national note buyer is not. A local is in a much better position to fix the problems if the buyer walks away or can’t/won’t complete the rehab.
