Default rate/issues on private money loans for flips

[Scott L.]

Hello, I'm just delving into acting as a private money lender for single family house rehabbers. Common terms I've been offered by the developers/borrowers range from 8-10% interest, for me to invest 85-100% of acquisition+fix costs. I receive first lien plus a personal guarantee. The borrowers are small but have experience with a dozen previous properties and have personal assets in the high hundreds of thousands to low millions, I'm guessing.

My questions:

- What are typical default rates on loans like this? 1%? 5%?

- Should there be a default how 'ugly' in effort and cost can this become legally to get paid or take over the property?

- Is there a way people look at these loans compared to other fixed income streams with greater security? I.e. a CD gets 0.65%, and a secured 'flip' loan gets 8%, does this imply a 7-something % default premium?

Thanks for thoughts on this - there are so many 8-10% single family loan possibilities they seem relatively safe, but there has to be more too it.

Regards,

Scott

[Dave Savage]

I don't think anyone can answer your questions as they are posed. I think you should look at it a different way:

Is the property you are lending on, one you would be willing to take back in case the borrower did not perform? Is there enough equity in the deal so you could break even if you had to bring contractors in after they half finished the job?

Does the borrower have proven experience?Can you walk one of their most recent rehabs to see if their quality meets or exceeds the quality expectations of that neighborhood?

Don't assume what their personal assets are, you could ask to verify or just ensure that the loan works from an equity standpoint.

Network network network to find references for any borrowers.

Also in many times in a private lending scenario you are in the driver's seat from an interest rate perspective as they need your money. You should be getting 10-12% especially for your first few deals with a new borrower. Remember hard money is going to be 12-18% with points most likely so you are a more attractive option to the borrower.

Good Luck