Private Money Lending 2nd Position Advice Welcomed

[Bill Leonard]

Will try to be brief.  My stepson has done very well for himself over the past couple of decades, has set a very healthy amount of funds aside, formed a RE investment company, and structured it properly to access the funds.  He has invested in his RE education and has bought and sold his own residence only.  I am helping him form his team of investor friendly realtors, wholesalers, hard and private money lenders, contractors, attorney, and so on.

The following proposal has been presented to him from an associate with a solid track record of 9 successful hard money deals with private money gap funding in GA on single family properties in the past 12 months.  We are impressed with this person's success and knowledge, know him to be a stand up guy (he has contractor background too), and see a win-win for both parties with future deals and lead exchange downstream.

The funding scenario is . . .

80% Hard Money with 20% Private Lender Gap Financing

• 1st Position Loan Amount
  • 80% Hard Money for Purchase and Rehab
  • Financial Requirement - $144,000
  • Use of Funds - 80% Purchase and 100% Rehab
  • Lender to be Recorded as 1st Position Lien Holder
  • Lender Holds Back Construction Funds and Drawn Upon as Needed.
• 2nd Position Private Lender Loan Amount
  • 20% Private Money for Purchase and Carry Costs
  • Financial Requirement - $35,000
  • Use of Funds - 20% Purchase, Closing and Carry Costs for 1st Position Loan
  • Terms
  • Lender to be recorded as 2nd position lien holder on title filing
  • 12-month balloon note with no prepayment penalty
  • 2 points and 10% annualized interest
  • Principal, Points and Interest to be repaid at retail sale of the property

My stepson is well aware his 2nd position can be extinguished if things go south.  He does not want 1st position as a private lender at this point in time although he can handle the dollars.  That may change later.  He intends for his own private lending to be a smaller part of his overall RE investments.  Gap funding behind a reputable and solid hard money lender (he appreciates their criteria) has some appeal to him.  His gap funding is contingent on the hard money lender commitment.

Here's the question (sorry it took so long to get here).  How reasonable and equitable is what is being proposed above for a 2nd position private lender?  I have my thoughts on terms and payment time frames, but I would like to hear from some experienced individuals in this area.  Any thoughts on docs that absolutely need to be signed as part of this transaction are welcomed as well.

Thanks in advance for your insights.