My hard money lending investment in Louisiana has hit a bit of a snag. There has been a big shake up in the structure of the LLC that is handling the renovation of these office buildings. The guy who was in charge has been bought out by another investor. The old manager just wasn't getting things done and seemed to have a very hands-off approach, resulting in delays. The new manager and the remaining principles are hands-on, micro-manager types, so I expect things will start moving forward much more quickly.
The snag is that the new manager wants six months of no payments in exchange for a higher interest rate. He is apparently in a bit of a cash crunch right now and is in the process of selling some of his other commercial properties. This guy is worth somewhere around $40 million and Les, one of the other investors, thinks he is a "smart cookie." In fact, he thinks this guy knows more about real estate than he does (and that's quite a lot). He also feels the guy will be good for the loan.
But since the February payment is late, technically the mortgage is in default. We (the other investors and myself) are currently voting on the course of action to take. We can restructure our loan and give the guy 6 months of no payments or we can start the foreclosure process. In Louisiana, the foreclosure process takes about 9 months. The mortgages are for $700,000 each on two buildings and the buildings are estimated to be worth roughly twice that.
So, do we delay payments for 6 months and get a higher return after that or delay payments for 9 months or more and get our principle back? In actuality, if we foreclose, it'll probably be a year or more before we get any principle back because we've got the 9 month foreclosure window, then more time to market and sell the buildings. Of course, my interest in the property could always be sold to someone else so I can get my money back sooner.
I voted for the 6 months of no payments with a restructuring of the note to a higher interest rate.
On a related note, our mortgage on the parking garage and lot is in the process of being refinanced with a conventional lender and we will get our investment back from that. I'll get $30,000 back, leaving $120,000 invested in the other two buildings.
This is just the simplified version of the saga. The whole thing is like a soap opera and it really boils down to incompatible people trying to work together. That didn't work out. But as Les says, when there is trouble, I make money, so I'm not too concerned.