Lenders, need some advice on a loan gone bad.

[Eric M.]

Luckily in my several years lending, I haven't had any deals get too messy so I don't have much experience with finding creative ways to solve problems and my attorney is sometimes not aggressive enough, IMO. So I am looking for some ideas. I know laws are different and your ideas might not apply.

Property in Illinois, SFH. Worth about 100K. I loaned 60K on it 2 years ago. Loan matured July 1 and the guy couldn't pay it off. House was rented, probably could be again, it is in good shape. The owner is an LLC where the 2 partners had a falling out and the one guy left has moved on and just wants out. Current balance about $68K. House has been up for sale and had contracts but they fall apart because...
back when the property was purchased, one of the LLC partners signed an agreement with the contractor for the contractor to basically front the money for the rehab in exchange for some of the profits. It is a 1 page agreement that reads like a JV, not a loan. I was not aware of this agreement until recently. This agreement was recorded well after my mortgage and it is recorded as an "agreement" not a "lien". The recorded document indicates the contractor thinks he is owed about $48K.
Seller/borrower is willing to do what I tell him to do, he just wants out. My attorney said force him to lower the price until sold which he did but 2 contracts have fallen through because the title company isn't happy with this agreement being on record. Contractor so far won't agree to a short sale nor will he commit to buying the home for the amount owed me, though he did express interest in that. Realtors think no conventional sale can be done as long as the recorded agreement remains.

Borrower is willing to Deed in Lieu to me but I still have to deal with the agreement. I want to just dump the property for 90K or so, take my money and give the contractor the rest. But my attorney fears that the contractor might sue me if he thinks I dumped too low and anyway, how do I sell it with the title clouded by this agreement?

Of course, my one solid option is to simply go through the formal foreclosure process to wipe out the agreement. Looking for other options. Thanks