Updated June 2018. One of the new “marketplace” (aka “crowdfunding”) real estate investing sites that I have put my own money into is . Although I have invested over $30,000 across different RE sites over the last 3+ years, this is my first investment to go into foreclosure proceedings. There are risks in every investment, and my potential loss is your learning opportunity!
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 $168,000. Purchase price $220,000 (LTC 76%). Estimated after-repair value $260,000. Broker Opinion of Value $238,000.
- Loan secured by the property in first position. Personal guarantee from borrower.
- Stated goal 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 a 3-month redemption period where the borrower can still keep the house if they pay foreclosure judgment plus interest, taxes, and costs.
- January 2018. The foreclosure sale was held and property ownership was reverted to RealtyShares. A judge still needs to confirm the sale.
- February 2018. The judge confirmed the foreclosure sale, and RealtyShares is officially the owner of the property. Property can now be assessed and fixed up before sale.
- April 2018. Property listed for $134,500 as per new BPO (Broker Opinion of Value).
- June 2018. Property is under contract for sale. Price not disclosed yet.
Payment history. I invested $2,000 and got paid $210.84 of interest before the payments stopped. Based on the fact that the total loan amount was $168,000 and the property was only listed for $134,500, it looks like I will definitely lose some money on this deal. Including interest paid, I hope to exit with somewhere around 80% of my original investment.
Thoughts and takeaways. Well, I have made close to 50 different real estate-backed loans now, so it was only a matter of time before I got a full default. The question is how often that happens and the size of those 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 typically only got you pennies on the dollar.
Real-estate backed debt is backed by a hard asset, so in the end at least you get the property to sell off. Beforehand, RealtyShares told me that the foreclosure process in Wisconsin typically took about 12 months. That turned out to be a good estimate, as it was 12 months between foreclosure initiation and the property being under contract for sale.
One takeaway is to be careful about based your loan-to-value ratios on optimistic appraisals or BPOs (broker opinions of value). A broker thought this property was worth $238,000 in January 2016. Another broker thought the same property was worth only $134,500 in April 2018.
Another takeaway might be to be careful about investing in struggling local economies. I didn’t know this at the time, but the low-income rental market in Milwaukee, Wisconsin was profiled in the NYT Bestselling book . Many of the properties mentioned in this book were literally down the street from this unit.
Finally, sometimes you just get bad luck. This is my only Realtyshares loan and it went into foreclosure. There are other with multiple loans and perfect payment histories. Realtyshares has since shifted their investment focus onto commercial properties and not residential ones, so perhaps they are stronger in that area. In turn, I have shifted my residential debt investing to as they have $1,000 minimums and a slightly different model.
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 are some sample 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. Investing in real-estate backed loans means that if the borrower doesn’t pay up, you can foreclose and take over the property. This post will hopefully serve as a useful example of the foreclosure process from a marketplace real-estate investment site. I haven’t seen any other similar resources. If you are an interested accredited investor, you can sign-up for free and before depositing any funds or making any investments. Current opportunities include office buildings, retail space, and large apartment complexes.
I also have active investments in these other real-estate sites: ($1,000 minimums, accredited-only, debt-only) and ($500 minimum, open to everyone, equity and debt). Closed investments include .
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