The Distressed Asset Lifestyle occurs in a specific sequence that has several phases. Within each of these phases, include different levels of distress to the lender/borrower, and also include opportunities from an investment perspective that each carry different levels of risks and rewards.
In this article we will be talking about the Distressed Asset Lifecycle, and what each phase entails.
Performing Loan: Performing loans are not distressed, as the borrower is up to date on payments.
Sub-Performing Loan: Sub-performing loans are loans that the payment is delinquent by typically more than 30 days, but less than 90-days. During this time, the lender is attempting to communicate with the borrower to get up to date on payments or resolve the issue. In the case of a loan modification, the lender is most likely to offer a solution during this phase.
Non-Performing Loan: A loan becomes non-performing, or delinquent, when the borrower is behind on payments and the lender has filed a Notice of Default. The risk to the lender increases here as the borrower still has the ability to file for bankruptcy and cause delays to the foreclosure process. Note Sales are typically done during this period which offer potential for deep discounts as the buyer takes on the risks of a possible bankruptcy and the foreclosure process.
Lender has filed for foreclosure: During this phase, the lender has filed for foreclosure and the borrower will have one last chance to resolve without filing for bankruptcy. This is called a ‘Cure Period’ which allows the borrower a certain amount of time to cure the default.
Bankruptcy Period: Depending on state laws, If the borrower files for bankruptcy, this can delay the foreclosure process.
Foreclosure Sale: During a foreclosure sale, an investor can bid on the property and if the bid fits the lenders criteria then the property is sold to the new buyer. If no bid during the foreclosure sale meets the criteria of the lender, then the lender takes over the operating position, which is what we call, “Real Estate Owned” by the lender, or ‘REO’.
REO: REO properties are considered ‘cleansed assets’. These are properties that have gone through the foreclosure process and are now free and clear of any liens and encumbrances and are now available to a new buyer.
There are many phases of the distressed asset lifecycle that offer various types of opportunistic investment opportunities. Depending on your investment goals and risk tolerance, each of these phases can offer opportunity. But remember, all opportunities are not created equal.
We recently published our 9-Point Due Diligence Checklist that covers the nine essentials that should be reviewed, verified, and personally alight with in order to control the risk. Click here to access the checklist.