Proficient Note Buyers
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February 13, 2013
What's Going On In There???
We have bought and sold hundreds of bank-distressed (REO) properties over the last several years. It is absolutely astonishing how, despite different locales, different occupants, and different socio-economic classes, the insides of these houses all look the same. In a word, TRASHED.

Earlier this week I asked my Realtor in central Ohio to check out a property we could buy at a very reasonable price from a big-name bank. Knowing this particular bank would simply be deeding the property to us, warts and all, I wanted to know what kind of additional investment would be needed to get it ready for the market.

First and foremost, the yard is overgrown and poking up through the several inches of snow on the ground. Gonna need snow removal and, once it's melted, ongoing yard maintenance....check. Next, the door was broken, shattered glass sprayed all over the front porch, and anyone could gain entry. Gonna need a locksmith to replace the door and get the property secured...check. Small potatoes compared to what my agent found when he walked through the door...

Garbage. Mounds. Piles. Everywhere. Actually, room after room was just filled with household items (clothes, toys, pots, pans, old furniture, etc.). Think of an episode of Hoarders. These items had value to the former occupants at some point (clearly not enough value to take them with them!), but to us they simply represent five (5!) huge dumpsters worth of garbage.

Was I surprised? Not in the least. They ALL look like this. When people get evicted from their homes, not only do they leave everything behind, but they make a royal mess of it first. Is there some handbook that tells how to leave a property when you get kicked out? It is uncanny how similar each property is. In fact, when we buy these houses, it is a given we will need to budget for a 'trash-out'. These typically range from $1,500 to over $5,000, depending on the location and the severity of the mess.

But that's not all. Most times (and this property in Ohio is no exception), there is an abhorrent pet odor that accompanies all the garbage. Sometimes the former occupants leave their pets to fend for themselves in the property when they move out; most times it's the more unfathomable situation: They just let their pets relieve themselves in the house. On the carpet, in the kitchen, bedrooms, furniture, etc. Adding to this olfactory atrocity is the food left to rot in the refrigerator that no longer has power running to it.

I'm not writing this to ridicule the unfortunate who lose their homes. Rather, this intends to serve as a precaution to those of you who are currently collecting payments on a note. Most security instruments (Mortgage, Deed of Trust, etc.) require the borrower to adequately maintain the property or run the risk of being in default. It is your right as a note holder to check on the property and make sure it is being kept up.

In the event your borrower has already defaulted on his/her obligations to you by no longer making payments, it is imperative you are aware of the condition of the house; not just from the street, but inside it as well. Banks can't do this due to the impossibility of doing all those property checks, but you can.

If you want no part of the 'ugly' side of this business, we can help. Whether your borrower is still paying or not, we can provide a lump sum cash payment for your note. You may not be able to stomach walking into a house like the one I describe above, but we do it all the time.

The best course of action, obviously, is to keep a good relationship with your borrower and communicate often. Every once in a while, ask if you can come pick up their monthly payment instead of them mailing it to you. (Clearly this assumes you live in the same area as the property.) Check to see how your borrowers maintain the property, both inside and out.

So how do we monetize this asset? Well, considering all the costs involved to make this house habitable again, we had to offer a pretty low price. After all, we have to pay for the trash-out, the repairs, ongoing snow removal and (when spring comes) lawn care, Realtor fees (once the property sells), title insurance, closing fees, and the cost of our investment dollars. Before anyone reading this decides to jump into this arena with both feet, just know all the ancillary costs will EXCEED our purchase price of the property.

Will we make a profit? I'm pretty sure we will. We still had to gamble a little bit, since we don't know the condition of the roof due to all the snow. The key is having the right team in place (Realtors, contractors, etc.) to efficiently do all that needs to be done.

Oh, and one more thing: Whoever said "One man's trash is another man's treasure" never bought distressed properties!

Make it a great day,


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