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The process isn’t always sunshine and roses—these tips will help you avoid potential problems.

Everyone wants their investments to be successful. But sometimes, even if you’ve done your due diligence and taken great care in the underwriting process, your investments just don’t
turn out how you hoped they would.

Beginning the Process
Before we discuss the foreclosure process, let’s take a step back and talk about the events leading up to the process being triggered. State laws and individual company procedures will guide what this entire process looks like. I’ll use my own experience in the state of Texas as an example.

Your deed of trust will specify what qualifies as a loan default. This will vary, sometimes broadly, from lender to lender. Failure to make interest payments, failure to keep construction on track and going beyond the maturity of the loan are all potential signals of a loan default. We give borrowers ample opportunity to keep their project and payments on track and to catch up on any missed payments. The borrower’s monthly payments are considered late after the 10th of the month. The loan is in default when payments are late 30 days or more. We send correspondence (“late letters”) to clients via both email and the U.S. Postal Service on the 11th day and the 41st day of delinquency. If the borrower hasn’t caught up by the end of the second month of delinquency, we’re forced to commence the foreclosure process.

To reiterate, foreclosing on a property is the worst-case scenario (maybe not the worst case, but far from ideal) for any private lender.

Foreclosure in the state of Texas is a nonjudicial process, making it a bit easier for lenders to protect their interests. Here’s how it works. Once a foreclosure is triggered by the terms agreed to in the deed of trust, the borrower is notified and legal counsel is engaged.

There are a couple of different circumstances that influence how we proceed from here. If the borrower has no prior default and reinstatement, a 10-day demand letter is sent to the borrower. If a construction default has occurred and the loan has not matured, a 30-day demand is required before accelerating the loan. The next step is for an appointment of a substitute trustee to be recorded, and counsel will post the loan for foreclosure 21 days before the foreclosure sale date, which is typically the first Tuesday of the month in the state of Texas.

Protecting Your Asset
In the background of all these proceedings, something else is happening in preparation for the foreclosure date. Unfortunately, you’re limited on the action you can take before the foreclosure, but you need to have a plan in place for asset security and property preservation before you even think about the disposition of the asset.

Since foreclosure can happen at various stages of a project, the condition of the property will determine which course of action you will need to take to secure it.

In many cases, a foreclosed property may be in the middle of construction. So, it could be that your biggest enemy is the elements. Quickly make sure the home is weathered, which typically means progressing construction to some extent, so you avoid damage that could cost you more money down the line. For lenders who have assets in cold climates, winterize the home to protect plumbing and other systems that are vulnerable to a freeze. If the home is still in the construction phase, it might also be a smart move to board up windows and other entryways to secure any construction materials that are on-site.

Additionally, cure any existing code violations on the property. Many code violations require only simple fixes, while others might be more involved. Curing them immediately can save you a lot of headaches down the road.

Do your best to maintain an amicable relationship with the borrower throughout and following the foreclosure process. You might have to rely on them to access plans, permits and other important information.

Lenders should always give their clients ample notification and plenty of opportunity to fix the situation. But it’s not always sunshine and roses. Remember, you are dealing with folks who have just found themselves in an unfavorable position.

The most common problem you need to protect against is theft. As soon as the foreclosure occurs, all points of entry to the property need to be secured. This includes changing all the locks and/or codes to doors and gates to the home, as well as any other entrances like garage doors. But if a borrower is facing foreclosure, they have a head start on the lender because they are aware of the foreclosure date well before it happens.

Keep in mind that when a borrower gets foreclosed on, they’ve potentially just lost a lot of money, so they might be inclined to do whatever they can to recover some of that cost. In some cases, they might even try to take appliances, fixtures and anything else of significant value that can be removed from the property. It can be difficult to prove what, if anything, the borrower has removed. But, if the servicer of the loan has a thorough draw process in place, you may be able to refer to photos the borrower has submitted for construction draws to show that items previously in the home were missing once you took control of the property.

In rare circumstances, you may encounter an unreasonable borrower. They might even try to intimidate the people working to secure the property (e.g., locksmith, construction crew, etc.) or even the lenders themselves. If this happens, it’s wise to engage local law enforcement and file a criminal trespass against the individual. If the situation escalates to that point, you also should consider installing motion sensor lights and cameras around the home to discourage the borrower from entering the property. Alert the neighbors to the situation, so they can inform you of any suspicious activity.

Having to foreclose on a property can be dirty business. Lenders need to be prepared to ensure the security of their assets. Nothing in the investment world is perfect, and rarely do things ever go according to plan. But if you’re aware of the potential problems, and you have resources and processes in place to protect your interests, you’ll be one step closer to mitigating losses you might incur when good loans go bad.