NPN The Story of Flood Insurance
This blog post has been a long time in coming. It always hurts when you take a loss but I’m ready to share this story and what we learned on how to do things better. This non performing note was from our first Fund and was our biggest loser….
Everything Looks Normal
We bought this non performing note for our first note fund. The house backing the loan was a nice, small home in New Bern, North Carolina.
We made contact with the borrower who just could not afford the loan payment. She lived alone in a 3 bedroom house with almost 1300 square feet. She had a super sweet loan modification from one of the prior lenders and her principal and interest payment was a little under $300 per month.
Get a Roommate!
There was plenty of room to take on a roommate or even two. If you can’t afford $300 per month, why not get some roommates to pay rent, which would help pay the mortgage?
It kills me when borrowers don’t use this easy solution to keep a home. You have plenty of room and could easily take on a roommate or two for extra income. Instead, you fight the foreclosure and eventually lose the home.
Took it Back as REO
There was nothing we could do for the borrower and she didn’t do what she needed to do to reinstate the loan. We foreclosed and were the highest bidders at the sale so the property reverted to us REO (Real Estate Owned).
The borrower left on her own and we conducted a cosmetic rehab. Two days after the renovations were completed, we got news that Hurricane Florence was about to hit the east coast. (This was in 2017.)
We sat on pins and needles and hoped that the area wouldn’t get hit that hard. Unfortunately, the hurricane rolled right through New Bern, NC. It got completely flooded and was a literal disaster area (declared by FEMA.) There was nothing we could do as we watched images of rescuers patrolling through the streets in boats.
Insurance will help us, right?
Although we didn’t have information about our property immediately, we knew that it probably sustained flood damage. We had regular insurance coverage but not the extra coverage for flood insurance.
I checked the property location and saw that the property was in a flood zone. We missed this during our due diligence so we never sought out extra flood insurance. As Californians subject to earthquakes, hurricanes never affect my partner and I and I think that provided a blind spot to this type of risk.
I don’t think it would have mattered as Hurricane Florence was a “1000 year event” and I’m sure that properties that weren’t in flood zones got flooded as well.
At the end of the day, it was our responsibility to know the flood status of the property and make the determination of whether we needed the extra flood coverage. In this case, we didn’t get any help from insurance and were on our own.
Difficulty Getting Anyone to Help
In the days and weeks that followed and as the flood waters receded, it was difficult to get a hold of our real estate agent. We sympathized as we knew the area was in dire condition.
Our house had been flooded for multiple days up to 3 feet above ground level. All the rehab we had done prior to the hurricane was wasted. Our agent had a hard time getting a hold of contractors as they were busy with other properties in the area that were probably even in worse shape than ours with people that needed to live in them.
We finally were able to get a contractor in that could cut the bottom 3 feet of drywall throughout the interior of the house and rip out the flooring to prevent mold and other water related damage.
Take the Loss and Sell “As is”
Contractors were extremely hard to get a hold of and their prices were going up because of all the demand. After months of delays, we came to the realization that we were going to take a loss and needed to limit the damage.
Trying to renovate the property would require us to put more capital at risk. The best course of action was to cut our losses and sell the property as is.
We learned our lesson the hard way to always check the flood zone status of the properties that back our non performing notes. We should always be aware so that we can decide if we need the extra flood coverage or not.
Sometimes it’s best to cut your losses instead of risking extra capital on an uncertain outcome. Although this note took a loss, the other notes in the portfolio of this fund did very well, made up for that loss, and returned just under 11% to our investors.
Purchase Price: $59,000
Total Cost Basis: $79,995
Sales Price: $25,000
Net Sales Price: $20,851
Net Profit: -$59,144
Days Held: 350
Return on Investment (ROI): -73.9%
Annualized ROI: -77.1%