Recovering Real Estate Development Loans for Private Lenders
It is well known in the real estate development industry that most projects make use of third party financing. Private lenders assist with development projects with private money lending. Traditional retail loans through major banking institutions often require an underwriting process that delays the project commencement date. Private lenders can usually close on a deal and provide financing more quickly than institutional lenders. These private loans are generally issued at higher interests rates but with the advantage of greater flexibility for the developer. In other words, the loans are structured to meet the needs of real estate developers.
Defaults on real estate development loans occur for different reasons, but a common culprit is problems with the development project itself. If the loan goes into default, the lender must bring a foreclosure action to take control of the mortgaged property. In Pennsylvania, if the mortgage is residential, the lender must send a thirty day notice of intent to foreclose letter before accelerating the loan or initiating a foreclosure action. A development project may be considered residential because the definition of a residential mortgage is rather broad.
One example of a case we resolved for a client involved an investor who loaned $125,000 to a real estate developer. The developer purchased three properties with the goal of developing them for eventual resale. Our client entered into a mortgage and security agreement with the developer to fund the renovations. The loan was guaranteed by the borrower’s pledge of the properties as collateral.
Unfortunately the renovation did not go smoothly. Development became so problematic that the borrower decided to sell the pledged properties rather than continue development. The ensuing delays led to a cash crunch for the borrower and a default on our client’s loan.
We assisted the lender with a mortgage foreclosure action against the borrower. The goal was to recoup the principal and interest plus attorney fees by foreclosing on the pledged properties. As we prepared the legal action, we discovered that the borrower was attempting to sell the properties for a fraction of what was owed to our client.
Our office filed the foreclosure complaint and immediately indexed a lis pendens against the properties. A letter was sent to the title company for the attempted sale demanding full repayment of the loan. Our client was now in position to either recoup the investment money through the foreclosure process or receive immediate payment from the pending settlement. The borrower recognized the situation and agreed to increase the repayment amount to fully compensate our client.
An investor who is considering lending funds for a real estate project should protect themselves with best practices:
- Ensure the loan amount and your potential losses are protected by sufficient collateral.
- Enter into a forbearance only if structured to protect you from the risks of a shaky borrower.
- Take action immediately when problems arise. Delays can be costly.
Our client succeeded because of best practices and decisive action. As a real estate attorney, I help resolve legal disputes. If you know a lender struggling to recover a real estate loan, please forward our contact information:
Phone (484) 690-4613
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