In our previous posts about hard money commercial loans, we discussed the risk of hard money commercial loans, including higher interest and fees, higher default interest, short terms, and fast collections through confessed judgment clauses and other collections in the event of default. We also discussed the mechanics of hard money commercial loans. When it comes to taking hard money loans for flipping houses, there are additional risks involved. Because the term of many hard money loans is very short, the flipping project must be completed within a very short time frame, and delays in the project could not only result in lost profits, but could result in the borrowers losing their own homes and other assets.
Case Study 1 – The Large Deal
Our client had taken out hard money loans for flipping houses for many years, and his largest deal went south. In this deal, as in every other deal, the individual formed a limited liability company for the purpose entering into the deal – Large Deal, LLC, and the loan was for the purchase and renovation of a home. The individual also had separately formed another entity – Small Deal, LLC – and was renovating that home as well with a separate lender. Large Deal, LLC had negotiated specific loan terms with a hard money lender, including construction draws when needed, pre-paid interest, and a construction reserve.
However, once the project started, Large Deal, LLC started to have problems with its lender. The lender delayed providing construction draws, which caused significant delays to the renovations and ultimately caused the loan to go into default, but not before most of the home was renovated. The lender retained an aggressive law firm who filed for a confessed judgment against Large Deal, LLC and the owner of Large Deal, LLC who had guaranteed the loan. The lender also initiated foreclosure proceedings on the home, and asked that the court award all profits from Small Deal, LLC to the lender via a charging order, even though Small Deal, LLC was not involved in this deal whatsoever. The lender sued for 24% default interest and fees totaling hundreds of thousands of dollars, and refused to entertain a short sale or any kind of modification, other than a deed-in-lieu of foreclosure which provided terms that heavily favored the lender.
Steiner Law Group stepped in and quickly got results. First, we quickly uncovered that there were inconsistencies in the loan documents and the settlement sheet for the closing of the purchase of the home. These inconsistencies formed the basis to ask the court to vacate the confessed judgment. Also, we challenged the request to the court for a charging order, and the court granted our request, which allowed our client to work on his other project.
While the request to the court to vacate the confessed judgment was pending, we assisted Large Deal, LLC to list the property for sale, and received several offers. Once we had obtained a good offer, we negotiated with the lender who agreed to a short sale of the property. After the short sale was completed, our client was still liable for hundreds of thousands of dollars.
We next went to court to argue the request to vacate the confessed judgment, and at the hearing, the judge requested clarification on an issue that weighed in favor of our client. Instead of litigating this issue, the lender came to the table with an offer that was almost too good to be true, and Steiner Law Group settled the remaining balance of hundreds of thousands of dollars for approximately 4% of the balance that was owed.
Case Study 2 – Lender Liability
Our client was new to house flipping and hard money loans for flipping houses, and had just started to fix up the structural elements of a property. His business took a one-year term hard money loan that was guaranteed by both he and his wife, and the lender from the outset earned significant amounts of interest and fees from the deal. 75% of the loan funds were placed in an escrow account in the control of the lender and any disbursements were subject to the lender’s whims.
As the project started, the structural engineer that was hired for the project did not perform the required work. Our client kept his lender in the loop, and the lender, throughout every stage, provided “advice” to our client on how to handle the non-performing contractor, including sticking with the same contractor and waiting. However, once it was in the lender’s best interest, the lender completely switched gears. The lender strung our client along until the term of the loan expired and once the lender earned all of the prepaid interest, it flipped on our client, called the loan and took aggressive collection action by hiring another aggressive law firm.
When our client came to us, the lender had refused to allow any short sale of the property, and had filed a confessed judgment lawsuit against our client’s business and against he and his wife personally. The lender had also started collections, including requesting garnishments against our client’s bank accounts and filing a foreclosure action against the property.
Steiner Law Group stepped in and took immediate action. We challenged the garnishments, and saved our clients thousands of dollars that would have otherwise been garnished. We carefully reviewed the terms of the loan and the facts of what happened with the lender, and asked the court to undo the confessed judgment due to the heavy self-motivated involvement of the lender. Based upon the merits of our arguments, the lender agreed to entertain a short sale, and we closed on a sale of the property in a few short months. Since most of the balance owed to the lender was paid from the sale of the property, we negotiated a payment plan for our client for the remaining balance, and the lender agreed to vacate the confessed judgment and dismiss the lawsuit.
Have questions about hard money loans for flipping houses?
Hard money loans for flipping houses seem too good to be true, because often, they are. If you are considering taking a hard money loan or are having issues with your lender, please call Steiner Law Group at (410) 670-7060, and subscribe to our newsletter, Fresh Chapter.