I was spitballing with a homebuyer with a particular itch, and we came up with an interesting proposed HML structure. I'll describe the scenario, the itch, and how we could in theory scratch it.

SCENARIO:

BRRRRrrrrrrrr person.
Proposed deal meets your LTV requirements.
Borrower has the ability to do the full rehab, all cash, no financing of rehab costs needed. They have cash on hand for the down payment and rehab costs.
Let's say that the rehab cost is $60k.
ARV gain will be huge.
Borrower wants their capital back ASAP, as they always do.

PROBLEM:

As a soft money lender, we have to wait 6 months before we can do a cash out refinance based on ARV, unless the scenario fits into the delayed financing exception (which it wouldn't if they got a HML to buy it). They don't want to wait six months to get most/all of that $60k back, they want to re-deploy the capital sooner.

SOLUTION:

You as a hard money lender, do not like taking on more risk than you're comfy with. You like "I can't lose" type scenarios, if you can find them. Let's suppose the borrower was willing to put that $60k into some escrow or neutral 3rd party account somewhere instead of using it for rehab, and is willing to sign an agreement stating that if they ever default on any mortgages that you gave them, you get to keep that $60k, and as soon as they have paid back any/all mortgages to you, they get their $60k back. If you had $60k thus secured, would you be willing to do your hard money loan at your normal LTV plus $60k? (Shell game: They are depositing $60k somewhere, meaning they can't use that $60k, but you're about to lend them $60k "extra" that they can use)

WHY THIS WOULD WORK:

Cash out refinances have the six month wait, and not everything will fit into the delayed financing exception. Rate/term refinances don't have a wait. You're going to lend this person $60k more than you normally would, secured by that $60k pledged. That $60k pledged as security is NOT a second mortgage on the subject property, it's blanket security for any mortgage they might have with you. Here's $60k. Please give it back to me once I've paid back all money that you have lent me, and lend me $60k more than you normally would because you have that security. Then they can go rate and term refinance the LTV+$60k first mortgage with no wait. And then they get their $60k deposit back from you. Look who just got back the bulk of their capital, with no six month wait, and without the HML having to take on any additional risk.

So, TLDR to HML lenders: Would you lend someone $60k more than you normally would, if they deposited $60k somewhere and you get to keep if they default?

If any lawyers want to chime in with if this would even be legal or not, that would be helpful too, because I sure as hell have no clue in the world if this type of thing is legal or not.

Chris Mason

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Question for HMLs from a "soft" money lender.

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