NEED ADVICE! Unable to pay hard money loan

Member since 2024 · 3 posts · 2 votes

I'm investing with an equal partner and unfortunately we're defaulting on our hard money loan because we don't have the money to pay it off and we won't be able to sell the home by the due date. A contractor also put a lien on that house. What would be the impact on my credit and would the lender be able to force us to sell our personal real estate if we are personally guaranteeing the loan? Any advice would be greatly appreciated. TIA.

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JD MartinBusiness Member

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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

Quote from @Jay Lee:

1. Impact on credit - it will be shot. A housing default is a serious credit killer.

2. Yes, the lender can attempt to collect against personal assets if you are guaranteeing the loan. It's not a simple process, as they first have to foreclose on the existing property, attempt to sell it at a reasonable cost to minimize their losses, then file a suit against you and win that suit for any outstanding balance. If you have significant personal assets, they'll likely be successful, if you don't they may not.

3. The mechanic's lien is almost guaranteed to be wiped out in foreclosure unless you have a whole lot of personal money in this deal already or have experienced significant appreciation.

I would recommend you try to work out something with the HML. No lender wants to foreclose; they want their money. Most will try to work with you if there's a good faith effort and some reasonable path to a successful conclusion. If your property is substantially complete and you lack some paint and window blinds, you can probably figure something out. If it's in shambles because you grossly underestimated the cost of the rehab, then you're probably screwed and should consider this an expensive education.

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Matthew CrivelliBusiness Member
Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
2y
@Jay Lee

They are going to take the house & your credit will be shot because you will now have a foreclosure attached to your name. If you signed a pledge of shares they can also take whatever assets are in the name of the LLC to recoup what is owed. As far as your personal assets, I don't believe they will be able to touch them.
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Steven Goldman
Lender · PA · Member since 2019 · 533 posts · 461 votes
2y
Quote from @Jay Lee:

I'm investing with an equal partner and unfortunately we're defaulting on our hard money loan because we don't have the money to pay it off and we won't be able to sell the home by the due date. A contractor also put a lien on that house. What would be the impact on my credit and would the lender be able to force us to sell our personal real estate if we are personally guaranteeing the loan? Any advice would be greatly appreciated. TIA.
Most lenders want to resolve the problem and not foreclose. The contractors mechanics lien will be discharged if a foreclosure occurs. If you personally guaranteed the note than the lender can choose to attempt to collect a deficiency based on the foreclosure laws of the state where the property is located and or the language in the note or mortgage. My advice is speak with a lawyer and follow the lawyer's advice. In the meantime let the lender know you are having a problem and see if you can work it out between the lender and the contractor and avoid further legal hassles. A foreclosure on a property owned in a LLC may or may not show on your credit report. It still best practice to try to resolve the situation you created. Good luck.
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Peter MckernanBusiness Member
Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
2y
Quote from @Jay Lee:

I'm investing with an equal partner and unfortunately we're defaulting on our hard money loan because we don't have the money to pay it off and we won't be able to sell the home by the due date. A contractor also put a lien on that house. What would be the impact on my credit and would the lender be able to force us to sell our personal real estate if we are personally guaranteeing the loan? Any advice would be greatly appreciated. TIA.

That contractor will get paid (if your primary, not the flip) when you pay them or sell your house. I agree with Matthew on his points above as well for the liability to the lender, and what they can do on the property.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
2y
Quote from @Jay Lee:

I'm investing with an equal partner and unfortunately we're defaulting on our hard money loan because we don't have the money to pay it off and we won't be able to sell the home by the due date. A contractor also put a lien on that house. What would be the impact on my credit and would the lender be able to force us to sell our personal real estate if we are personally guaranteeing the loan? Any advice would be greatly appreciated. TIA.

1. Impact on credit - it will be shot. A housing default is a serious credit killer.
2. Yes, the lender can attempt to collect against personal assets if you are guaranteeing the loan. It's not a simple process, as they first have to foreclose on the existing property, attempt to sell it at a reasonable cost to minimize their losses, then file a suit against you and win that suit for any outstanding balance. If you have significant personal assets, they'll likely be successful, if you don't they may not.
3. The mechanic's lien is almost guaranteed to be wiped out in foreclosure unless you have a whole lot of personal money in this deal already or have experienced significant appreciation.
I would recommend you try to work out something with the HML. No lender wants to foreclose; they want their money. Most will try to work with you if there's a good faith effort and some reasonable path to a successful conclusion. If your property is substantially complete and you lack some paint and window blinds, you can probably figure something out. If it's in shambles because you grossly underestimated the cost of the rehab, then you're probably screwed and should consider this an expensive education.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2y
@Jay Lee
Are you personally responsible ? Yes if you signed a personal guaranty
Some states have homestead where they cannot go after your house but some states also can garnish your wages
Out of curiosity for others to learn.
What was cost of house?
What was rehab budget?
How much did you put down?
What is house worth?
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Ben Aaron
Investor · San Francisco · Member since 2024 · 58 posts · 12 votes
2y
we often assist clients facing similar challenges with hard money loans and credit concerns. In cases of defaulting on a loan that you've personally guaranteed, it can significantly impact your credit score and potentially expose your personal assets, including real estate, to risk. The presence of a contractor's lien adds complexity, as it can affect the sale or refinancing of the property.
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Alan F.
Flipper/Rehabber · CA · Member since 2023 · 1k+ posts · 1k+ votes
2y
Quote from @Jay Lee:

I'm investing with an equal partner and unfortunately we're defaulting on our hard money loan because we don't have the money to pay it off and we won't be able to sell the home by the due date. A contractor also put a lien on that house. What would be the impact on my credit and would the lender be able to force us to sell our personal real estate if we are personally guaranteeing the loan? Any advice would be greatly appreciated. TIA.

I would sincerely recommend working with the HML any and every way possible to save yourself alot of grief. Lenders don't want houses, do everything you can to turn this negative into a positive.
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Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
2y
Quote from @Matthew Crivelli:

@Jay Lee

They are going to take the house & your credit will be shot because you will now have a foreclosure attached to your name. If you signed a pledge of shares they can also take whatever assets are in the name of the LLC to recoup what is owed. As far as your personal assets, I don't believe they will be able to touch them.

They could if he personality guaranteed the loan, which many lenders do. I would need to look at the contract to know for sure.
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John McDonald
Member since 2023 · 158 posts · 96 votes
2y
Really sorry to hear about the tough spot you're in. Defaulting on a hard money loan is a tricky situation, especially with a lien involved. When it comes to the impact on your credit, it can be significant. Defaulting on a loan typically leads to a drop in your credit score, which can affect your ability to secure financing in the future. It's a bit like a red flag to lenders that you've had trouble paying back a loan in the past.

Now, about the lender forcing you to sell your personal real estate – it's a possibility if you personally guaranteed the loan. When you personally guarantee a loan, you're essentially pledging your assets (like your home) as security. So, if things go south, the lender might have the right to go after these assets.

It's crucial to talk to a real estate attorney ASAP. They can give you specific advice based on the details of your loan and situation. Also, open up a conversation with your lender. Sometimes they're willing to work out a deal or a payment plan, rather than going through the hassle and expense of seizing assets.

And remember, this isn't the end of the road. Many successful investors have faced setbacks and bounced back. Learn from this experience and use it to make smarter moves in the future. Best of luck!
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Nick Dallaire
Developer · Boston, MA · Member since 2011 · 13 posts · 6 votes
2y
This is where building / maintaining great relationships with everyone involved in the deal can make a difference. Hopefully they will be willing to work out some sort of compromise or maybe you bring in one more partner to bring the deal back to good standing. I would explore every avenue of raising a bit more capital for sure. The worst thing to ruin in this business is your reputation. Get some more $ somewhere in your sphere and buy yourself some more time.
Best of Luck my friend!
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John Clark
Member since 2018 · 1k+ posts · 1k+ votes
2y
Quote from @Jay Lee:

I'm investing with an equal partner and unfortunately we're defaulting on our hard money loan because we don't have the money to pay it off and we won't be able to sell the home by the due date. A contractor also put a lien on that house. What would be the impact on my credit and would the lender be able to force us to sell our personal real estate if we are personally guaranteeing the loan? Any advice would be greatly appreciated. TIA.
You will find that some states (all?) have lien priority rules protecting lienor contractors. The mechanics lien may not just disappear. He may very well be paid first and in full. There are considerations to be had, such as whether the lender paid some of the contractor’s bills and therefore assumed some of his priority. You need a lawyer.

Also, I get the impression that this was a pure investment play, not a house hack. Investment plays usually have fewer protections than residential loan situations.

You need to take legal advice and act accordingly. You also need to find out what went wrong in your plans and why. Oftimes the planning and financing suppositions were too optimistic.

Your goal is to minimize your losses. Your lawyer will tell you what you can lose. Do not waste time coming here for advice. Call a lawyer NOW.
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Jay Lee
OP
Member since 2024 · 3 posts · 2 votes
2y
@Matthew Crivelli @Steven Goldman @Peter Mckernan @JD Martin
@Chris Seveney @Ben Aaron @Alan F. @Account Closed

Thank you all for your help! Do any of you have an attorney in mind for this situation?@JD Martin
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Steven Goldman
Lender · PA · Member since 2019 · 533 posts · 461 votes
2y
Quote from @Jay Lee:

@Matthew Crivelli @Steven Goldman @Peter Mckernan @JD Martin
@Chris Seveney @Ben Aaron @Alan F. @Account Closed @John McDonald @Nick Dallaire @John Clark

Thank you all for your help! Do any of you have an attorney in mind for this situation?@JD Martin

Where is the property located?
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Jay Lee
OP
Member since 2024 · 3 posts · 2 votes
2y
Indianapolis
1 Reply
Jeremy Horton
Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes
2y
What happened to cause this train wreck?
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Katlynn Teague
Real Estate Agent · Atlanta, GA · Member since 2022 · 352 posts · 219 votes
2y
Hey Jay,

I'm sorry to hear you are going through this. The best advice I would give you is to call your lender. The goal of these lenders is to get their money back, not to foreclose. Who knows they may be able to work something out with you and elevate the situation a hair. Also, speak to a lawyer and follow the play. @Steven Goldman was spot on!
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
2y
Quote from @Jay Lee:

@Matthew Crivelli @Steven Goldman @Peter Mckernan @JD Martin
@Chris Seveney @Ben Aaron @Alan F. @Account Closed @John McDonald @Nick Dallaire @John Clark

Thank you all for your help! Do any of you have an attorney in mind for this situation?@JD Martin

Sorry, that would be out of my area - you need someone in your state.
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Dave Skow
Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
2y
@Jay Lee- contact hard money lender and explain and request an extension to the due date
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