NPN Story: Assignment of Rents Victory
During the due diligence phase for a non performing note backed by a duplex in New Jersey, I saw that the borrower had filed multiple bankruptcies to stop sheriff's sales on multiple rental properties over 10 years.
Multiple Bankruptcies to Stop Sales
He would wait until the day before the sheriff’s sale, file bankruptcy, and stall the foreclosure for years, if not completely.
One time, he had to convert a Chapter 13 bankruptcy case to Chapter 11 because he had too many properties! He listed our collateralized property as a rental on his filings, which backed up the servicing comments we read.
In general, it’s easier to get relief for a rental property than for the borrower/debtor’s personal residence. Debtors fight harder for their own house and bankruptcy judges are more lenient when it comes to a person’s personal residence.
The loan had been delinquent since is 2009.
Serial Bankruptcy Filers
I really enjoy taking on these kinds of loans where the borrowers play games and abuse the bankruptcy system. I enjoy the process of figuring out what the best strategies for liquidation.
Although it’s riskier to take on a problem loan, we only take them on when there’s a lot of upside. Serial bankruptcy filers are used to slow moving banks and attorney firms. They’re not used to lenders like us, that are small and make decisions quickly. All of a sudden, their games don’t seem to work anymore and they’re the ones that are on defense.
Once we purchased the loan and it transferred to us, I got right to work on developing a strategy for liquidating. This was in 2020 and New Jersey wasn’t allowing any sheriff’s sales at the time. When sheriff’s sales were allowed again, I believed that this guy would file bankruptcy to stall the sale like he’d done numerous times before with this and other properties.
Assignment of Rents for Residential Real Estate?
Most institutional notes and mortgages have clauses for Assignment of Rents. This means that in the event of a default on the loan, the lender is entitled to the rents that get collected. I’d never heard of anyone doing this for a residential mortgage.
Getting the assignment might hinder or delay the foreclosure process and takes extra time and money, which is why I believe that most lenders don’t do it. You also need to verify that a property is a rental and not owner occupied, which may be difficult since delinquent borrowers are usually not cooperative. (I’m sure invoking the Assignment of Rents clause is more common in commercial real estate, whose purpose as a rental is clear.)
I knew this was a rental because of the bankruptcy filings. I also knew that we had at least a couple of months before the sheriff’s office would even consider re-starting sales.
Taking Away Incentive to File Bankruptcy
I thought that filing a Motion to Assign Rents would have little downside and a whole lot of upside. If our motion was granted, we would be able to start collecting rents from the tenants but, more importantly, we would deny the borrower the rental income, taking away a big incentive for him to file another bankruptcy.
When the borrower files bankruptcy, the creditors are stayed from foreclosing but the borrower continues collecting rent. If the rents are assigned to us and we are collecting them prior to the sheriff’s sale, the borrower won’t get to collect rent pre-sale or post-bankruptcy.
Filing bankruptcy won’t get him his rental income stream back.
Rents Assigned to Us
We filed our Motion to Assign Rents. Within a couple of months, the court granted our motion. Our receiver/property manager started collecting rents and we received some steady income for a few months until sheriff’s sales resumed in early 2021.
By New Jersey law, the borrower can unilaterally postpone a sheriff’s sale twice. Our borrower did this and on the third attempted sale, the property sold to a 3rd party bidder. Like I expected, the borrower didn’t file bankruptcy this time because he lost the rental income six months prior and wouldn’t get it back through another filing.
Getting an Assignment of Rents was a very successful strategy on this one and will be great tool for us in the future for this kind of situation!
Purchase Price: $85,183
Total Cost Basis: $89,030
Sold to 3rd Party at Sheriff Sale: $160,000
Net Sales Price: $153,821
Net Profit: $64,790
Days Held: 332
Return on Investment (ROI): 72.8%
Annualized ROI: 80.0%