January 03, 2011
Blast From the Past #3
[The following blog was originally posted on March 31st, 2008. I have added new observations in parentheses.]
The property you sold had new carpet and linoleum, fresh paint, and new central heating and air. Are your buyers showing pride of ownership or treating it like a Fort Lauderdale hotel room during Spring Break?
In prior entries, we've focused on the buyers' credit and pay history; the final piece of the "Big 3" of underwriting is the property - the actual collateral for the Note. We see every kind of property in this business - from the single-family house to the commercial office building, from apartment complexes to raw land, from double-wide mobile homes to mobile home manufacturing warehouses.
Over the years, I have seen properties whose condition have left me in a state of shock. Take for instance the beautiful (from the exterior) single-family house we inspected in 1997 Kansas City. Well-maintained, impeccable yard, and in a neighborhood anyone would be proud to live in. Once we stepped inside, however...the homeowners (who had lost the house in foreclosure) had taken everything. EVERYTHING. The lighting fixtures, the outlet covers, the toilets, the plumbing, the trim, the windows...EVERYTHING. Or the house we inspected in Houston - vacant after an eviction. Squatters had decided to build their warming fire on the hardwood floor in the living room. What remained was a 6-foot wide hole to the crawl space below...a nice touch, but challenging for even the most gifted realtor to put a good spin on. (I run into these kinds of properties every day, now that I've become more involved in purchasing bank-owned foreclosure properties.)
Most security instruments (Deed of Trust, Mortgage) have standard language requiring the buyer to keep the property they purchase in good repair. Since you as the noteholder have a residual interest in the property, do you drive by the property periodically to ensure they are satisfying the terms of your agreement? A few kids' toys scattered on the front lawn probably isn't reason for concern. A few dozen cars in various states of disrepair parked haphazardly across the grounds may spell trouble.
Like credit and pay history, what you don't know about the property and how your payors are treating it CAN hurt you. If you attempt to sell your note, we will arrange for a local realtor or appraiser to tell us what they think the property is worth. If the property shows deferred maintenance, zero pride of ownership, or is sporting a brand new spray-painted "Earl's Used Cars and Salvage Yard" sign on the front fence, chances are the property report is going to come back unfavorable, and may very well eliminate any chance of selling your note.
Use the documents your payor signed to your advantage. Make sure they are required to keep the property in as good a condition as it was when you sold it. If they are allowing the property to fall into disrepair, contact your attorney to see what your remedies are. Drive by the property once a month and ask yourself the following question each time: If I had to foreclose and take this property back, would I be able to re-sell it in its current condition?
To recap: If you HAVE an interest in the property, TAKE an interest in it. With real estate prices stagnating or falling in most areas of the country, the last thing anyone needs are buyers causing even more rapid depreciation through the wanton disregard for the property...the property you worked so hard to sell. (Yes, property values are STILL stagnant or falling in most areas of the country, as this week's article asserts.)
Make it a great week, and Happy New Year!
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