Thursday, May 5, 2011

Transaction #2 of 52 in 2011: We Do a Simple Loan, With a Surprise Ending

Clear Day Capital started business in 2006 as a lender to real estate investors. As the investment real estate environment changed, so did Clear Day Capital's business. Over the last two years we significantly increased the qualifications of our borrowers.

When a repeat borrower called in early January and told us he needed a loan for $20,000 that could be leaned in first position against three separate single family homes, we said yes. He was reliable, the properties needed repairs but he had a plan for rehab, and the land for one property alone was worth the total amount of the loan.

The borrower contact us a couple of weeks later. The contractor who was scheduled to bring in the fix-up funds and do the work was no where to be found. Did we have additional funds to loan?

Sometimes we say "yes" to lending more money. In this case, there were several challenges that made us think twice about about lending more money. First, these houses are in locations where we wouldn't normally invest. Second, the two of the three houses where in much worse shape than we normally rehabilitate. Last, the quality of the houses were much lower than we normally invest in (less than three bedrooms, and really small lots.)

So... the answer was "no" to fix-up funds.

About a week later, the investor came back to us with an update: All three houses were scheduled for destruction by Ogden City. They had been vacant for over four years and destruction was imminent. Without new funds, the best we could hope for was three vacant lots with liens from the city to pay for destruction and scrap removal. Our money would be stuck. Lots aren't selling. Lot's don't bring in rent. Lot's cost money. The liens would be equal to the value of the lots. Lots of problems with lots!

We decided to take the properties back from the client. We did it as a purchase, without paying cash to the borrower. We took over the note and added additional cash.

To stop the destruction of the properties, Mayor Matthew Godfrey of Ogden Cityrequired us to put funds into an escrow account for each property. We then pulled permits and went to work with our general contractor, Bryan Kawa.

Do you want to read what happened to the properties? Check out my blog posts on Transactions #12-13.

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