At RealtyShares, we follow a rigorous underwriting process and create safeguards to protect our investors. Even so, some investments will still underperform.
In these cases, our team of experienced professionals will aggressively pursue your rights and safeguards to protect your investment. A full array of options is assessed. They include:
- Taking additional collateral in exchange for accruing interest
- Short sales
- Taking a deed-in-lieu of foreclosure
- Other potential loan modifications
- Foreclosure Proceedings
In the process of pursuing these options, it sometimes happens that we’re able to turn a bad situation into a good one.
What follows is a true story about how our Asset Management team created a much better outcome for investors than initially had been expected. At first, because of a delinquent and noncommunicative borrower, it seemed as though RealtyShares investors might lose the entirety of their invested capital.
But thanks to some sharp-eyed asset management (see photo below), they turned a bad situation into a positive outcome. This particular situation is certainly not the norm, and notwithstanding the results obtained here, investors should remember that real estate investing involves significant risks. But this story shows how, when something goes awry with one of our investments, our Asset Management team will work on your behalf with a goal to achieve the best possible outcome. (article continues below)
Payment Default and an Uncommunicative Borrower
In late 2016, RealtyShares made a loan on a residential property. At first, things were going along fine. But when the 12-month maturity date arrived in late 2017, the borrower did not promptly repay the loan.
As usual, RealtyShares tried to discuss the situation with the borrower. It often makes sense for us to grant extension periods to borrowers who are having short-term timing issues or who otherwise might just need a few more months to complete the sale of a property.
At first, it seemed as though RealtyShares investors might lose the entirety of their invested capital. But thanks to some sharp-eyed asset management, they turned a bad situation into a positive outcome.
In this case, however, the borrower seemed unable to pay the required loan interest and was not promptly responding to our requests for a discussion. So our Asset management team stopped trying to negotiate a loan modification and instead began the foreclosure process.
During the foreclosure process, we discovered that the property had been illegally sold—twice!—since the loan was originated. Such events are relatively rare. Normally, a buyer would have their new property lender and the title/escrow company contact us for a payoff statement.
In this case, no such notice was received, perhaps because an all-cash sale may have been involved.
Finding a Solution in the Fine Print
Even though the property had been sold twice, RealtyShares’ mortgage lien still remained intact. And Zillow reported that a March sale of the property had valued it in excess of the original loan amount.
So we continued to press our foreclosure claim. The twist was that now there was a new owner who stood to lose the property.
If we succeeded in foreclosing on the property, its new owner may have been able to make a legal claim against the original borrower for failing to keep up on his loan payments to RealtyShares. Still, his main interest was preserving its investment.
In the meantime, a second-lien loan had been placed on the property. What to do with this mess?
The original borrower wasn’t off the hook, either. He had personally guaranteed the repayment of our loan—so now he was effectively guaranteeing that we would be repaid by the new borrower. (Understandably, he was not so keen on that responsibility.)
In the meantime, a second-lien loan had been placed on the property. What to do with this mess? (article continues below)
A Clever Strategy
At this point, our Asset Management team got creative. They pressed the original borrower on the loan guaranty, noting the breach of the loan’s transfer clause and pointing out that he could be held liable for the loan’s full repayment—even though he no longer had control of the property.
He came back with a proposal: since the loan was now well collateralized, the guarantee would only be needed if there was a “deficiency” on the loan; that is, if the value realized in a foreclosure was insufficient to pay back RealtyShares investors.
At this point, our Asset Management team got creative.
That now seemed unlikely, so—would RealtyShares be interested in a settlement arrangement involving a payment of money, since its loan seemed already sufficiently well protected?
Our Asset Management team agreed that, despite the loan’s unruly history, it was now well-secured. We saw the original borrower’s proposal as an opportunity: investors could benefit from such a “settlement” amount, and the payment could be used as a “bonus payment” for investors in the deal.
In short, despite the investment’s troubled path—including borrower nonpayment and possible foreclosure—its realized result was actually more favorable than originally expected.
Our Asset Management team negotiated the settlement payment a bit higher, then took it. In the meantime, we continued to seek foreclosure on the property and gave notice to all relevant parties.
The new second-lien lender promptly responded: they saw any foreclosure as a threat to their second-lien position. Since the first-lien loan was relatively small, they likely thought: Why not just buy out the first-lien loan and become the senior lender?
Despite the investment’s troubled path, its realized result was actually more favorable than originally expected.
Thus, our Asset Management team received an offer to repay the RealtyShares loan in full. The team also had received the “bonus” payment from the original loan guarantor.
The happy result? A full payoff of the loan, as well as a bonus “kicker.” When combined with default interest and late fees, they have resulted in a better than expected outcome. (article continues below)
We’re With You For the Long Haul
As I indicated before, this particular situation was somewhat unusual, and notwithstanding the results obtained here, investors should remember that real estate investing involves significant risks, including the loss of invested capital. And in many situations, the best we can expect is to obtain the full principal amount of the loan from a foreclosure or other enforcement proceeding.
When you include default interest and late fees, the investment yielded a better-than-expected outcome.
The good news is that we do actively work on investors’ behalf with the goal of achieving a possible outcome. That’s because we don’t disappear after the deal is done. We are here to see it through.