How to secure a $10k loan to someone in the middle of a remodel

Question

I have someone that is nearly done with a remodel/flip and needs $10k to shore up loose ends, etc. They'll repay me $13k in 90 days. I don't know this person too well. I plan to have them pay for prelim title to see what is owed on the home. I know there is a primary on it. How do I secure the money I lend using the real estate in question as collateral (assuming it's a good LTV)? Put a second on it? A lien? Do I have the promissory note with a second mortgage recorded against the property?

Definitely new to this sort of thing. I'm a buy and hold type of guy but this opportunity came along so I figured I'd ask the question.

Thanks in advance,

Casey

Definitely new to this sort of thing. I'm a buy and hold type of guy but this opportunity came along so I figured I'd ask the question.

Thanks in advance,

Casey

Charlie Fitzgerald · Answer

If they don't finish the project and sell it within 90 days, where do they have the funds coming from to repay you?  Being a Jr. lien behind their existing 1st is little if any security, unless you have the capacity to foreclose on your 2nd lien if you must, and then take out the 1st to acquire the property.  Add in the fact that you state you don't know them too well and in my personal world, there is no "opportunity"  here.  2nd lien position is 1st place loser when SHTF.

Franklin Romine · Answer

See if they have any other assets to use for collateral.  Business, autos...?

Frank

Casey Miles · Answer

All very good points. It would be expensive to recover my $10k. But what if I'm not recovering $10k? Lets say hypothetically he has a first position mortgage for $100k and the property in question is worth $1mm? At some point does this deal become worth the risk from an LTV stand point? Almost to where he/she doesn't perform to the original agreement?

This guy probably did make mistakes in his budget, etc. That's why he's willing to pay an effective 120% APR on the money because it is risky. My questions weren't to analyze the risk. Assuming he will default and there's a good LTV, how do I go about getting at least my initial investment back. It sounds like recording a mortgage on the house would be the best bet.

Douglas Snook · Answer

Find out how he is holding the property he is working on. If it is an LLC or otherwise not in his name, make sure the loan is also against him personally. Does he have a primary residence you can put a second on instead of the flip property?

Whatever you do, document everything!

Jeff Rabinowitz · Answer

If you decide to do this you will probably be better off securing your loan with a mortgage recorded against the house than using the equipment as collateral. The tools can disappear--it is harder to hide a house. Best would be to get a mortgage on the house, collateral agreement on the equipment, and a personal guarantee. The profit you are looking for is only $3K. Will that even cover the retainer for an attorney? It is worth finding out how much you might have to come out of pocket if this loan goes bad before risking this.

Travis Sperr · Answer

Lending in second position on a deal that is under rehab is as good as unsecured. Looking at this a little differently if I had your shoes on I have to ask what kind of flipper doesn't have access to 10k to wrap up a project? Either has no reserves or very poorly planned this project. Being that you don't know him that well - the potential of $3k in profit does not out weight the risk of injecting $10k into this deal.

Casey Miles · Answer

Thanks for the input Darren and Charlie. I know there would be significant expense in foreclosing and that my initial "profit" of $3k would surely be gone. That's why I would only do it if the LTV was good so If I end up with the property I'm still ok after buying it from the first lender and paying the associated fees accrued during the foreclosure process.

Ideally he has some equipment he can collateralize instead. I meet with him this afternoon, I just wanted to get some questions asked beforehand. I'll report back with the details after the meeting.

Thanks again,

Darren Eady · Answer

I don't lend in 2nd position for a myriad of reasons, but if you are going to risk it, you would need to pay off the 1st lien in full, with any late fees and attorney's fees, if the payment is behind.  You'd want a good valuation of the property, title report to check for any mechanic's liens from people who have worked on the home and you'll need the ability to purchase the entire first mortgage if required to foreclose.

Charlie Fitzgerald · Answer

Sure...but it will eat up it any profit you thought you were going to get when you made the original loan, AND will ultimately cost you money IF you are successful.

Casey Miles · Answer

So assuming the LTV is good. Could I foreclose on the property being in the second position? Obviously I know I'd have to handle the 1st lien somehow. Surely there's got to be a way to secure a loan like this assuming there is a good LTV?

How to secure a $10k loan to someone in the middle of a remodel

Most Popular Reply