2nd Lien investment - property in foreclosure

8 Replies

Unfortunately, I got into a situation with a colleague that I have invested with before, lending him money and receiving a favorable return.  Well his development projecct this time, is in foreclosure with the hard money lender.  Mine is the 2nd lien and will be wiped off soon.  I will bite the bullet but would love to know how this whole amount could be considered as a tax write off against my regular income on Schedule E (?), and lowering my overall taxes?  Can someone who has had this bad experience or even someone who knows the tax laws help me out please?  Thanks in advance!!

talk to your accountant.

but if this loan is in Texas you can sue on the note and get a judgement if you get wiped out..

so you may want to explore that before you just write it off..

and for all these reasons I do not personally care for second position.. just too much drama if they go bad.

Not sure if you want to throw good money after bad so to speak but you could always go and bid on the first at Sheriff Sale. Hard Money usually wont touch it unless there is some decent equity in it. That's why the second was needed I assume. The upset bid to cure the first may be doable, who knows? Depending on the particulars, you might be able to salvage all or part of your investment by selling the property after you secure it. I realize it may be a stretch but you may want to at least explore this. 

Another approach:  If the equity is there talk to the holder of the first. If you can take over his payments and get the property in your name you should be able to sell the property and recover your investment. Note, I say if the equity is there.

Thank you all.  I will take what you all have said and explore my options.  I am leery of taking over the loan as I have already created a "hole" for myself.  I am going to talk to the hard money lender today who will post the foreclosure and see what we can do for a win-win situation with all involved parties.  @Dave Van Horn , if you are reading this, I actually invest in your notes company and would you care to help me out here with some advice?

@Dave Van Horn 

Hi @Audrey C.

Before you decide whether or not you want to just chalk this situation up to a total loss, you may want to consult with a TX Foreclosure attorney and see what your reinstatement and foreclosure rights are...especially since things can vary with commercial mortgages vs. residential, and with the ability to collect depending on whether or not the borrower had personally signed. If it still makes legal and economic sense, you may be able to foreclose from your position after reinstating (or bringing Current) the 1st lien - which means you might not have to pay this Hard Money Loan (or 1st lien) in full, giving you enough time to foreclose and liquidate since you’ll have title and control of the property. Keep in mind TX is a quick foreclosure state so you may have to continue making some additional payments on the 1st. Once you have ownership, you could possibly borrow the money to finish the project yourself if that's something you'd like to do.

If the 1st does end up foreclosing and you get wiped, you may be able to pursue a judgement against the borrower like @Jay Hinrichs suggested. You can also pursue the judgement by hiring a collections attorney. You may also be able to sell the judgement, oftentimes to a collections attorney as well (if you need a Texas collections attorney, PM me and I can give you their info). Selling the judgement or collecting on the judgement (which may or may not be worth doing) could help you recover some of your money, and then you could write off the difference as a loss. But I understand if you don't want to pursue your friend with a judgement in this scenario.

As for your original question: Your accountant should be able to tell you how a wiped lien could be treated since it can be different depending on how active or passive someone is in the note business, as well as the best time to take the loss. So you'll absolutely want to confirm this with your accountant to be sure.

Hope this info helps! If you have any more questions feel free to ask me either here or through PM.

- Dave

Thanks @Dave Van Horn .  I appreciate your feedback.  I have an attorney who advised me to sue on the Personal Guarantee.  Is this what you mean when you and Jay said to "pursue a judgement?"  But we think this person is overleveraged on ALL his projects.  He has four that we know of right now (yes four!!) but when I lent him the money, he only has the one that I am involved in.  The "friend" is not a real friend but a business associate.  He just went over his head and bit off more than he and his partner can chew.  

I spoke to the hard money lender and the foreclosure date is postponed to Feb 6.  I will explore the option of the collections attorney and will PM for this info.