HELP!!! What can I do if borrower is not able to pay back??

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HELP!!! What can I do if borrower is not able to pay back??

Sean Yang
Investor · San Diego, CA · Member since 2016 · 69 posts · 18 votes

Hi all, I think I am in some serious trouble now and really need your guys' input!! About a year ago I got connected to a loan broker here in BP who was posting ads looking for private money to fund local flippers- so called gap financing. After a few emails and a face-to-face meeting, I was sold on this idea and started to invest money with him. It was a flat rate loan with my name on the 2nd lien position. Loan was structured for 12mo as stated on the Note, meaning the full amount is due either upon the sales of that project or by the end of 12 months, whichever occurs first. I received a Promissory Note, a Deed of Trust, and a personal Guaranty from the borrower. In the first a few months, the broker sent me monthly updates. Although the project was a bit delayed, he promised me it's looking fantastic and nothing to worry about.

I got quite busy later of the year and stopped following up with him; however, things started to go downhill from here... Earlier this month, I pulled the Note and noticed the payment due date was only a few weeks away but the project was still not listed for sale. I started calling the broker but he's not responding to any of the emails/texts/calls. I felt something was wrong and immediately called the escrow company who gave me the borrower's phone number. I called the borrower directly and was told things were not looking good. His company was mismanaged and lost quite bit of money and also he's stuck with a few projects now. He borrowed most 1st loans from a hard money lender who is going to begin foreclosure process if not paid by Jan 2018. He said he's trying to refinance one of the projects but not sure if he's qualified. He's asking me if I have a lot more money to buy out the 1st loan and I told him no. He said he takes his reputation and integrity seriously and will try to pay me back the principle if we work together, but I just don't know how that would happen if things are falling apart like he described. 

So I guess my question is- what are my options now? I know being on a 2nd position is quite weak but is there something else I can do instead of just waiting? I have a Promissory Note, a Deed of Trust, and a personal Guaranty but not sure what I can do with these. I guess I can take them to the court and go after his personal assets? That might be the last straw but I really hope there is some other solution that could minimize both losses. Any advice is welcome! Thank you BP!

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y

few things..  Gap funding and second position loans are highly highly highly risky.. unless your Very rich and can easily stroke a check to take the first out.. that's number one.

2. in CA if its a balloon payment I am pretty sure ( at least it use to be this way) that you must give a notice in writing of the balloon 60 to 90 days before its due.. if you don't you can't forclose and when you figure out you can't forclose then you give the notice and your 90 days starts.. so you may want to see if the first lender gave his notice ... if not that may have bought you some time.

3. personal gurantee's are WORTHLESS 95% of the time.. in these scenarios remember the borrower probably has little to no money in the deal since he has a first and a second.

4. contact senior lender pronto and see if you can work something out if you think there is equity to protect yourself.. normally there is not... if the project is buggered up and default interest and such is tolling by the time you get in the deal equity is gone.

But do drive by walk property and figure out what you got..

lastly most brokers on BP if they are not working with a major corporation you want to really be careful of some are flat scammers  although it looks like this broker actually did the deal made their fee's and poof gone.

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  • Sean Yang
    OP
    Investor · San Diego, CA · Member since 2016 · 69 posts · 18 votes
    8y

    Also, is the broker off the hook? 

    0Reply
  • Dennis Canon
    Specialist · Los Angeles, CA · Member since 2016 · 221 posts · 58 votes
    8y
    This is why gap funding and 2nd position is much less favorable. Hope you get your money back. Please keep us posted.
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    few things..  Gap funding and second position loans are highly highly highly risky.. unless your Very rich and can easily stroke a check to take the first out.. that's number one.

    2. in CA if its a balloon payment I am pretty sure ( at least it use to be this way) that you must give a notice in writing of the balloon 60 to 90 days before its due.. if you don't you can't forclose and when you figure out you can't forclose then you give the notice and your 90 days starts.. so you may want to see if the first lender gave his notice ... if not that may have bought you some time.

    3. personal gurantee's are WORTHLESS 95% of the time.. in these scenarios remember the borrower probably has little to no money in the deal since he has a first and a second.

    4. contact senior lender pronto and see if you can work something out if you think there is equity to protect yourself.. normally there is not... if the project is buggered up and default interest and such is tolling by the time you get in the deal equity is gone.

    But do drive by walk property and figure out what you got..

    lastly most brokers on BP if they are not working with a major corporation you want to really be careful of some are flat scammers  although it looks like this broker actually did the deal made their fee's and poof gone.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    I have no way of knowing but a lot of guys that broker loans are not licensed.. and you most defiantly need a license in CA to broker loans you should look this guy up and see if in fact he was licensed and he gave you all the stator disclosures mandated by law.

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  • Sean Yang
    OP
    Investor · San Diego, CA · Member since 2016 · 69 posts · 18 votes
    8y

    @Jay Hinrichs

    Thank you for your detailed response and it's very helpful! So lets say the 1st loan is $500k and 2nd loan is $200k. So as long as it's foreclosed for above $700k, we are still above water?  In terms of the broker, he is a licensed real estate broker last time I checked. Does that allow him to broker loans in CA? 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @Sean Yang  yes it does but he needs to give you some disclosures..

    Also

    if your first is in foreclosure and its 500k  most likely the unpaid balance by the time it goes to auction will be quite a bit higher.. could be as much as 50 to 100k.. depending on default interest and foreclosure costs.. so lets say the opening bid started at 600k.. in that case as long as you are in second position you will receive any overages..  lets say it bids to 650k  you would get 50k..  lets say it bid to 800k you would get 200k... if 200k is your loan amount  you can only get what your unpaid balance is if it bids higher than both of the loans and all associated interest and costs then any thing left over goes to next in line IE if there are judgments or liens.. then anything left over goes to the owner of record.

    the HML is going to have to foreclose to get you off of title unless you voluntarily give the owner a deed in lui for some sort of compensation.. its why many first lenders will not allow junior loans.. it forces them to foreclose in a default scenario like this.

    so it just becomes simple math.. if the project is a half done rehab.. you can expect bids to be low.. unless the market has shot up and you get some spirited competition at the courthouse.

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  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    8y

    Going after the broker for loan irregularities could get him or her in trouble with the BRE but it likely won't get your money back. You could remind him he is a fiduciary to all parties and is expected to look out for everyone's interest. That at least might get him to return your call, but in all likelihood, it won't go anywhere.

    You have a few options, @Sean Yang, but none are great.

    Property values have gone up in the past year and the ARV could now be higher than when you made the loan. Do you have an idea of how much is owed to the 1st position lender, how much it would take to complete the project, and a more recent ARV? Is there any meat left on the bones? If so, you might be able to find a partner or buyer with cash to pay off the HML, take over and complete the project, or perhaps arrange for someone to buy it outright and make you both reasonably whole.

    The HML does not want to foreclose. It can take months, there is no guarantee they will recover all costs, and they could end up owning the property. There is more certainty in a sale even if it means leaving something on the table for a new buyer. Run the numbers and also call the 1st position lender to see where they stand and what kind of hardball they might or might not play.

    If you can find a new qualified buyer or partner, this could mean a new loan which might entice the HML to compromise a little or a lot on what they are currently owed. Understand that even an uncontested foreclosure can take four months and lenders want to keep their money working.

    As I'm sure you know, the market is tight now and any serious rehabber will consider all reasonable deals. Both the NSDREI and SDCIA real estate clubs, in your backyard, are huge and could be good places to find someone. Perhaps the 1st position lender knows someone as well.

    2Reply
  • Bruce May
    Lender · San Diego, CA · Member since 2011 · 664 posts · 231 votes
    8y
    Working for an HML I guarantee you that the HML in your project would rather not foreclose. You should call them and figure out a way to acquire the property and complete the renovation.
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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    8y

    You need some numbers.  @Jeff S. listed some.  How much is the 1st lender owed, including fees, back payments, and whatever.  What is the property worth as-is?  What will it take to complete the work?  What will it be worth fixed up?  

    One of the best options would be to sell the property as is and pay off you and the first.  I've been the lender on a deal where the borrower default, and we ended up finishing the rehab and sold retail.  That take time and more money and may no net any more in the end.  That would be your second best option, IMHO.  Get the borrower to give it to you deed in lieu of foreclosure, you finish the rehab and sell it.  Or give the borrower more money to finish and get it sold.

    Getting the borrower to give it to you deed in lieu would give you the ability to sell as is and pay off the first.  That would require cooperation from the first.

    But at this point knowing the numbers is key.  

    3Reply
  • Sean Yang
    OP
    Investor · San Diego, CA · Member since 2016 · 69 posts · 18 votes
    8y

    @Jon Holdman @Jay Hinrichs @Jeff S.

    Thank you all for the advice and they really helped me get a better grip of this deal. I am trying to work with the borrower through a deed-in-lieu to another flipper but the numbers don't look great, so even if it works I may have to take a hair cut. The borrower is also trying to get a refi but not sure if he will be qualified since he's late on payment for the previous loan. This guy has a good track record and has flipped 45 homes in the last two years, so I doubt he's willing to give up everything over a couple of unsuccessful deals. 

    On the other hand, my friend recommended me some debt collection company. Does any of you have experience with such service? They claim they don't charge anything unless debt is collected and their fee is quite reasonable at 15%. If they fail, they have an in-house law firm which will handle the case at the same rate. If that still isn't successful, they will hand over to litigation/lawsuits who charges about 30% only if debt is collected. They claim they have a 85% success rate which is quite impressive. Is there any drawback if I hand this over to a debt collector now? 

    0Reply
  • Sean Yang
    OP
    Investor · San Diego, CA · Member since 2016 · 69 posts · 18 votes
    8y

    The borrower has completely demolished the house so basically it's going to a be a new construction... I don't think I can personally handle a project like this. The numbers are as following: 

    1st loan balance ~540k

    2nd loan $180k 

    construction budget: $400k

    Total cost: 1.1M-1.15M

    ARV: 1.4M

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Sean Yang:

    The borrower has completely demolished the house so basically it's going to a be a new construction... I don't think I can personally handle a project like this. The numbers are as following: 

    1st loan balance ~540k

    2nd loan $180k 

    construction budget: $400k

    Total cost: 1.1M-1.15M

    ARV: 1.4M

     I you add in tax insurance utls carrying costs default interest ( if any) then your sales cost to sell you probably have little equity past your amounts due and if you got your principal back that would be  a win.

    is there construction hold back sitting in escrow IE the 400k is sitting somewhere ready to deploy if permits are in hand ?

    If you cant take it on you have to find someone who can.. that's the chore right now.

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  • Sean Yang
    OP
    Investor · San Diego, CA · Member since 2016 · 69 posts · 18 votes
    8y

    @Jay Hinrichs

    Yea there is a construction hold back of around $295k by the first lender I think (but the borrower told me the real cost is going to be around $350-$400k). But does it help if I also hand it to the debt collection company? 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @Sean Yang  @Jon Holdman  @Jeff S.  Maybe Jon or Jeff can jump in here on the debt collection company in my mind what your talking about is a company that would take on a judgment you received from a debtor and then try to collect it.  which means you have to go through the foreclosure process sue on your junior lien get said judgment then hand it over to the debt collector for collection.

    I am personally un aware of any company that will do all of the above in one package for you.. all on the come for a commission at the end.. the debt collecting yes.. but the foreclosure and judgment no I believe those folks will need to be paid up front..

    I am happy to be corrected here if I am not either understanding what your asking or if there indeed exist a company that will do it all in one bundle on the come.

    Although I am not a HML today I was for many years and I have foreclosed unfortunately more times than I care to think about and I never once found a company that would prosecute a foreclosure without payment as they go or in advance. there can also be some statutory limits on foreclosure fee's in some states this could be true not sure in Ca.

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  • Sean Yang
    OP
    Investor · San Diego, CA · Member since 2016 · 69 posts · 18 votes
    8y

    @Jay Hinrichs No, the company I was referring to is just a general debt collector, who does email/mails/calls to collect debt if I provide them the documents to back up my claim (in this case I have promissory note, deed of trust, and a personal guaranty). My understanding is they will pressure on the borrower and maybe work with him to setup a payment plan. With the personal guaranty signed by the borrower, I am entitled to go after this personal asset if there is any, correct? 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    Mr. Yang   PG is worthless 99% of the time.. you have to go to a full blown trial and get a judgement then you hand it over to the debt collector.

    same with the note and deed of trust.. yes anyone can send a letter say hey your late if you don't pay we are going to foreclose.. you don't need to pay 15% for that.. just write it yourself.

    and I am sure the first is already doing that..

    I would take the advice above contact the senior lender let them know your in second if they don't already know and see what if anything they are willing to do..

    If you go through a deed in Lui make sure you open a title order and get insurance there could be leins behind you and you don't want to take title to those.. if there are you will need to foreclose them out.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    8y

    Well, there are companies that will do the foreclosure and pursue the borrower for you.  They're called loan services and that's how most of the conventional loan market works.  I may send a mortgage payment for a conventional loan to Chase, but the real investor is most likely Freddie Mac, Fannie Mae or someone else.  If I default, Chase pursues me through the whole process.

    But I don't think that's what's meant here.  I'm not aware of a company that would pick this up at this point and deal with the foreclosure and then pursuing the borrower.  I can see that if you do pursue this and do end up getting a judgment against the borrower, then there are debt collectors who would try to collect on that judgment.

    If the first is owed $540K but has $295K in construction escrows then they're really owed just $145K.  So those number look to me like the first is owed $540, you're owed $180K, $400K is needed to get the property ready to sell, but there's $295K on the table to put toward the work.   So, with another $105K in cash and some patience on the part of both lenders, this project could be completed, sell for $1.4 million, and net about $1.29 after costs.   That's enough to pay off both you and the first and leave the borrower with half a million in their pocket.  Given those numbers and your description that the existing property has been razed and it will take only $400K to build something that will sell for $1.4 million there must be considerable value in this plot of land.  Specifically, the land must be worth something like a million bucks.  If that's true, I'll stand by the advice to foreclose and either accept someone else buying this valuable chunk of land at the foreclosure and paying off both you and the first.  Or, it doesn't sell and then you (with some forbearance from the first) sell it as-is.  If I understand these numbers correctly it should net enough to let you pay off the first and get your money back and then some.

    Am I misunderstanding these numbers?

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  • Sean Yang
    OP
    Investor · San Diego, CA · Member since 2016 · 69 posts · 18 votes
    8y

    @Jon Holdman

    The $540k does not include the $295k construction budget. The 1st loan was actually $484k, and he had drawn $56k from the construction budget, which is how I got to the $540 (484+56). So there is still $295-$56= 239k left in the construction budget as far as I know. 

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  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    If the project is demolished, what do you think it will sell for at trustee sale?  It may be that you can pick up the land for cheap and save your investment by continuing the project, or selling it off with plans included.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @Jon Holdman  HM  400k in a building budget to get to 1.4 maybe a stretch.. with CA building rates on the coast area at 250 to 300 a foot.. but there really is not enough info here and its just a WAG  at this point.. I think your advice to sit down with the first lender and figure it out is what the first step should be.

    I would think the land value is about right at 400 to 500k for a 1.4 house figuring 600k to build a 2k sq ft nice home.

    some wiggle room

    So Mr.  Yang your thinking the first is owed about 300k.. plus fees and back interest so maybe it goes to sale and sells for 500k to a bidder.. lets say first gets 350k for all their back interest and costs you would get as second position 150k.. would you take 150k to walk.. ??? 

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  • Mark Elkins
    Schaumburg, IL · Member since 2017 · 38 posts · 49 votes
    8y

    @Sean Yang

    Gentlemen, please allow me to tie up some loose ends from the discussion above. First, Sean, no, the real estate agent license and mortgage brokers license are different things. The Mortgage Broker is subject to Dodd-Frank regulations. The real problem is that he didn't broker a mortgage to you it was to the investor. To you, he might have been an investment counselor asking you to get into an unregulated investment without proper disclosures. If you are not an accredited investor, this is particularly troublesome. You might have some recourse against him via SEC violations. That would be the long way around and may never come to any result for you.

    Foreclosing or threatening to foreclose is not your best option, depending on the state regulations and the determination of the buyer you could get tied up for years in an hourly attorney fee. BTW- your first check should be with the recorder of deeds. It is possible and, it actually happens with unbelievable frequency, your "2nd" mortgage lien might actually have been recorded in 1st position! If that happened, you can sit back and wait for somebody to pay you (provided the taxes stay current). If it didn't you need to get busy protecting your position and negotiating a solution.A collection agency is not the way to go. All they do is hound the debtor for a commission and if they can’t collect they either give up or recommend a lower level agency that wants more commission. Eventually, somebody will sue the buyer for you but you won’t get more than a dime on the dollar if they are able to collect at all. If you want to do this you are better off to sell the note to somebody who buys non-performing mortgages for a fee (typically 40-60 cents on the dollar) and then the problem is his.

    The rest of this is right in my wheelhouse so feel free to contact me about this. Let me splain. . . .No, there is too much, let me sum up. . . .

    The HML is not really out that much money because $300,000 is in escrow! The HML and claim his escrow and walk away with the property by foreclosing and be pretty much whole even by selling the property at a deep discount at foreclosure. Your concern is getting your value back anyway you can, not in having the borrower pay. There are so many options my head is spinning at the sheer number of ways for you to come out ahead on this deal. @Bruce May is right the HML doesn’t want to foreclose. You could buy the mortgage from the HML at a discount if you have the cash and there are ways for you to get the cash. You could take a deed in lieu of foreclosure from the buyer and guarantee the HML yourself on negotiated terms. If your credit position is good you could then refinance the whole deal and handle it yourself or sell it by simply giving the HML his $300,000 back with terms on the $200,000.

    You could still have a claim against the buyer the whole time and if he is really reputable he might make arrangements to pay you. More likely, he is in a bad position all around. You said that his business is belly up. Perhaps he has equity in another project that you could take over and finish for a profit beyond your investment? That could be a great solution for you! You get a workable project and he gets out of your debt only to deal with the HML.

    You must start to get creative or somebody smarter is going to take advantage of what I personally think is an ideal situation as a buyer and they will come offer you a short sale. Given the costs you are likely to incur if you go to court, that short sale will be your lifeline.

    I can think of about a hundred ways to make this deal work to your advantage or at least get you mostly whole. You just have to find the one that works best for you!

    I hope this helps! Holler if you need me.

    Best regards,

    Mark

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @Mark Elkins Mark this is what I love about the US.. however just so you know... in CA a RE broker IS A LENDER subject to dodd frank ... or you can be an RMLO or a finance lender .. so you can legally lend money 3 ways in CA.. I am a CA broker and ran a pretty good sized HML company for years with my brokers license.

    That said... also in CA first lenders rarely if ever will discount unless there is some major issues and based on whats been said above the lender will within 6 to 7 months have that on the court house steps and get 100% of his money without discounting a dime.. this is no IL  and IL foreclosure laws which grossly benefit the borrower.

    other wise yes any number of work arounds are available.. my gut feeling from the thread though is this was a non experienced lender who did not realize gap funding was highly risky for the exact reason he finds himself in.

    there are NO SEC rules here as long as the arranger of the loan was a CA broker and used the state forms you can get right off the BRE website.

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  • Mark Elkins
    Schaumburg, IL · Member since 2017 · 38 posts · 49 votes
    8y
    Originally posted by @Jay Hinrichs:

    @Mark Elkins Mark this is what I love about the US.. however just so you know... in CA a RE broker IS A LENDER subject to dodd frank ... or you can be an RMLO or a finance lender .. so you can legally lend money 3 ways in CA.. I am a CA broker and ran a pretty good sized HML company for years with my brokers license.

    That said... also in CA first lenders rarely if ever will discount unless there is some major issues and based on whats been said above the lender will within 6 to 7 months have that on the court house steps and get 100% of his money without discounting a dime.. this is no IL  and IL foreclosure laws which grossly benefit the borrower.

    other wise yes any number of work arounds are available.. my gut feeling from the thread though is this was a non experienced lender who did not realize gap funding was highly risky for the exact reason he finds himself in.

    there are NO SEC rules here as long as the arranger of the loan was a CA broker and used the state forms you can get right off the BRE website.

     Thanks for clearing that up for the lending in CA!  Your license law must include mortgage education.  

    The various states all have some variations in mortgage foreclosure. My experience in CA goes back 10+ years in San Diego and in Garden Grove and I was able to work out some amazing deals, including the one I mention where I bought the property from the failed owner subject to the existing financing and then negotiated a discount purchase of the underlying mortgage from the HLM.  I then foreclosed on the property earning the difference between the purchase price and the mortgage before selling the property for a tidy profit.  

    The biggest difference between foreclosure and trust states is that the homeowner must initiate the litigation in trust states.  After that, the laws are mostly the same and the standards of proof and civil procedure are the same.  A friend of mine in Sacremento kept a foreclosure open for 8 years until the successor in interest to Bank of America finally gave up.  So this is a large part of my strategy on these types of buys when I don't get cooperation from the lender.  I will sue on the mortgage before the process is final and that will tie it up long enough to encourage negotiation.  I have not had to do this with any HLM.  They seem to come to their senses pretty quickly.  They won't recover all their money on the courthouse steps so if there is a good deal on the table and the deal can actually work, makes sense and pays them all or most of their money, a deal can be had.  It's mostly banks that won't listen to reason.

    Thanks again! You've got great experience and I've been reading many of your posts.

    I hope this helps!  Holler if you need me.

    Best regards,

    Mark

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @Mark Elkins apples and oranges as it relates to HML and a conventional loan your not going to keep a HML at bay unless you file a BK.. one reason HML do not ( generally make owner Occ loans) these are commercial.. so that tactic of hiring a lawyer and claiming mortgage inaccuracies is not going to work most of the time if at all.

    your talking about the deep recession times 10 years ago and there were many deals to be had but in todays market .. not so much.

    HML in todays space are pretty sharp pretty competitive and generally were not making loans in the same manner they did 10 years ago.

    Only way a first position lender here takes a cram down is if the trustor  did so much damage to the property that the property is not worth the 300k they are owed.. and bare land as you know in those areas is easily worth that in most cases.

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  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    8y

    Have you spoken with an attorney?

    0Reply
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