Help! Hard Money headache

[Robert Kriedermann]

I took out a hard money loan for a rehab project. Purchase price was $51,000 and the rehab escrow was $60,000. I've worked with this lender before and the fee is always 5 points plus $2500 with 1% of the loan to be paid as an interest only payment each month. The escrow is dispersed as follows: 20% at the start, 20% after 2/3rds of the project is complete, and the last 20% when the project is finished.

I get my first $20,000 and do 90% of the work before asking for the next $20,000. The lender can only provide another $10,000 because that is all he has at the time. I'm assuming he keeps the money earning interest somewhere until the last possible moment before he has to pay me. That way he earns interest in 2 places on the same money. So I accept what he has and tell him to get the remaining amount ready because the project will be done in a few days and I will be asking for the rest.

I complete the project and ask for the remaining $30,000 of the escrow. The lender doesn't have it. Weeks pass. He calls me and says he has $15,000 of it now and he will have the other $15,000 sometime in a few weeks. Meanwhile, I have been paying interest on money that I don't have in my hands and he can't give me. In a few weeks I will no longer need the money because I have a different rehab project being sold and I will have cash on hand. On the phone, I ask him to keep the $15,000 he can't give me and take that amount out of the loan as well as the interest and fees associated with that amount. He agrees and tells me his assistant will write it up.

I did not hear anything so I email his assistant to find out what my adjusted payment is. His assistant tells me they will credit the $15,000 to my loan and credit me the $150 each month I had payed as interest on that money. I ask about taking off the fees associated with the $15,000 and they refuse.

$15,000 x .05 = $750 and $7.50 per month in interest. I feel that money should be credited to me. One might see him creating a loan based on money he doesn't have as an invalid mortgage. Is it legal to charge someone fees and interest on money that isn't available? Not giving me the escrow as specified in the contract is breach of contract. I feel like just asking for a refund on the fees associated with the money he can't give me is actually being nice about it but he isn't even willing to do that. He says he gives me a discounted rate compared to other people so he isn't willing to give any fees back. Why should I be punished with higher fees because he can't complete his side of the agreement?

What should I do?

[Ann Bellamy]

This is unforgivable on the lender's part. $15,000 is a make/break on a project, but is a small amount of money in lending terms. So it sounds like he committed money he didn't have in his bank account, and it was probably money he expected to get from a loan payoff or from the sale of a property, but it didn't happen. Or he had to spend more money than expected on another project, so you ended up on the short end of the stick.

A lender should never ever commit funds that aren't actually in the bank, available, and not committed to someone else, because too many things can happen in real estate. One situation like this can destroy his lending reputation, and rightly so.

Also, if 15,000 is all it takes to tap him out, then he is very small time. We keep way more than that liquid at all times just to have cash for contingencies.

I understand your not wanting to go the legal route because a messy battle in a small network of real estate investors can be lose/lose for everyone. But here is the reality: He is in jeopardy here, not you. He made a commitment he couldn't keep.

I'm a very direct person, so I would have a conversation with him, and lay it out: you kept your end of the agreement, and he didn't. You're not going to pay for rental of money that was not available, including fees, and he's going to sign off on releases agreeing to that, even if only an email to document the agreement. In return, you won't sue him. If he doesn't agree, you will not only sue, but that information is public record and will negatively impact his reputation, and you don't want that to happen within the local network. You don't have to threaten, it simply is what it is.

I would do a deal of the month or a blog post about what happens when the lender fails to deliver and how you solved that problem. It won't even be accusatory, simply a story about how you solved an unforeseen problem. Everyone needs understand how to have reserves to cover every contingency.