Hey BP,

If I give my property back to my hard money lender in deed of lieu and they take the property back and rehab it, will this affect my credit score and stop me from getting a bank loan in the future? I tried to flip a home with a hard money lender before purchasing my primary residence and ran into issues with a bad contractor. My credit score is great and I don't want to ruin it.

@Phillip Amaechi   As long as they report it, yes, it probably would affect your credit.  You're not paying as agreed.  I'm a landlord and I report to creditors anything that's left owed to me after a rental, even if it's a only few hundred dollars.

-Tom

If they rehab the property and sell it and don't lose any money then they don't have to report anything.

Originally posted by @Tom S. :

@Phillip Amaechi  As long as they report it, yes, it probably would affect your credit.  You're not paying as agreed.  I'm a landlord and I report to creditors anything that's left owed to me after a rental, even if it's a only few hundred dollars.

-Tom

@Phillip Amaechi I disagree, a Deed in Lieu is still not paying as agreed. 

Tom, what is the process of reporting to the creditors when tenants left you with a huge repair bills?

Are they WILLING to accept a DIL? A DIL may get you off the hook for unpaid taxes, code enforcement liens, etc. If a lender does a foreclosure, those additional amounts can be added to the amount and if appraised for less, they may be able to come after you for a deficiency. You need to check out your state laws or talk to an attorney. How much did you borrow at purchase, and how much did they fund?

If reported, it may ding your credit score a little,or a lot. But, it is treated the same as a foreclosure for future loans.....no conventional financing for 4 years after a DIL, last time I checked.

Will it stop me from getting a 203k loan or FHA loan?

Originally posted by @Wayne Brooks :

If reported, it may ding your credit score a little,or a lot. But, it is treated the same as a foreclosure for future loans.....no conventional financing for 4 years after a DIL, last time I checked.

I don't want to give the property back but its a messy situation. I'm a first time rehabber and took on a big project with a fraud contractor that screwed me over bad. My hard money lender refuses to help. I have a lot of my own cash invested in this deal that I want to recover. I'm currently suing the contractor with the support of the Maryland Home Improvement Commission. I purchased the property for 53k and borrowed 110k from the HMl. We budgeted 60k for the renovations but in reality the renovation needed 85k-100k. My realtor showed me comps for 175k-200k but as the months went by and we analyzed the market we realized the house could sell for 225k-250k. The contractor didn't pull permits or get the work inspected, the work wasn't up to code, the work he did was sloppy, and he walked off with a lot of my money. The lender said they weren't going to foreclose. They said they are going to take it back and rehab it. I learned a expensive and valuable lesson and just want to start fresh without ruining my credit.

Originally posted by @John Thedford :

Are they WILLING to accept a DIL? A DIL may get you off the hook for unpaid taxes, code enforcement liens, etc. If a lender does a foreclosure, those additional amounts can be added to the amount and if appraised for less, they may be able to come after you for a deficiency. You need to check out your state laws or talk to an attorney. How much did you borrow at purchase, and how much did they fund?

Originally posted by @Phillip Amaechi :

I don't want to give the property back but its a messy situation. I'm a first time rehabber and took on a big project with a fraud contractor that screwed me over bad. My hard money lender refuses to help. I have a lot of my own cash invested in this deal that I want to recover. I'm currently suing the contractor with the support of the Maryland Home Improvement Commission. I purchased the property for 53k and borrowed 110k from the HMl. We budgeted 60k for the renovations but in reality the renovation needed 85k-100k. My realtor showed me comps for 175k-200k but as the months went by and we analyzed the market we realized the house could sell for 225k-250k. The contractor didn't pull permits or get the work inspected, the work wasn't up to code, the work he did was sloppy, and he walked off with a lot of my money. The lender said they weren't going to foreclose. They said they are going to take it back and rehab it. I learned a expensive and valuable lesson and just want to start fresh without ruining my credit.

Originally posted by @John Thedford:

Are they WILLING to accept a DIL? A DIL may get you off the hook for unpaid taxes, code enforcement liens, etc. If a lender does a foreclosure, those additional amounts can be added to the amount and if appraised for less, they may be able to come after you for a deficiency. You need to check out your state laws or talk to an attorney. How much did you borrow at purchase, and how much did they fund?

 Licensed or unlicensed contractor? If unlicensed, I would do my best to get his *** thrown in jail. Good luck!

Yes he was unlicensed. He was promoting himself as a home improvement company. That's the plan. Hopefully the next court date is the last one. My attorney said he has to pay back half the amount spent or he will get locked up. He was also on probation for another crime.

Originally posted by @John Thedford :

Originally posted by @Phillip Amaechi:

I don't want to give the property back but its a messy situation. I'm a first time rehabber and took on a big project with a fraud contractor that screwed me over bad. My hard money lender refuses to help. I have a lot of my own cash invested in this deal that I want to recover. I'm currently suing the contractor with the support of the Maryland Home Improvement Commission. I purchased the property for 53k and borrowed 110k from the HMl. We budgeted 60k for the renovations but in reality the renovation needed 85k-100k. My realtor showed me comps for 175k-200k but as the months went by and we analyzed the market we realized the house could sell for 225k-250k. The contractor didn't pull permits or get the work inspected, the work wasn't up to code, the work he did was sloppy, and he walked off with a lot of my money. The lender said they weren't going to foreclose. They said they are going to take it back and rehab it. I learned a expensive and valuable lesson and just want to start fresh without ruining my credit.

Originally posted by @John Thedford:

Are they WILLING to accept a DIL? A DIL may get you off the hook for unpaid taxes, code enforcement liens, etc. If a lender does a foreclosure, those additional amounts can be added to the amount and if appraised for less, they may be able to come after you for a deficiency. You need to check out your state laws or talk to an attorney. How much did you borrow at purchase, and how much did they fund?

 Licensed or unlicensed contractor? If unlicensed, I would do my best to get his *** thrown in jail. Good luck!

@Phillip Amaechi when replying using the quote function, be sure to put your reply outside the quoted post.  Otherwise your reply will get partially hidden.

Its up to the HML whether or not they report it to credit reporting agencies. Ask them. You could negotiate that they would not report it in exchange for doing a deed in lieu rather than forcing a foreclosure. If it is reported it will have a very significant affect on your credit and will keep you from getting any mortgages for some years.

Sorry you learned a hard lesson. I've been in the same situation, as the HML. Rehabber got in over their head, did work without permits and got caught. We took the property back deed in lieu, finished the fixup and sold it. In hindsight, I would have done exactly what banks do. Sold it as is, with the defects, and walked away. We had to trench up the finished basement and rip open walls to let the inspectors have a look. So, "finishing the rehab" meant not only finishing what was incomplete, but also paying permit fees and fixing the damage. We lost money. Even if your HML makes money on the deal, you won't get any of that. The only way for you to get any money from the deal would be to force a foreclosure, let it go to auction, and hoping the bidder pays more than the HML is owed (plus all the foreclosure costs, typically $10K or so for that price range.)

You can lay some of this on your contractor, but ultimately you're the one that hired them and let them proceed without permits.  Rehab projects require a lot of hands on time, even with contractors.  Sloppy work should have been caught quickly and fixed.  Payments should have been made incrementally.  A $53K property that needs even $60K in work is WAAAAY too big a project for a first time rehabber.  But things like this happen.  If you don't take a chance you never learn.  Write it off as tuition in the school of hard knocks.

Extremely rare that a HML reports to fico.. here is why.. they have to report ALL their loans to fico or NONE.. I went through this when I was running my shop.. Ergo its highly doubtful they report..

what they can do though is issue you a 1099C which will be ordinary income to you.. and create a mess with the IRS.

they could sue you for a judgment.

If they go the DIL route make sure you have an attorney negotiate out the fact that no deficieancy can be done and that they will not issue the 1099C against you.

Originally posted by @Jon Holdman : Thanks. It has been an expensive lesson but I'm not giving up!

@Phillip Amaechi .

the other reason HML do not report to fico is they kill their own chances of you refinancing if they are reporting lates on you. its against their best interest to report you... so it simply does not happen in the HML world. At least with companies that are for real.. and individuals that lend have no ability to report you as they are not signed up with the reporting agencies you just don't send in a note saying you are owed money as a lender.. you have to get approved to be in their system.. so all the speculation above is by those that have never actually owned a HML company and or are talking about tenants totally different.

Originally posted by @Jay Hinrichs : Thanks! I will talk to them about that.

@Phillip Amaechi

Why would you expect your HML to help? He/she has fulfilled the terms of your agreement and you have not. Either way they are going to inherit a mess which costs time, money and effort

Saying that, if I were you I would offer to do a Deed in Lieu with no recourse. Terms of the agreement could include non reporting and not going after you for a deficiency. It saves them the time and money to foreclose and rids you of the albatross 

Once again, @Jay Hinrichs is right on. One of the reasons people go to HML is because they have bad credit or don't want the loans to show up on their credit reports. As a HML, I don't really care what your credit is - I care far more about you having the capacity and capital to complete the rehab. I don't lend on houses hoping to take them back. If I wanted to rehab the house, I wouldn't have sold it to you with the HML in the first place - I'd just have rehabbed it myself and saved the headaches.

Originally posted by @Greg H. : Yes those terms will be granted to me. And I wont be the first or last investor whether inexperienced or experienced to get ripped off by a bad contractor.

@Phillip Amaechi

"Its up to the HML whether or not they report it to credit reporting agencies. Ask them. You could negotiate that they would not report it in exchange for doing a deed in lieu rather than forcing a foreclosure. If it is reported it will have a very significant affect on your credit and will keep you from getting any mortgages for some years."

@Jon Holdman said it best.

Okay. Thanks.

Originally posted by @Kerry Boyle :

"Its up to the HML whether or not they report it to credit reporting agencies. Ask them. You could negotiate that they would not report it in exchange for doing a deed in lieu rather than forcing a foreclosure. If it is reported it will have a very significant affect on your credit and will keep you from getting any mortgages for some years."

@Jon Holdman said it best.