Yesterday was the due date for our note for hard money loan #13. The property has still not been sold and the borrowers would like a three month extension. The borrowers were first time borrowers with us. We haven't had any problems with them - they pay on time through automatic payment with their bank. It seems the problem is that they aren't too knowledgeable about the rehabbing process.
The property has been on the market for 6 months. My partner told them it was priced too high, but they were trying to get a profit out of it. They spent tens of thousands of dollars rehabbing it and staging it (renting furniture and interior decorations so it shows better). They are also trying to sell the place themselves, without an agent to save on commission costs. (The borrowers manage some apartment complexes and have their own website.) That doesn't appear to be going so well for them.
They started off listing the place for $400,000. When we made the loan, we comped it between $350,000 and $420,000. Average days on market a year ago was 4 months, so trying to sell at the top of that range will take longer. The borrowers purchased the property for $321,000 and our loan is for $224,000. They currently have the property listed at $379,000 and they have an offer for $359,000. They countered (I don't know their counter amount) and are currently waiting for a response. They claim they also have another offer on the way and are getting about 20 people per week looking at the property.
The borrowers need to cut their losses with this one. If they bought it for $321,000, put tens of thousands into it, and are selling it for $379,000, they will have a loss. (They've been paying us interest for a year, so that's another $22,400 expense.) Holding costs are killing them - they still have to pay us each month, plus they need to pay the staging company each month for the rented furniture. Yet they are unwilling to cut their losses and move on. My partner notes that this is similar to the mindset that some stock market investors have - they hold on to a falling stock all the way down because somehow, they haven't lost money until they actually sell. Well, in real estate, the dollar amounts are pretty large and holding costs will each your profits up quickly. To be successful, you have to be not only know how to limit your losses, but also be willing to take a loss. Otherwise, you just lose more and more money each day.
I'm not too concerned with the situation. My partner put the matter out to a vote of all the mortgage holders to see what we wanted to do with this - start foreclosure or give them an extension. I voted to give them the 3 month extension. They have always paid on time and this loan is actually earning 1% more than my other loans. Even at the lower sales price of $359,000, we're still at a 62% loan to value ratio (hmm..same ratio as the new loan I wrote about yesterday), so if they do default, we'll be covered. In fact, I have some money available to buy out any of the other investors if they want to get out for any reason.