Here’s an update on my debt investment at RealtyShares. The borrower stopped paying for unclear reasons, and as a result this is my first investment to go into foreclosure proceedings. I am still hopeful for a full recovery of my principal and accrued interested, but it will take a while to come to a resolution. I wanted to share some interim details for those interested.
Initial investment details.
- Property: 6-unit, 6,490 sf multifamily in Milwaukee, Wisconsin.
- Interest rate: 9% APR.
- Amount invested: $2,000.
- Term: 12 months, with 6-month extension option.
- Total loan amount is $168,000. Purchase price $220,000 (LTC 76%). Estimated after-repair value $260,000. Broker Opinion of Value $238,000.
- Loan is secured by the property, in the first position. Personal guarantee from borrower.
- Stated goal was to rehab, stabilize, and then either sell or refinance.
Subsequent summary of events.
- January 2016. Funds committed. Loan closed.
- July 2016 to May 2017. Sporadic payment history for over a year. They would be on-time for a while, then there’d be a late payment, then things would brought back current, etc.
- May 2017. Borrower stated that the property was under contract for $225,000 with final walk-through completed and expected close within 30 days.
- June 2017. Borrower stopped paying. I guess the sale fell through (or they lied). Foreclosure process initiated by RealtyShares.
- September 2017. Judgment granted in Wisconsin court. By law, there will be 3-month redemption period where they borrower can still keep house if they pay foreclosure judgment plus interest, taxes, and costs. Expected scheduled sale date in December 2017.
Payment history. I invested $2,000 and have gotten paid $210.84 of interest before the payments completely stopped. That’s paid interest of 10.5% of principal with a rough estimate of 24 months elapsed from January 2016 to January 2018 (could be longer). My total return will depend on how much money the property will fetch upon sale.
What’s next? It was only a matter of time before I got a default. The question is how often that happens and the size of any losses. When it came to Prosper or LendingClub, the interest rates might be higher but when a loan was 60 days late you were pretty much done. As an unsecured loan, you had nothing to fall back on if the borrower broke their promise (besides hurting their credit score). Sending it to collections might get you pennies on the dollar.
However, this debt is backed by a hard asset, and RealtyShares has already started the foreclosure process. Within three months, either the borrower will have paid it off or the apartment complex will be put up for sale. I tried to research some recent comps in the area using the popular real estate websites like Zillow, but this is a somewhat unique property (6-plex). I don’t see any reason why it would sell for significantly less than the loan amount.
This is complete speculation, but I wonder if the borrower is still collecting rent from all these tenants even after they stopped making loan payments and even now during the foreclosure process. Just pocketing the rent… Is that allowed? Otherwise, the incoming rents should be higher than the mortgage payment, so why not keep paying on the loan? Curious.
Communications quality. I would grade the online updates from RealtyShares as acceptable/good. They are relatively detailed and consistent, providing me a look inside the foreclosure process. Here is a copy/paste of my most recent updates:
October 9, 2017 We have identified a real estate broker to sell the property. The broker spoke with the previous property manager who was at the property a couple of weeks ago and who may be available for property preservation. The broker is going to take a contractor to the property to try and get an accurate cost estimate to complete the renovation.
September 21, 2017 Judgment was granted at the hearing. We expect the filed judgment from the court in approximately one week and will process it upon receipt. We should be able to schedule the sale in late October and it will be held after the redemption period expires—sometime in December. As soon as we receive the filed judgment order from the court we will have the exact 3 month redemption date. Sale cannot be held until the redemption period has expired.
September 8, 2017 The partner has declined to go forward with the purchase of the property. On the foreclosure front, the judgement hearing is scheduled for September 18th. If the judgement is successful, there is a 6-month right of redemption period during which the property can not be sold. During this period we will identify a property preservation firm and a commercial broker to sell the property.
August 25, 2017 A minority partner has stepped forward and has asked for a week to visit the property with the idea of making a paydown in exchange for an extension. We have agreed to speak next week after his inspection.
August 22, 2017 Service has been completed on the foreclosure. The defendants were personally served with the summons and complaint on August 2, 2017. The statutory answering time will expire on August 22, 2017. The judgment hearing will be scheduled at that time.
June 29, 2017 Due to the borrower’s inability to stay current, we have decided to start the foreclosure process for payment default. The foreclosure will run parallel with the sales process, meaning if the sponsor can sell the property and pay us off before the foreclosure is complete we will stop the process, if not we will take over the property. Typically, foreclosures in Wisconsin take up to 12 months.
Bottom line. Well, I used to wonder what would happen in a foreclosure scenario, and now I get to find out. So far, I’m just waiting. There is no secondary market, so I can’t sell my share and invest it elsewhere. I must be patient, and hopefully I will earn an illiquidity premium as a result (i.e. higher returns). I will update again when there is more to report on the recovery process. If you are interested and are an accredited investor, you can sign-up for free and browse investments at RealtyShares before depositing any funds or making any investments.
I’ve also made investments in these other real-estate sites: PeerStreet, which offers $1,000 minimums and automated investing. Patch of Land, a debt investment backed by a single-family residential property in California. Fundrise eREIT, a basket of commercial property investments with an equity focus.