Unrecorded deed of trust as collateral for private money loan

[Michael W. McCord]

Hi, I have a proposed deal with a builder that wants to use my private money loan to purchase 5 adjacent townhome lots in Sanger TX in order to secure a construction loan which will have the first lien. He says that we will go to title company and have them issue a deed of trust to me and not record it as it would impair the builder getting the construction loan. So if the deal goes south, I can just go to title company and record the deed. I understand I may need to consult an attorney for my specific case but before I go too far deep into this I wanted to find out from the BP community if this is a viable strategy or something that should generally be avoided.

Thanks!

[Doug Smith]

My answer would be a polite "oh, Hell no!" There is no such thing as a first or second mortgage/deed of trust...it's simply the order in which the deeds are recorded. In the time that you're sitting on that DOT, many others can pile in and file in front of you. After 32 years of cleaning up messes with title through my lending practice, there is no way I would allow them to do that. That being said, it's your money. I wish you well in your endeavor and perhaps we'll work together some day.

[Jay Hinrichs]

second position on a construction loan is by far the most risky thing you can do in the lending world.

Also as stated above.. if you found yourself needing to record it.. means the deal went TU and most likely there will be liens filed ahead of you and you might find yourself in 10th place not second place..  To reiterate mortgages are 1st 2nd 3rd 4th simply by the order they are recorded.

Now if this is someone you know real well and trust.. then maybe a general partnership would be a better thing to do for you.. 

[Wayne Brooks]

@Michael W. McCord Yeah, no way, no how.  As others have said, you may not even be in second position at that point.  If you Are willing to take a second position….then go ahead and record Now….you can always subordinate your mtg to a lender/construction loan at any time.  This would also help you control how Much of a construction loan you would be junior to and at what terms….more control.

[Chris Seveney]

@Michael W. McCord

I concur with the others responses

What I would add is the only way I would consider this is to say “that’s fine but the interest rate on unsecured is like a credit card so it’s 25% and 5 points to originate the loan

we also will sign a personal guarantee and a loan agreement with a confession of judgment and default penalty of $25,000

Oh also I need a personal financial statement from you showing your net worth which must be 3x the loan amount.

[Jeff S.]

The construction lender doesn’t want any lenders behind them, and your borrower wants to get around this with your money using a silent second. Correct? That is, he wants you to hide your loan until/unless something goes wrong. Then you would appear to everyone’s surprise? Why in the world would you do business with anyone willing to play this game, @Michael W. McCord?

Here are a few additional thoughts:

1) If this borrower is willing to ask you for a silent second, how do you know he also hasn’t asked several others telling them they would be in second position?

2) You’re Ok lending money without the protection of title insurance?

3) Will the Sanger, TX county record (or whatever it’s called in TX), or your title company, allow you to record a mortgage signed many months or years in advance without re-notarizing? What’s the chance of your borrower agreeing to that if the loan goes bad? Answer: zero.

4) Of course, you’ll be getting a complete set of loan documents from a lending attorney, including a note, mortgage, 1003, all disclosures, lender instructions, and a personal guarantee cheerfully signed by your borrower. Yes?

5) If you had to foreclose from 2nd position or lower, could you bring the senior lender(s) current and save your investment?

In reality, forget all of this, Michael. You don’t want to do business with any borrower willing to play these games.

Borrowers are always on their best behavior when they want money from you. If this is as good as this guy gets up-front, I can guarantee you’re in for an exciting lesson-learning and probably very costly ride.

Certainly, there are some boring, 1st position, story-free deals, you could lend on?

[Michael W. McCord]

Thanks all for the honest feedback. I had my doubts which is why I posted on this forum before going in too deep down this path. I agree the risk is too great and I don't know the borrower all that well so definitely will take a pass on this.

[Caroline Gerardo]

Nope no never