!st Private Lending Deal

[Michael Dallas]

Hey BP, I am buying a 9-unit multifamily property, and I am picking up the seller's loan. All I need to do is come with $95k as a down payment. I have been talking to a local guy I know who is an agent and has money to invest. He is interested in the deal but has been dragging his feet and finding it hard to get on the phone to talk to and communicate with. I feel like I am asking for pretty good terms that would benefit him, and if he wants different terms, let me know. Although he has not been very responsive, he still says he's interested. 

What I presented him with is a $95k loan at 10% interest only payments for 2 years, at which time I will either sell or refinance and pay the whole $95k back. Would be around $792 payments per month in just interest. Is this a good deal for him? I am at the point of saying I need a solid answer now and just looking for someone else to finance the deal. I am supposed to close on the property next Friday, so time is of the essence. Thank you everyone that helps!

[Bill B.]

The only lender that would take that deal is a lender that wants you to fail so they can take the deal from you. You’re giving them negative collateral. 

Imagine this is a $500k building. Seller has $405k tied up in the deal, 2nd lender has $95k tied up and you have $0. A year goes by. The 2nd lender has collected $9,600 in interest but still has all the money tied up. Suddenly you need a E30k roof, or $40k in AC units, or some other amount of money you don’t have. 

You walk away slightly ahead with the rents collected, 2nd lender loses at least $50k of his $95k in selling costs, and other expenses. (Unless they wanted the building and has the $405k laying around to pay off the seller.)

Imagine your best case scenario. Everything does great and in two years the building has appreciated to $520k, up 4%. Now you’re going to get a loan for 75% of that.  That’s $390k. You still need to come up with $10k for seller and $95k for 2nd lender out of pocket. Same situation you find yourself in today, only slightly worse. Assuming you got that loan with no origination, underwriting, appraisal or other fees/costs. 

This is basically an unsecured personal loan, like a credit card. Unless I wanted you to fail so I could get the building, and I had the $500k liquid to lend to you and then pay off seller when you fail. I wouldn’t do it for 18%. 

Ps. Are you going to feel bad every time you see this guy if you lose him $50k in the next two years or just ghost him and move on? Because if he makes this loan with no desire to buy the building he doesn’t deserve to lose his money but he should expect to.