WHAT IF YOU CAN’T MAKE GOOD ON YOUR INVESTMENT PROPERTY LOAN?
Sometimes real estate investors just can’t pay their loans on time. What happens then? What options might be on the table? What happens if you fall into foreclosure?
Why Investors Can’t Pay Their Loans
Real estate investors don’t generally go into a deal or sign for a loan with the intention of not paying. You’ve done your numbers and your market research. You’ve educated yourself and don’t see any way this deal can go sideways on you. Sometimes it just does anyway. It may happen rarely, but it’s good to be aware of some of the issues that have hit others, so you can avoid them.
These issues include:
•Surprise repairs
•Running over rehab budgets
•Rogue contractors
•Cash flow held up from other deals
•Market changes
•Personal financial emergencies
•Nonperforming tenants
•End-buyers who backed out or delayed closings
•Missing insurance or tax payments
Knowing Your Options
If you tackle the issue early, you have options. If you bury your head in the sand and drag your feet, you can guarantee those options are going to dry up and things will only get worse. The earlier you deal with it, the better the outcome is going to be.
Your Options:
•Approach your current lender to get extensions or other options.
•Try pledging equity in other property to get a line of credit.
•Consider a secured line of credit against other assets or savings.
•Ask friends and family for help.
•Bring in a partner on the real estate deal.
•Try to refinance with another investment property lender.
•Check out peer-to-peer lending sites.
•Consider real estate crowdfunding.
Three VIPs:
1.Get new financing closed before you go thirty days late.
2.Take action early.
3.Have a documented plan of how you’ll turn around the situation.
What Happens When Investors Don’t Pay Their Loans?
If you are simply going to be a few days late in paying your mortgage payment and are 100 percent certain that you won’t be more than thirty days late, you probably don’t need to stress yourself out or panic. Regardless, call your lender. Stay on top of it. If you are responsive to the situation, your lender is more likely to be responsive as well. If there is a chance you might run over thirty days, you’ve got to get on your game, fast!
How bad the situation gets, and how fast, may depend on:
•Where you are at in your loan
•The amount of equity you have
•The current condition and status of the property
•The current market
•Who your mortgage lender and loan servicer is
In all cases you can expect your phone to ring off the hook, the mailbox to fill up with notices, and eventually for attorney’s letters to come. You may even be served a notice of default (NOD). During this time there will be mounting fees, accrued interest, and fees for attorney’s letters. All of this makes it harder to catch up and must be avoided.
If all your efforts to bring the loan current fail, eventually the loan will go into foreclosure. How long a foreclosure will take depends on the laws of the state, current foreclosure volumes, as well as the type of loan. A business or commercial real estate loan can fall into foreclosure in just a few days. Residential real estate loans may take ninety days or more before they get into the court system. Just know that as the market improves foreclosure times are being cut rapidly.
Even though the bank may seize the property as collateral, that doesn’t mean that borrowers are off the hook for their debt. Depending on local laws, creditors may still pursue deficiency judgments from borrowers for money owed, even after the property has been forfeited.
Alternatives to Foreclosure
Banks and mortgage lenders usually do not want to foreclose. They are in the money business, not the real estate business. They do not want the situation to get progressively worse and risk losing capital and the money of their investors. However, there may be some cases in which it is more appealing for lenders to foreclose than to cut borrowers a break. So don’t assume anything or take for granted the option to work things out.
Options that may be available instead of going through foreclosure may include:
•Loan modifications and recapitalization plans
•Selling the property as-is
•Reinstating the loan
•Short sales
•Signing over the deed in lieu of foreclosure
•Having someone else buy the note and become your new lender
A loan modification that gives you time to pay, without making the terms even harder to keep up with, can be a viable option that creates a fair compromise for both borrower and lender. Expect fees and changed terms—both of which can be a much better alternative than foreclosure.
Effects of Foreclosure on Real Estate Investors
There are both short- and long-term effects of foreclosure on real estate investors. At a minimum, in the short term, it’s likely you will be unable to obtain other financing. No other lender, especially a mortgage lender, is going to want to extend you credit if you are in foreclosure or are fresh out of it. That doesn’t mean that you can’t find ways to invest in real estate and get back on top of your finances, but it is going to make things a lot harder.
In the wake of the crises of the early 2000s and then the overtightening of loan requirements, it has finally become easier once again for borrowers to get loans after foreclosure and short sales. Often it is just a two- to three-year waiting period. The foreclosure crisis impacted millions of people in America, including many wealthy real estate moguls and celebrities. It will impact your finances for a long time and recovery is possible, but it is best to avoid a full-blown foreclosure at all costs.
Your credit report will be hampered for at least seven to ten years. The cost of not being able to access credit will make everything in life and business more expensive. You’ll make less and pay more for everything. If banks or the feds believe you may be involved in a real estate and mortgage fraud scheme, lenders may even blacklist you altogether. Judgments, collections, and tax penalties may also impact earnings until the debt is satisfied.
So, know your options and get to work solving the situation quickly. If you’ve already been through foreclosure, you can still invest in real estate, but your borrowing options are certain to be more limited and far more expensive.
TAKEAWAYS
For any investor facing the inability to repay a loan, what would you recommend as a course of action?