Our office recently assisted Anna, 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. Anna entered into a mortgage and security agreement with the developer to fund the renovations. Her loan was guaranteed by the borrower’s pledge of the first property as collateral.
Unfortunately the renovation did not go smoothly. Development became so problematic that the borrower decided to sell the pledged property rather than continue development. The ensuing delays led to a cash crunch for the borrower and a default on Anna’s loan.
Anna had a close relationship with the borrower and so she extended a forbearance. The forbearance agreement permitted the borrower to sell the problematic property while also protecting Anna. The borrower pledged the remaining two properties as collateral in the forbearance agreement. With the first property sold the borrower could resume payments and develop the two remaining properties.
But the borrower again ran into difficulties renovating the remaining properties and soon defaulted once more. With the two remaining properties being her only protection, Anna knew she had to act.
What should a lender do when facing the risk of total loss?
Anna asked for our help in filing a mortgage foreclosure action against the borrower. The goal was to recoup her principal and interest plus attorney fees by foreclosing on the remaining properties. As we prepared a complaint, Anna became aware that the borrower was attempting to sell the properties without fully repaying Anna. The borrower listed the repayment amount on the proposed settlement sheet as a mere $30,000.
Our office filed the foreclosure complaint and immediately indexed a lis pendens against the properties. A letter was sent to the title company demanding full repayment of the loan. Anna was now in a good position. She could either recoup her 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 $125,000.
Anna wrote us a note after receiving confirmation of her funds.
“You have absolutely no idea how relieved this makes me feel. Thank you for helping make this happen.”
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.
Anna had a successful outcome because she followed best practices and acted decisively. 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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