Hard Money Lending on a Subject 2 Property

[Rob Nichols]

Hello everyone!

Bottom Line Up Front: How can a hard money loan be secured on a subject 2 property?

Background:

A local wholesaler is purchasing a duplex that he intends to keep as a rental. He's negotiated a purchase price of $125K for the property and it has an ARV of about $190K. He has also negotiated with the owner to sell it via subject 2. He has approached me about a hard money loan for the closing costs and minor rehab work that will cost between $15-$20K. Since he wants to keep it as a buy-and-hold rental, he plans on refinancing inside of a year to pay off the original owner as well as my loan.

Given the local rental rates, it should cash flow well and I understand his strategy, however, I'm concerned about how to collateralize my loan to him.  I know it's standard for hard money lenders to take out a lien on the property or get a deed of trust, but since this is a subject 2 deal, the bank will be in first position should things go south and the buyer fails to make payment (and the original seller fails to make payment as well).   Am I correct that getting a lien on the property to secure my hard money loan is of little value since I'd be in a position behind the bank?   If so, how do I mitigate my risk with the loan? Is there a way to secure it with the property as collateral given it's a subject 2?   

I intend to consult a real estate attorney next week but thought I'd throw the question out to the community before hand to see what you all thought.

Thanks in advance for the advice!

Rob