We actually had to foreclose on this house

Sometimes a loan looks perfectly fine on paper and still ends in foreclosure. That’s exactly what happened with a deal I want to walk through today. If you’re building a private lending business, this case study has something important for you, because the lesson here isn’t about a bad loan.

It’s about what can go wrong even when you do your homework.

Key Takeaways

Good collateral does not guarantee a clean exit. Hidden subordinate debt can trap a borrower and kill their ability to sell.
A foreclosure that looks simple can still cost you close to $30,000 in hard expenses before you see a dollar back.
Vacant properties deteriorate. ARV degrades over time, especially when a borrower walks away.
The 4 C’s exist for a reason. Collateral alone is never the whole picture.
Knowing your exit before you lend is what separates a stressful default from a manageable one.

The Deal at a Glance

The borrower had a 707 credit score, experience flipping real estate, and owned a portfolio of properties including some commercial and land. These are not the characteristics of someone you’d expect to end up in a messy default.

The borrower had purchased the property back in 2020 for around $275,000 already renovated and was holding it. By the time they came to me, the property was free and clear.

A nice 2,500 square foot colonial in central PA. No tenant in place, but in solid shape.

I did a loan of $195,000 on what I believed was an as-is value of roughly $350,000. That’s well under 60% LTV. And the stated purpose was simple: the borrower was taking cash out to buy other real estate.

Nothing exotic. Nothing alarming.

Why This Looked Like a Non-Event

On paper, this loan had a lot going for it. Experienced borrower. Low LTV.

Free and clear collateral. Business purpose, structured through an LLC. And the property was in good condition.

I reviewed it with my partner Joshua Weidman who covers Central PA, and he did his homework on these folks.

The plan for repayment was straightforward too. They were going to sell the property to pay us off. They listed it on MLS in the neighborhood of $500,000 or so.

That was probably overpriced. A realistic ARV was probably closer to $400,000 to $410,000. But even at that, there was MORE than enough equity to cover our loan plus interest.

So for a while, the loan performed normally.

What Actually Went Wrong

When the borrower got behind on payments, I sent a default letter and started the foreclosure process. And that’s when something unexpected surfaced. Our foreclosure attorney did the title work and found a large blanket loan recorded behind us.

A seven-figure loan spread across multiple properties in their portfolio, including this one.

This is a textbook example of subordinate financing risks that every lender needs to understand before funding a deal.

That’s why they couldn’t sell. If they dropped the price and sold, the proceeds would have had to satisfy that blanket lien too. They weren’t just choosing not to sell.

They literally couldn’t. Not without a much bigger number than the market would support.

Now here’s the thing about subordinate financing risks: as a first-position lender, you generally can’t stop a borrower from recording a second lien against a property after you’ve funded. They’re technically in default if they do it without your permission depending on your loan docs, but they CAN record it. If you’re not watching, you won’t even know until something like this happens.

I wrote more about this situation in my piece on subordinate financing risks, and this deal is a textbook example of why it matters.

The Borrower Went Dark

I tried the usual approach. I was working with the attorneys on the legal side. My partner Josh was playing good cop, staying in contact with the borrower directly.

I got basically nothing back. No contests. No bankruptcy filings.

Just silence.

That’s actually a strange kind of default. When borrowers fight you, it’s frustrating. But at least you know what you’re dealing with.

When they go completely quiet, you’re just moving through the process with no information and no negotiation.

The Foreclosure Process and What It Cost

Pennsylvania is not the fastest state for foreclosure, but it’s not the worst either. Under normal circumstances with no major hiccups or bankruptcy filings, you can get through the process in under a year. The Federal Reserve’s lending surveys consistently show tightening standards as default rates climb, which is worth tracking if you’re building a lending operation in multiple states.

This one took just under 2 years from loan origination to the time we sold the property.

According to ATTOM’s year-end 2025 foreclosure data, U.S. properties in foreclosure spent an average of 592 days in the process. That national average matches close to what I experienced. And in judicial foreclosure states, those timelines stretch even further.

I went to sheriff sale around February or March of 2026. The auction was poorly attended. This has been a consistent pattern lately.

Auction buyers have pulled back. The property sold back to me at my opening bid.

The Hard Costs Nobody Warns You About

Here’s what I want every lender reading this to internalize. Even a relatively straightforward foreclosure, no bankruptcy, no major contest, carries REAL costs. These are not paper losses.

These are actual dollars going out the door.

$52,000 in interest accrued from March 2024 through end of July 2026, calculated at 11.5%.
~$15,000 in legal fees for the foreclosure process
~$12,000 in sheriff sale fees including transfer tax and auction costs
~$2,000 in insurance premiums for forced-place coverage we had to carry
Additional unpaid charges bringing the total default-related expenses to roughly $29,000

A note on the interest figure: the contracted note rate was 12% to 12.99% and the default rate could go up to 18-24%, but I voluntarily reduced it to facilitate a clean exit. Fighting over every basis point on the default rate would have invited more legal disputes, burned more time, and ultimately recovered less. Preserving capital was more important than winning an argument over interest.

Knowing your loan documents inside and out gives you that flexibility when you need it.

That’s nearly $30,000 in hard costs just to take the property back. And this was not a brutal, contested foreclosure. Think about what those numbers look like if a borrower files bankruptcy twice and drags the process out further.

I’ve seen that scenario too, and the attorney fees alone can exceed $50,000.

As I said on the podcast:

“If you’re foreclosing on a property and the numbers are a little bit tight, that’s where it gets a little bit shaky. This was almost $30,000 in actual expenses just to take ownership. And this wasn’t even a super contested foreclosure.”

This is precisely why I push back hard when I see lenders in the mastermind community approving loans at 10% down on fix-and-flip deals. You have no buffer. Zero margin for this kind of outcome.

The down payment is not just about risk sharing with the borrower. It’s about creating enough equity that if everything goes sideways, you can still eat $30,000 in foreclosure costs and walk away whole.

The Exit and the Real Numbers

After taking the property back at sheriff sale, I had someone go check it out. The property was still in decent shape overall, but the borrower had taken the appliances. Kitchen appliances gone.

I debated whether to put money into it and try to hit $400,000-plus, or sell it as-is.

I listed it as-is around $337,000 to $339,000. Got a cash offer of $300,000 from a business entity out of New York. Solid buyer.

And I took it. Because I’d rather move the asset, get the capital back, and put it to work on performing loans than spend more time and money trying to squeeze another $50,000 out of a property I didn’t want to own in the first place.

The Final Breakdown

After paying real estate agent commissions, transfer and aggregate taxes, and other minor closing costs, I netted just over $280,000 on the sale.

Original loan: $195,000. Net from sale: ~$280,000. That sounds like a big win at first glance.

But remember, that $280,000 has to cover the $52,000 in accrued interest plus the $29,000 in default-related expenses. So the actual return on the capital is fine. Not great.

But fine. I got my principal back plus a reasonable yield. And we did it without throwing MORE money at the property trying to hit a higher sale price.

That’s the goal in these situations. It’s not about extracting maximum value. It’s about moving on.

If you want to understand how capital structure decisions affect outcomes like this, the article on capital structures for lenders gets into that in more detail.

The ARV Decay Problem Nobody Talks About

There’s one more thing I want to flag from this deal because it doesn’t get discussed enough. Property values don’t just sit still while you’re going through a foreclosure. They can actually go DOWN, especially on renovated properties that sit vacant.

In this case, the property was fully and nicely renovated. Good staging, good condition, well-done rehab. The borrower tried hard to sell it.

But once they stopped actively managing the property, things started to deteriorate. Wear and tear. Deferred maintenance.

And you lose that fresh-renovation premium over time.

Think about what that means on a fix-and-flip loan. You approve the deal based on an ARV of $400,000. The borrower finishes the rehab.

The property looks great. But it sits on market because they’re overpriced or because market conditions shift. Six months go by.

A year.

The property that was worth $400,000 newly renovated might be worth $370,000 now. Maybe $350,000.

And that gap comes directly out of your collateral cushion.

The Tenant Risk Is Even Worse

One variation of this that I want to specifically call out: borrowers who throw a tenant into a property they can’t sell. I get why they do it. They need cash flow to cover the loan payments.

But the moment a tenant goes in, your ARV evaporates. You’re no longer collateralized against a renovated flip. You’re collateralized against a tenant-occupied property, and those trade at a significant discount.

Tenant-occupied properties often sell at a significant discount to vacant renovated homes, and that gap comes directly out of your collateral position. Foreclosure activity rose in the first half of 2025, which means more lenders are dealing with exactly this dynamic right now.

If you have a borrower who has a stale project and you suspect they might be considering putting a tenant in, get ahead of it. That conversation needs to happen early. Because once they’re in, the dynamic of your collateral position changes completely.

What I Take Away From This Deal

The reason I keep coming back to the 4 C’s in every coaching call and mastermind session is because deals like this one demonstrate exactly why all four matter. Collateral was fine here. Character and capacity were what caused the problem.

The borrower had enough equity to get out. But they had overleveraged their broader portfolio with a blanket loan, they didn’t have the capacity to service everything, and when things got hard they went quiet instead of problem-solving.

A 707 credit score and a history of real estate experience didn’t prevent any of this. And that’s the REAL lesson. If you are building or scaling a lending operation, here is what this deal should teach you:

Price your loans so you can absorb foreclosure costs. Nearly $30,000 in expenses just to take back a property that didn’t even put up a fight. If your margin is thin, that wipes you out.
Run thorough title searches at origination and monitor for subordinate liens. You can’t always prevent a borrower from recording a second, but you can know your deal environment and structure your covenants accordingly.
Vacant renovated properties lose value fast. If a borrower’s project goes stale, get eyes on it. The ARV you underwrote against may not be the ARV that protects you 18 months later.
Know your state’s foreclosure timeline before you lend there. PA was manageable. Some states would have made this a 3-year nightmare. Foreclosure timelines vary dramatically by state and those timelines directly affect how much your collateral deteriorates before you can exit.
Selling as-is is almost always the right call. The temptation to put money into the property and squeeze a higher price is real. But you’re not a house flipper. You’re a lender. Get the capital back and move on.

If you want to go deeper on how to protect yourself from situations like this before they happen, the article on how to not lose money in private lending walks through the underwriting principles that matter most. And for anyone wondering what proper loan documentation looks like for covering these scenarios, check out the piece on must-have loan docs. If you want to avoid the most common patterns behind deals like this one, the breakdown of hard money mistakes is also worth a read.

The private lending business is good. I believe that strongly after 18 years of doing this. But it requires real discipline.

And deals like this one are a useful reminder of what that discipline is actually protecting you from.

The video above goes deeper on the multiple ways you can exit a sideways deal, from workout options to foreclosure to deed-in-lieu. Worth watching if this case study raised questions about your own default protocols.

Frequently Asked Questions

How much does foreclosure actually cost a private lender?

In this case, a relatively straightforward foreclosure in Pennsylvania cost nearly $30,000 in hard expenses. That included roughly $15,000 in legal fees, $12,000 in sheriff sale fees and transfer taxes, and around $2,000 in forced-place insurance premiums. That’s before accounting for over $52,000 in accrued interest during the default period.

Contested foreclosures with bankruptcy filings can run significantly higher.

Can a borrower put a second lien on a property after you’ve already funded?

Yes. A borrower can record a subordinate lien on a property even after you’ve funded in first position. Depending on your loan documents, doing so without your permission may put them in technical default.

But they can still record it. That’s why title monitoring and strong loan covenants matter. This deal is a direct example of what happens when a blanket loan gets recorded behind a first-position lender without the lender knowing until foreclosure.

Does good collateral protect you from a foreclosure loss?

Not completely. In this case, the collateral was genuinely good at origination. The loan was under 60% LTV.

But a hidden subordinate lien, a borrower who went dark, and a property that lost some of its renovated premium over time all compressed the eventual recovery. Good collateral creates a margin of safety, but it is not a substitute for evaluating character and capacity as well.

How long does foreclosure take in Pennsylvania?

Pennsylvania is not among the slowest states, but it is not the fastest either. In a relatively clean scenario with no bankruptcy filings or major contested actions, you can complete the process in under a year.

This deal took just under 2 years from origination to final sale, which included the time the loan was performing before default was declared. ATTOM data shows the national average for foreclosure timelines in 2025 was 592 days.

Why does a renovated property lose value while sitting vacant?

Renovated properties carry a premium that reflects fresh finishes, new systems, and move-in-ready condition. That premium erodes as time passes. Deferred maintenance accumulates.

The property may lose staging, appliances, or minor components. And the market simply discounts a renovation that is 18 months old versus one that was just completed. If a borrower walks away from a project, the ARV you underwrote against may be materially lower by the time you take the property back.

Disclaimer: The opinions shared in this article and on the Private Lenders Podcast are solely those of the speakers and are not legal, financial, or accounting advice. Always consult with your own legal, financial, and accounting professionals before making lending or investment decisions.

Why Good Collateral Isn’t Enough: A Foreclosure Story

We actually had to foreclose on this house

Key Takeaways

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