How to enforce note? - Posted by Bob Ridge

Posted by Gavin Wilkinson on August 09, 2003 at 17:21:28:

I don’t wish to be down on you, because I wish you the best.

However, what was your exit plan? Every business idea must have a failure, or backup plan. The backup plan for a mortgage is to forclose on the property. If you are in California, as I am, a forclosure would take about 4 months. It would start by recording a notice of default. There are companies that will guide you through the process or even do it for you for a fee.

If you record a notice of default, this will trash your investors credit, as most banks will not loan to someone with a notice of default on their credit. So when you start foreclosure, expect your investor to hate you and not cooperate with you any more.

If I was in your shoes I would arrange a meeting face to face with her. I would politely and respectfully remind her that the note is past due and give her a short deadline to refinance. If it does not look like you are about to get your money by the deadline, start the foreclosure. There is nothing else you can do. Business is business. Why feel bad? She made her end of the bargain and is failing to live up to it. If you cannot perform, don’t sign a contract!

If you are not going to foreclose, have her sign a loan extension, collect a fee for extending the credit, and stop calling her every week!

How to enforce note? - Posted by Bob Ridge

Posted by Bob Ridge on August 09, 2003 at 17:03:57:

I recently loaned money to an investor to buy a bank-owned house. The purpose was to get the house under the investor’s control before the contract ran out. Then she would secure other temporary financing or sell the house and pay me with a single balloon payment within 2 months. My loan to her was secured by a promissory note for the balloon amount and a mortgage for the amount loaned.

We are now a month past the due date, partly because she has had a lot of unfortunate things happen beyond her control, but also partly, I believe, because she is not trying as hard as she can to get me out of the picture. She is taking her time to find just the right deal, be it reselling the house or getting a refi.

She is very touchy about her FICO score (640), so she is not talking to as many lenders or investors as she needs to, for fear of having her credit pulled repeatedly. She has already been turned down a couple of times for not having enough trade lines. She has suposedly been approved for a 55% LTV on the property, which would be enough, but that is where she’s left it.

More recently, she has not followed up with an online home equity lender (she owns her primary free and clear) that had an answer ready for her two weeks ago and is still waiting for her to call. Nor is she returning my daily calls more than about once a week. While I still believe she will get it done, I want to get a plan for enforcing the note underway.

Of course I plan to consult an attorney, but what can I expect the best course of action to be? Foreclosing would be a pain, and that would only get me the original loan amount, right? Then I suppose small-claims court would be the venue for retrieving the rest. But I want to avoid all this, as well as the legal fees and hassles (I’m a 90-minute drive away).

She has also put up $6K in rehabbing, so I’d feel even worse about just taking the property from her. She brought up the possibility of me doing a L/O to her, but I don’t want to have my capital wrapped up long-term. I’m not even sure I would trust her as a tenant right now.

So, any ideas about what I should do, or what I can expect if I pursue this legally? Thanks…


Re: How to enforce note? - Posted by TKP, Houston

Posted by TKP, Houston on August 10, 2003 at 15:04:08:

Bob, I agree with Gavin, you need to have a face-to-face talk with her. I would suggest that you make clear to her what a foreclosure will do to her future RE career, and than you trade time for additional fees and/or collateral. Give her an extra few months for a fee, higher iterest rate or share of profit that makes it well worth it to you, and ask for additional security. You did mention that she owns her home free and clear. Just a thought. TKP, Houston

Re: How to enforce note? - Posted by Jasonrei

Posted by Jasonrei on August 09, 2003 at 18:03:33:

I agree with Gavin’s suggestions.

You may be entitled to attorney’s fees, trustee’s fees, and other costs. The documents I draw up with my private lenders spell out everyone’s duties and obligations. I also tell them who to call and what to do in the very unlikely event I don’t perform as agreed.

Your investor may have hit a brick wall, might have no clue as to what she can do. If I were you I’d try to talk to her and tell her you don’t want to go to an attorney because then she’d be in an even deeper hole. If things are that bad (and we don’t have the numbers here so it’s hard to say) you may have a disinterested third party inspect and appraise the property. Possible solutions would be:

She puts the house up for sale.

She gets a hard money loan to cash you out.

She deeds the property over to you, in lieu of foreclosure. You then try to sell the property.

Where is the property? Someone here may be able to take over her position, or yours.

Ultimately, you need to do what’s required to protect your investment. I’ve had short-term notes with private lenders, notes I should have made for 9-12 months instead of 3. I asked for an extension on two and they were happy to give it, but I was prepared to refi if need be to keep them happy. Take action now, though. I have a feeling you don’t know the true value and condition of this property (she might not even have it insured?). She may have gotten in and realized it wasn’t what she thought it’d be and so she’s trying to hide. Every day that goes by takes a little bit more of your security. Honestly, none of my private lenders follow up the way they should, but they trust me. But if I was them I’d be thinking the worst and would oversee my investment. Don’t panic, but take action.

Re: How to enforce note? - Posted by Brent_IL

Posted by Brent_IL on August 09, 2003 at 17:58:55:

I’d talk to her first to find out what’s going on, and talk to a RE attorney immediately thereafter. If she did the paperwork, are you certain that the loan is in fact secured by the property?

Many, many sellers and investors believe what they want to believe, or believe what they are told, but have to disregard the written agreements to do so. I’m not saying that that’s the case here, but I’m sure that if questioned, scores of folks who have accepted a written substitution of collateral on my deals will swear that they have a note secured by the subject property instead of the air that is their actual security. Some forget; some are blinded by greed; some, despite clarification, didn’t understand what I was asking for in the first place, but agreed because they didn’t want to admit that there was an area of knowledge in which their understanding was incomplete.

Almost all post-sale RE questions are answered in the documentation.