Private lending on property went on fire

[Raj G.]

Hi, I did private lending to one of my friend , he mortgaged his investment property as first lien with me.

agreement was that he will pay interest monthly, and he was almost regular on that.

in July that property got  deadly fire, in August beginning he paid my interest for July and didn't mention anything about fire.

today, he called me  and told that he wants of pay off(but he didn't pay last month's interest).

I said OK start processing for payoff, but pay me last month's interest asap, then he told me that house went on fire and he is hoping to get insurance money and then he will pay, he has no money to pay interest .

Now, my concern is should I wait and watch or I need to take some pre-action to make sure that I get insurance money since I am on first lien.

That was my first ever lending :-(. 

I will appreciate any advice/help on this. 

Tags: Jersey City, Bayonne, Union, Newark, New Jersey, loan, Edison

[Jeff V.]

@Raj G.

First thing, did you get a copy of the insurance binder that shows you as "loss payee"?

If you did, then I would include the missed interest payment in the figure that you provide for payoff.

If you did not get binder, then your "friend" could theoretically collect the insurance money and not pay you a dime, then you would be forced to foreclose on the burnt building to try and recover the capital.  Being the value is obviously diminished on the collateral, you would have to go after a deficiency judgement to collect the remainder owed.

Note to self....  always get the insurance binder to protect yourself from loss.

That's what I would expect from this scenario, but I'm still fairly new to the lending/note space.  Interested in hearing from more seasoned lenders as well to be sure I'm on point.

Hope this helps, 

Jeff V