Nineteen months from last payment to sale turned 10.5 percent into about 1

Funded a $95,000 first through a loan broker in early 2023. Single family rental in a slow secondary market, borrower was buying to hold and refinance out. Appraisal came in at $146,000, so 65 percent LTV, which is exactly the number I'd told myself I'd never go above. 10.5 percent interest only, 2 points, 12 month term. I collected $1,900 at close and the broker collected his own point on top from the borrower.

Payments came in months 1 through 4. $831.25 each, $3,325 total. Month 5 nothing. Month 6 a text about a tenant who'd stopped paying. Month 7 nothing.

Then the part I hadn't priced. That state is judicial foreclosure, which I knew as a word and had not translated into a calendar. My attorney sent the demand, we gave a cure period the borrower didn't use, filed in month 9, and got a sale in month 24. Nineteen months from the last dollar I received. Foreclosure procedure and timeline vary enormously by state and I'd never checked what this one meant in months.

What it cost while I waited:

Attorney and court costs, $9,400. Delinquent property taxes I had to advance to keep the lien position clean, $2,760. Force-placed insurance after the borrower's policy lapsed in month 8, $1,850 across two periods. Trashout and cleanup once I had it, the tenant left and the copper didn't stay, $4,300. Utilities and lawn while it sat, $900. Resale commission and closing costs, $7,100.

It sold for $121,500. So against $95,000 of principal plus $26,310 of advances and costs, call it $121,310 in, I got $121,500 back, plus the $3,325 of payments and the $1,900 of points collected up front. Roughly $5,400 of total return on $95,000 tied up for 26 months. Somewhere around 1 percent a year on capital I'd underwritten at 10.5.

I didn't lose principal. I lost two years, and the two years is the loss.

What I got wrong, in order. I underwrote the appraised value and never asked what the house would fetch as-is, vacant, sold quickly, which turned out to be about $121k rather than $146k. My real advance rate against liquidation value was 78 percent, not 65. I took the broker's file without asking how many of his loans had gone to foreclosure and what the recoveries looked like. I had no tax or insurance escrow, so I funded both from my own pocket at the worst possible moment. And I never once looked up the median days from filing to sale in that county before wiring.

Differently next time: I check the state's foreclosure process and the county's actual timeline before the loan is approved, and I discount my advance rate for slow states rather than pretending 65 percent means the same thing everywhere. I escrow taxes and insurance or I require proof monthly. I ask the broker for his default and recovery history in writing and I assume the answer is worse than what he says. And I price the loan against what the collateral sells for in 90 days to a cash buyer, with the appraisal as a ceiling I never lend against.