Lent money to fund a deal, now can't get a call back

[Michael You]

Middle of last year, I lent money to fund a flip and close on a development deal. Both were meant to short term, 3-6 months until the flip sold, or until the development deal found a longer term investor. Now, after repeated attempts to contact the borrower by phone, text, or email to get any information, this person has gone radio silent. 

The flip deal is unsecured, the development deal is secured in 2nd position. 

What are my options to get money back? Any thoughts / ideas greatly appreciated. 

[Kelly DeWinter]

Unsecured flip ?, not even by property being flipped ? bad real bad. 

Was it a personal loan ? A promissory note ? I'd get in my car and drive to their house to find out what's going on. Foreclose on the 2nd immediately, Check to se if your state allows you to file a lien on the flip, but it does not sound likely.

Your best bet is a face to face meeting.

[Michael You]

@Kelly DeWinter you got me there, realize this is bad. Promissory note on both. 

[Joel Owens]

First analyze how much money you are talking here relative to your liquidity/ net worth and your pace of regeneration of capital.

Then look at what state you lent the money in and what type of structure.

Flip deal is unsecured? 

I don't know that you approach them in person. That could be dangerous if the individual is unstable. People that are in financial distress can sometime do very un-rational things. Really at this point there are sites like rocket lawyer where for a cheap fee they might do an initial review and give insight into options.

They might simply tell you after an asset search of the individual that it would cost you more time and money than it is worth to pursue the individual and to just take a tax write off. The attorneys usually have case law experience as to how these things will play out in court.

No legal advice given. 

[Michael You]

@Joel Owens thanks for the advice. flip is unsecured. 

this is in the single digit percentage of net worth, so I haven't put as much energy towards this, but still needing to come to a conclusion. 

[Joel Owens]

The specialist attorneys generally have the case law and litigation experience to say you are likely to spend XX time and XX money and the percentages are you will have XX outcome.

You can then decide what your time is worth. Example you chase someone for 1 year trying to squeeze 10k out of 30k owed. In the same time the energy and effort you take 100k and turn into 130k looking over other investments. Sometimes the squeeze isn't worth the juice you will get out of it.

[Victor N.]

Your best bet is to hire a collections attorney where the borrower and property are located. You can't take a tax write off unless you try to collect the notes.

[Greg Dickerson]

@Michael You make sure you speak to an attorney before lend on any other deals with other investors. You should take a 1st lien position and not allow any other debt on the properties you lend on. There are good investors out there you can lend to. 

[Lydia R.]

Kind of insensitive to ask for a loan on a post where the OP is talking about how he just got screwed by lending money...

[Roman M.]

give it to collection agency to collect. They will do it on % basis. 

[Chad Gaddie]

@Michael You If they are local, take a field trip to go look at the properties. You can learn a lot from this. Are they half finished? If so, the borrow probably just ran out of money. Are they occupied? If so, maybe the project was finished and they are just trying to cut you out of the proceeds. If it is close enough to being done, maybe you can strike a deal to take back the property and finish the deal yourself. Also, you never know who you might run into over there... a chatty neighbor can provide a lot of intel.

[Michael You]

@Greg Dickerson 

@Chad Gaddie

I hear you, thanks for the advice. 

[Jeff S.]

Because someone didn’t return calls and emails you should immediately foreclose, call a collection attorney, write off the deals, and bring in the muscle? Wow.

There’s still a bit of work you can do before you spend another dime, @Michael You. Have you spoken to the first position lender on the development project? They could have some insight into any issues. Unfortunately, they could also be preparing to foreclose, which could wipe-out your 2nd position lien. If you don’t already have it, their contact info will be on their deed of trust. You can get a copy at the county recorder’s office. Or, call the title company that did your recording and ask for some help. And, definitely visit the properties.

Did you loan to a person or an LLC? A single member LLC? Was there a personal guarantee? A 1003? Often not worth the paper any of this is printed on but, depending on the sophistication of your borrower, and whether they can even afford a lawyer at this point, you might be able to leverage a deal. Unfortunately, as I think you figured out, your bargaining position is rather weak.

Also, be careful foreclosing from second position. It might not be worth it if you can’t satisfy the first or if the property is unsalvageable for the cost involved. Alternately, taking over either project could work out if you have the background, time, and money, to complete them.

I never have a problem if a project is being worked and simply taking longer than expected. This is real estate after all. I have huge issues with a borrower that won’t communicate since there is never a good reason for that. No doubt you’ll eventually be contacting a good attorney and CPA to determine your bets options, but do some legwork first to determine the real issues without jumping to conclusions. 

Good luck, Michael.

[Michael You]

@Jeff S. Thanks for the info. I've done all the legwork already. I have the recorded docs, with 1st position info already. Haven't taken action on this yet because, as you mentioned, being in 2nd and foreclosing doesn't have much value. I have a personal guaranty on the borrower, so I have some leverage. 

I don't have a problem with a deal taking longer than expected. Both of these deals are well past their promissory note terms, my issue, as again you mentioned, is the lack of communication and apparent lack of effort to update your investors.