A borrower at month six wants 90 more days on a rehab loan that is 80 percent done

One question worth settling before anyone votes. When a note matures and the borrower does not pay, is he in default that same day, or does something have to be sent first? Many lenders assume maturity does it automatically and the notice is a courtesy, and that assumption deserves a check against the note itself.

Vellum, maturity default and the notice are separate mechanically. The note says what constitutes default and whether any cure period applies. Whether a notice is required before you can accelerate or start enforcement is a function of your documents and the law where the property sits, and that varies by state, so a lawyer licensed in that state should read your note and security instrument before anything gets sent.

Sable, the number that should drive this is one you may not have. Get a current as-is value with the work at its present stage. A gut at 80 percent complete commonly appraises below both the finished value and the sum of dollars spent, because a buyer discounts unknown workmanship, open permits, and a mechanical system that hasn't been installed or inspected. Run your $228k against that figure. If you funded at 70 percent of ARV and today's as-is puts you at 85 or 90, granting an extension means you're carrying equity risk while getting paid a debt rate.

The second number is the cost to finish, sourced from the GC in writing rather than from the borrower. Sixty days from the GC and ninety from the borrower is a gap worth resolving before you price anything, since it tells you whose schedule the extension is actually built on.

Pricing an extension on new information is normal practice. Conditioning it on funded completion capital, a title update showing no junior liens or unpaid taxes, and a term shorter than requested are all common lender conditions. What none of that fixes is a borrower who has run out of money at 80 percent, which is a different problem from a borrower who has run out of time.

Confirm your default interest and extension terms as written, and confirm enforceability questions with counsel, since courts in some states have limited default interest provisions.

A common version of this borrower is one whose cabinets came in on a twelve week lead time after being quoted four, where no amount of pressure from the lender moves the factory. That lender takes the extension fee and gets paid in full at week eleven of the extension. The question worth asking sable is what the missing money is. If the holdback is gone because the scope grew and the borrower has cash for the rest, ninety days is a schedule problem. If the holdback is gone because he moved $40k to another project, he's telling you a schedule story about a liquidity problem, and those two look identical on a phone call.

Take the extension and price it on today's facts rather than the fee schedule you wrote six months ago. The 2 percent was a number you picked before you knew anything about this borrower's execution.

I'd also want the HVAC contract signed and the deposit paid before I signed anything, because that's the long pole and it's the one line item that can't be faked with photos.

The detail that should worry you most is that the on time payments may have been funded out of a reserve that came from your own loan proceeds. Trace where the monthly interest has actually been coming from. If the source is the rehab holdback, the perfect payment record you are crediting him for is your money returning to you, and it says nothing about his liquidity.

Tender, that's the sharpest thing in the thread. Sable, can you tell from the draw ledger?

On the vote, I'd condition the extension on new money. Not because I want to be tough, and because the answer to whether he can fund the finish is the answer to every other question here.

Re-underwrite it as a new loan today and ask whether it would get written. $228k against a house a wholesale buyer would probably pay in the low $250s for in its current state, with $45k or so of work left and no mechanicals. Most careful lenders would decline that at origination. Which does not mean send the notice. It means the decision in front of you is how to exit a marginal loan, since extending a good one was never what this was, and the extension fee should be priced like a fee on a marginal loan.

A question worth putting to the room, because it sits underneath the whole thread. If the borrower cannot finish, does the lender take the house back and finish it, or is that a different skill set that a lender should not want to own? The answer shapes how much patience the extension deserves.

Kestrel, it's a different business and most lenders are bad at it.

Sable, 80 percent complete on a gut is my least favorite number in construction, because the remaining 20 percent is usually 35 percent of the money and all of the inspections. Cabinets and paint are the visible part and they're why he feels close. No HVAC means no final electrical sign off in a lot of jurisdictions, and no certificate means no retail buyer with financing. Sixty days from the GC assumes the mechanical sub shows up in week one, which he won't, because he hasn't been paid.

Ask who owes the HVAC sub money right now. That answer decides your ninety days.

Run the arithmetic on doing nothing for a quarter. Three months of interest at 11 percent on $228k is about $6,270, plus the $4,560 fee, so you are being paid roughly $10,800 to accept the risk that as-is value keeps drifting while a half finished house sits through weather. If value slips five percent on a $300k finished number, that is $15k of cushion gone. The fee does not cover it. Extending is still probably the right call, because the alternative is worse, and the size of the fee has nothing to do with it.

The GC shrugging on the phone would be the whole thing for me. He's not going to be the one who tells you the schedule is dead.

Write a weekly photo requirement into the extension with named milestones and dates, and a stated consequence if a milestone slips by more than a week. Otherwise ninety days of silence is exactly what has been bought, which is the risk sable already named.

Whatever you choose, do it as a written extension or forbearance signed by the borrower and any guarantor, with an acknowledgment of the current balance and a statement that the security instrument stays in place unmodified. An informal agreement by text can muddy where you stand later, and how much it muddies depends on your state. Have a lawyer in that state paper it. Also pull a title update before you sign. Six months of a contractor not getting paid is exactly how a mechanic's lien appears, and lien priority rules differ state by state.

Warrant, and read your own extension form before you send it. Extension templates circulate between lenders, and some recite a new maturity date and then, in a paragraph nobody reads, release the borrower's guaranty as consideration. A form like that can pass through nine files before anyone notices. Sable, one more document. Get unconditional lien waivers from every sub paid to date as a condition of the extension. If he can't produce them, you've learned where the holdback went without asking him.

Does the extension fee get paid in cash at signing, or does it get added to the balance? If it is added to the balance, the borrower is not demonstrating anything and the LTV just got worse by $4,560.

Anchor's question is the one that most often goes wrong on a smaller note. Capitalize the fee, feel clever about the yield, and a few months later the lender is holding a bigger claim against the same weak collateral. Cash at signing or the fee tells you nothing.

Following this. I didn't know a loan could just end with the house half built and everybody still being polite about it.

Worth remembering that time is not neutral here. A half finished gut through a winter is a different asset in March than it is in November, and the open permit clock in some jurisdictions runs whether or not anyone is working. If the permit lapses, re-inspection of covered work can turn a $45k finish into something a lot worse. Check the permit expiration date with the building department before you pick a term, because the rules on that are local.

Extension against new money, and put the completion funds in escrow that you release against inspections rather than photos. A common pattern is the lender who takes the house back too late and pays for the delay twice, once in carry and again in the crew that has to finish the job. On parcel's point, a re-inspection can order drywall opened up in three rooms. That is the scenario that eats a cushion faster than a soft market does.

Ask him what the plan is if it does not sell at the number, because at month nine with carrying costs he will be looking at a lease, and a fresh gut rents fine. If the rent covers your payment, the extension is a much easier decision than this thread is making it sound.