RealtyShares Real Estate Investing: Default and Foreclosure Example – June 2018

Updated June 2018. One of the new “marketplace” (aka “crowdfunding”) real estate investing sites that I have put my own money into is RealtyShares. 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!

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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 Evicted: Poverty and Profit in the American City. 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 PeerStreet 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 browse investments at RealtyShares 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: PeerStreet ($1,000 minimums, accredited-only, debt-only) and Fundrise eREIT ($500 minimum, open to everyone, equity and debt). Closed investments include Patch of Land.

Comments

  1. I haven’t had a default on RealtyShares yet but I had had 2 on Patch of Land. Both PoL defaults are a year past the original end date and remain unresolved. In one case PoL did foreclose but has been unsuccessful in sale of the asset so far. In the other the borrower filed bankruptcy the day before the foreclosure sale as a delaying tactic.

    As far as the collection of rents, I *think* the borrower is allowed to pocket them unless there was a clause in your loan for assignment of rents (this was almost certainly the case). However, I think you have to prove the rents were collected and get a court order to collect. That might all be part of the foreclosure process.

    • Investors haven’t seen anything yet. These investments, when the economy does truly go south, are going to be vaporized. 75% LTV in the middle of Wisconsin? No thanks. Second notes? No thanks. These are but 2 of the tens of ways you can get screwed in these types of deals. Keep them short term, and only in absolute prime markets.

      What happens when people continue to pay the first, and not the second on these loans? You foreclose, but how do you take out the first if you don’t have the funds? Disaster waiting to happen.

      These are real estate investments for the uninformed. Commercial has little to no statutory protections, and how do you know if the property is being bought properly with the right amount of due diligence? A broker opinion of value is a bad way to go because they don’t look at much.

  2. I’m currently investing three 2k debt investment with realtyshares. I hope this doesn’t happened to me.

  3. To your question “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?”

    I thought it was possible to do this. I thought people were doing this during the 2008 financial downfall. Since people were so underwater on their mortgages, they would stop paying their loans and collect rent until they lost their property.

    • Joshua Katt says:

      Of course its possible and prudent too, he’s the legal owner of the property and leases until yanked away in foreclosure. Questionable is what happens in this 6 month redemption period, is the foreclosing agent/service allowed (and is) directing any current rents away from the defaulter? For a fee of course…

      Is it likely the units weren’t fully let or they are behind too in rent payments causing the default?

      Please keep us informed, thanks for sharing, going to give this a try to.

      • I suppose anything (legal) that results in a greater net for an individual is “prudent” for that person, though I can’t help finding the practice a bit lame. I recall discovering after the fact that a landlord of mine had stopped paying his mortgage while continuing to collect my full rent for the many months it took for the foreclosure to finally occur — you can presumably see why this would annoy me (though technically yes, the utility I derived from my monthly rent payments was undiminished).

        It feels to my as though this is taking advantage of policies intended to protect people from being peremptorily evicted via foreclosure, while not in any way favoring the people who are actually living in a property.

  4. Just curious, does this have any affect on your credit, or just the actual borrower’s?

  5. Michael S says:

    The loan documents should include an Assignment of Rents, entitling the lender to collect rents in this type of situation. As a practical matter, the lender likely has not exercised its rights.

    • Interesting, I will try and have a look. But I agree, it does not look like anyone on the lending/servicing end has pursued this at all.

    • Cooper's Dad says:

      Typically, before the lender can collect rents directly under the assignment of rents, the lender must give notice to the lessors of a default and the lender is invoking his rights under the assignment to receive rents directly from each tenant. Was this notice given in a timely manner?

  6. Sorry to hear this bad news, Jonathan, is this your only investment with RealtyShares? I have a $2K investment also, just started in Sept, so no interest paid yet. Have been researching to get into a 2nd one, but the interest rates on $2K has been dropped to 7%, so still looking.

    What are your other investment with PeerStreet, Patch of Land, Fundrise eREIT? have the investment been positive?

    • Yes, this is my only investment with RealtyShares. It’s my only default so far, everything else has either been paid off as promised, is ongoing, or otherwise exited. I don’t believe any other loan is even late at this point in time.

  7. Thanks for the update and sorry for the bed news. I have been thinking to invest in RealtyShares or PeerStreet, but just didn’t put that into action yet. Please keep us posted on the process.

  8. Appreciate you sharing – we all get to learn, I guess this is the downside to this type of investment. Will this foreclosure show-up on the borrower? Next time they try to get a loan like this, you would know? thanks.

  9. I don’t understand why did these borrower pay 9% APR on a 24 months secured loan. I am pay only 3.5% APR on my home mortgage. and a lot of SMB are paying 6% to 9% on the unsecured LOC.

    Are RealtyShares dealing with people with terrible credit score?

    • I would assume it has to do with large amounts of money being borrowed for extended investment purposes. I gather that once you own like four properties, at that point getting any sort of additional conventional mortgage becomes difficult (impossible?). Presumably lenders consider you higher risk at around this juncture, with consequently higher premiums? If there are other factors involved I’d be interested to hear (such as higher credit risk individuals, though I’m not sure why they would be favored).

  10. From the looks of it, it wouldn’t have mattered if they paid 2% or 20%, but generally yes, if somebody is paying more than 6% interest in today’s market for a deal, that should get your antennae up.

  11. Very interesting read since I am also an investor on Realtyshare. Any updates on your case?

  12. I was just coming to your site to see the latest and greatest on your real estate investment experiments and specifically get an update on RealtyShares. Saw the comment above. Interested to see how this wraps.

    So from all the different real estate investment avenues you have worked with, what is your recommendation from a non-accredited investor perspective?
    – Peerstreet
    – RealtyShares
    – Either FundRise investment strategies
    – MogulREIT
    – VNQ (currently invested)
    – Real Property as a Rental (Currently Invested)

  13. Hello, any update on this deal? One of my RS investment properties is about to go into default. Fortunately, it’s located in one of the landlord friendly states (Texas). Hopefully, the foreclosure process will be a breeze.

  14. I started investing in RS since last year and my first 2 investments on RS are in default. All of them are dept investment in hot area in California. I found out RS only advertise the positive side, e.g. how much fund are invested and optimistic data, but they never disclose the default rate. One good thing about RS is they provide good communication (the updates) and try their best to get the money back.

  15. Joshua Katt says:

    I too have a RS residential loan near default. Shocked how quickly it went bad, only 3 payments were made. I tried another commercial property then started getting (very unclear) emails saying I had a chance to backout to due a valuation adjustment. When they couldn’t describe the problem in plain English, I bailed. They love to use lots of jargon and bombard one with data that is hard to make meaningful sense of – and I used to work in a corporate real estate dept for a Fortune 300 company.

  16. The Frugal Millionaire says:

    Jonathan, your link to Amazon is taking me to a different book, titled “Nickel & Dimed”. Thought you might want to know.

  17. This particular property detail as it played out just screams “shady”. Adequate due diligence initially showed that the property was worth $238K, and the buyer supposedly put down actual cash in the amount of $52K ($220K purchase price less $168K loan)?

    Then less than 18 months later it’s only worth $134,500? When real estate markets everywhere are up, or at least flat in the slummy areas? That’s a drop of 56.5% in value.

    I’m guessing that buyer and initial valuer of said real estate had some sort of side deal going, and also that buyer didn’t really put down $52K cash. Then they sucked all the rent out of the place for 18 months and paid little to no property taxes, and let the place run down further too. I’ll be surprised if buyer purchased the place in their actual individual name, versus possibly using a shell buyer (paid them a couple of grand to use their name) or some sort of LLC where they got away without giving a personal guarantee.

    You’re taking this a whole lot better than I would, given current value ($134,500- versus initial supposed value you invested based on of $238K).

    Also, how do you think that you’ll get 80% of your $ back? The property is only listed at 80% of the amount RealtyShares loaned them (134,500 / 168K = .80). They won’t get full asking price, and then there are all those legal costs, + closing costs, + real estate commission + all the likely unpaid property taxes that RealtyShares will have to ante up on that will come out of your potential partial return of funds.

    • It’s true, I might very well get less than that. I just did a quick back of envelope calculation of 80% – 10% other fees + 10% interest that I have already received.

      I don’t know if there was fraud, or something more endemic. Some people followed the “rich” landlords with multiple rental properties profiled in the Evicted book since publication, and they found that those landlords have also since filed for personal bankruptcy and lost many of their properties to foreclosure. Basically, the lives of the renters may be difficult, but it doesn’t appear like the landlords were making barrels of easy profits either. The landlords had to constantly finding new tenants, turning over properties, making repairs, and trying to collect back rent.

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