1st Private money / Hard Money lending deal...advice for newbie?

Question

Hey BP,

I have an opportunity to lend on a fix/flip with healthy interest rate / points, already verified property in good neighborhood and comps support claimed ARV.  Without going into too much detail, what advice would you give a newbie private lender to protect their capital as best as possible?

Also where would you source the lending contract / paperwork (of course to be reviewed by a real estate attorney as well)?

So far, my list of things I should do include these.  Thanks BP!

1) Verify Experience / Check references of investor

2) Verify Investor has substantial Skin in the Game

3) Verify Deal is actually a deal (has enough meat on the bone / upside potential)

4) Get 1st position (this specific deal 2nd position is best buyer can offer...bank will be in 1st position)

5) Verify Scope of work makes sense and bids/costs are realistic

6) Check contractor(s) track record / references.

7) Release cash in draw form upon completion of various rehab scope milestones.

What am I missing (and what above is inaccurate)?

Thanks again!

Jay Hinrichs · Answer

@Justin Hennig  you may want to ask your self why the bank wants to be in first.. why universally HML will only do first position loans.

2nd position loans are EXTREMLY risky unless your very experienced all the other things that you should do are pretty vanilla and folks have covered those.

But bottom line.. do you have the money to pay off the first in full when the deal goes sour?

if the answer is no then you should not do this deal.. Some first lenders MAY allow you leeway as a second in possession but many will not even talk to you since your not the borrower.

There is a big push with folks these days to try to find gap funding IE come in with little or no money down by getting a first and then a second.

If your going to come in with the gap.. and this person could not do the deal without you.. then your in essence an equity partner in my mind and should be making a pref return on capital and up to 50% of the profit.   that is standard in the industry for those that know the risk involved and know how deals are put together these days.

to make a second position loan and think 12 ot 15% interst is some great return.. well I can tell you it is not...

Go back and renegotiate this deal... if it goes under the 15% you think your going to make goes Poof.

check to see if your a mortgage judicial foreclosure state as well.. I would NEVER under any circumstances as a lender go behind a mortgage in a Judicial state.

Jeff S. · Answer

"Without going into too much detail, what advice would you give a newbie private lender to protect their capital as best as possible?"

My first advice would be not to do second position loans.  These are no place for a beginner, @Justin Hennig.  In fact, many experience lenders will avoid these in favor of more secure 1st position loans.  At best, we won't loan on a second unless we are also in first position and can control the deal.  Somehow, I have a feeling your mind is made up on this one.

Are you even sure that the first position lender will allow a second?  Some will and some won't.  Have you obtained and read a copy of the 1st position lenders note and mortgage?

"Also where would you source the lending contract / paperwork (of course to be reviewed by a real estate attorney as well)?"

You get these from a lending attorney.  This not the same as a real estate attorney.  In fact, you probably want to spend some time with this attorney and have him or her explain the basic laws in your state and federally to maintain compliance, as well as to understand what you're getting into and what you must avoid.

A good lending attorney will be able to provide you with an entire loan package containing a note, mortgage, personal guarantee, all the various statements and disclosures, affidavits, and even your lender instructions.  He or she should also be able to explain both the liability and title insurance endorsements you'll require.

Alternately, you might consider getting your loan originated by a local hard money lender.  HML's are use to private loans as these, will have vetted paperwork, and should be able to recommend resources to you.  These would include a lending attorney, which you should still spend some time with, a loan servicer, if required, and a disbursement company that can check construction progress and pay your borrower as the rehab is completed.  State law can be very restrictive here.

Last, and most important by far, never loan far from home, look at every property you loan on, and spend some time with your borrower.  This is a business based on relationships.  Do you know this individual? The quality and character of a borrower, whether you like and trust him or her, is far more important than making the numbers work behind the deal.  That's the easy part.  You're really investing in your borrower's skill and integrity -- all the more so in fact, with a second.

Be careful, Justin, and good luck.

Rick Pozos · Answer

If you are in 2nd position, the buyer probably does NOT have skin in the game or very little. 2nd position is so much more risky when it comes to rehabs. I would only do this type of situation for a family member or very close trusted friend. Both YOU and the investor should have a great deal of knowledge of what can go wrong. Lending in 2nd position is NOT for the rookie lender or investor.

Even if the borrower has not filed bk, he can now and cause you lots of grief.

If you have to do this, make sure that you go to a title company and they give you title insurance, that the owner pays for. Make sure that the title company gives you a mortgage and a deed of trust AND it gets recorded. Do not close without title insurance.  Attorneys work for the title company so you know that your documents will be done professionally. I sure hope that you are making at least 15% because that is the kind of risk that you are taking on.

Boyd McClean · Answer

Has he or she had a BK?

Is the property in a flood zone?

What is your LTV requirements?

Length of loan

Are interest payments made monthly or accrued?

1st Private money / Hard Money lending deal...advice for newbie?

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