Earning 63% IRR on a 1st lien secured by Low-Equity Vacant Land

Case Study #1: Non-Performing Senior Lien (Land Lot Short Sale)

In our first ever episode of (two case studies per video) we outlined the resolution of a non-performing senior lien secured by a parcel of vacant land that was exited through the short sale process. This mortgage note was resolved with a win-win-win resolution. The borrower was released from a deficiency balance, the past-due Home Owner’s Association bill was paid off and our investor doubled their money!

Fair Market Value$25,500
Delinquent Taxes$0
HOA Dues$6,347
[127% CLTV]
Purchase Price$7,755
% of Equity= 45.2%
% of UPB= 28.7%
Exit Amount$15,485
[63% IRR]

purchased September 2015 & exited April 2017 = 19 months

Non-Performing Mortgage Note Resolution

Our first conversation with a new borrower always begins with three questions. We explore this crucial initial conversation in depth in the Advanced Resolutions module of our free course.

  • What happened?
  • Where are you now?
  • What do you want to do?

With the borrower’s answers to these questions in mind, we are able to craft a work-out to their defaulted debt that fits their needs and budget. In this case, the borrower wanted to keep the vacant land lot that our senior mortgage was secured by – they were hoping to pass it along to their son some day. As for what happened and where they are now – medical debt had set them back and the co-borrower had been laid off from their job. Fortunately they were starting to earn some money again through disability and a new landscaping business.

Negotiating Other Liens

There was some bad news though – the borrower’s Home Owner’s Association (HOA) was significantly in arrears and began the foreclosure process for the past-due amount. So our strategy needed to shift. Instead of a discounted payoff, we worked with the borrower to list the property with a local realtor. The realtor found a buyer and with our help, the HOA fees were negotiated down by several thousand dollars.

Short Sale to Release the Deficiency Balance

At the end of the day, the borrower was not able to afford to keep the vacant land in the family to build upon one day, but they were able to get out from underneath their debt by paying off the HOA and our 1st position mortgage with the sale of the vacant parcel of land. Rather than pursue the unsecured deficiency balance, our investor client agreed to release any further liability and accept the short sale payoff as payment in full.

Since this property was underwater, another potential exit strategy would have been a Deed-in-Lieu of foreclosure. Depending on your overall goals, taking back the vacant land might be a better exit for you. In this case, the lender was not interested in managing a parcel of land in a different state. However, there are many advantages to owning the underlying property (tax advantage from writing off the cost of depreciation being one of them). If you decide to go that route, Seth Williams over at has a lot of great information to share about vacant land & real estate investing in general.

Since the borrower was cooperative and helpful in working with the listing agent, the investor had no problem considering the loan paid-in-full and waiving their right to pursue any remaining balance left unpaid following the short sale (a “suit on note” to seek a deficiency judgement is one way investors pursue unsecured loan).

See below for a time-stamped video presentation of this case study in the premier episode of our YouTube series: 


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