First Deal as Lender - Low CLTV but 2nd Position?

[Andy Kurtz]

At a recent BP MeetUp, I met an investor looking for private funds for a fix and flip. Here are the particulars: ARV: $600k conservatively Acquisition Cost: $300k (probate deal) Rehab Cost: $150k. Will take approx 6 months. The house won't be ready until the dead of winter (always a concern in Boston), but the property is located in a white hot market. The rehabber also sent me their portfolio of prior deals; they have done 20 deals since 2015, though this project is the first at this price range. They have a HML for the $300k acquisition cost, and they are looking for funds to finance the rehab. I explained that I'm not comfortable lending the full amount, but if they had 10% skin in the game I'd consider it. @Jay Hinrichs mentioned in his recent podcast to avoid going into second position at all costs. Being my first deal as a private lender, I have obvious concerns about being in 2nd position, but the CLTV is so low, I'm strongly considering this opportunity. What questions should I be asking myself to further evaluate this? Should being in a junior position simply be a deal breaker for me? Thanks for any and all input

[Jay Hinrichs]

second position lending for big rehab and construction is to be avoided by all but the most experienced.

it could all work out fine .. but when it does not then you are in a world class mess and you just start asking yourself why did I do that.

what interest rate is he willing to pay.

you can get perfectly good first positions in the 10 to 12% range if that's all they are offering then its a HARD no in my mind.

what can happen

1. company gets over extended and now they can't pay you and the first forecloses and you need to come up with the money to pay the first off to protect your position.. do you have the 300k and most likely in the default scenario much more than 300k as there will be default interest and other charges

2. they don't pay subs like they are suppose to.. again huge risk.

rehab lending is quite risky even in first position.. unless you get below 75% ARV in first.

this loan you described does not have a lot of equity... take out holding costs and sales cost and the 150k in equity is cut in half..

if your going to do this your really an equity partner and deserve 30 to 50% of the profit not an interest rate.. and interest rate on this loan would be by someone who does not know any better.. but now you do.. !!!  good luck