Private Money Loan, What Would You Do?

Question

Mary Ann Casey · Answer

Thank you so much for your input @Jeff S.  and @Jo-Ann Lapin!

Account Closed

As a result of all the input received on this post, I have decided not to pursue or counteroffer on this private money request.  I agree with everything each of you contributed.  THANK You!

Account Closed · Answer

Most experienced lenders will not go above 70% of ARV in first position.  You will be above 70% in second position, not a good place to be by lending industry standards (775/1050=74%).  Assuming your numbers are correct everything will probably work out just fine.  A couple things to consider:

1. Unless you are licensed 12% is Usurious, in CA.

2. If 1st defaults you will need to bring it current before foreclosing, if you can't your position is essentially unsecured.

3.  Personally, I would expect 50% of the profit to do what you are describing, the other two can split the other 50%.

Jeff S. · Answer

This is a rescue loan, @Mary Ann Casey,  and a spectacularly dangerous deal for you to invest in. Your post understandably focuses on the numbers, but there's more to it than that. Rescue loans rarely work out.

Because you wrote that this is to finish the flip, and not the purchase money, your friend appears to have been seriously undercapitalized from day one. Neither she, with all the experience you mentioned, nor the hard money lender knew this? If they did know, no HML could have/should have made this loan.

I'm not being facetious. If you really want to risk getting wiped out, and I would strongly suggest passing on this deal, the first thing I would do is call the 1st position lender. Did they know this could happen? How did they confirm the rehab budget with your friend in the first place? Are they comfortable with the situation? If not, what might cause them to foreclose (and wipe you out)? Most important, why won't they lend the remaining funds instead of you?

Some HML's will call a loan if there is a second recorded. Some don't care. Where does this lender stand? Have you read their note and deed-of-trust?

If you continue to insist, you really ought to have an experienced, licensed, HML originate this loan for you. Not just because you will need a broker of record to originate a real estate loan in CA with interest in excess of 10%, but they would be a second set of eyes on the deal and could ask more independent questions than anyone could here. (Not a solicitation. We don't do this.)

From only what you've written, I bet another lender would also suggest you pass.

Jo-Ann Lapin · Answer

Mary the arv is just far too high here. You may pm me and can perhaps give some additional ideas

Adam Schneider · Answer

@Mary Ann Casey If you are a real estate broker in CA, the usury % is different than if you are not a real estate broker....I agree with David C.'s feedback. I would not touch that loan unless the borrower provided cross-collateral where you'd have a first lien position.

Mary Ann Casey · Answer

GREAT INPUT,  Account Closed!  Thank you!

Mary Ann Casey · Answer

Thank you so much, @Adam Schneider!

Mary Ann Casey · Answer

Sorry! I'm not sure why the formatting was lost when I posted my question the first time (used a cell phone)...so here it is again:

I have an RE Investor friend who has 30 years successful experience in Fix & Flips. She needs some additional rehab funding to finish a project. Details are below. She's waiting on my response or counteroffer. If I do this, it will be my first private money lending experience.

*NOTE: This is a 2nd-position funding request that can only be changed to the 1st position if I can fully pay off the outstanding first loan in addition to providing the additional rehab funding needed, which I can't do.

So...What would you do, or counteroffer, on this scenario:

• $1,050,000 ARV

Broker indicates the property is worth $1,150,000 to $1,250,000,

but expects offers to be no lower than $1,050,000.

•    $540K Purchase 
• + $145K Fixes/Updates completed thus far
• = $685K Invested so far 
•  -  $  50K Loan paid off so far
• = $635K Current Loan Balance.  Loan is at 9%, LLC owned, 1st deed of trust

To finish the project:

• + $140K  Additional Rehab Funding Needed/Requested:

- She's asking for $60k to $140k - 1 year term, 12% - No pre-payment penalty

(if less than $140K, other sources of funding would be sought to reach $140K)

- 2nd on the loan*

- Interest only payments until sold, or balloon in 12 months, whichever comes first

•  = $775K  Total Loan

•  + $100K  My own high estimate of costs for broker fees, closing costs,

interest payments until sold (based on her input/estimates),

plus I'm adding some Contingency, if needed.

• = $875K  Total due at closing

After loan payoffs, whatever profits remain from the sale of the house will be split 50/50 with my RE friend and her partner who are the 2 members of the LLC on the first position of the loan.

Your Thoughts? Advise?

What would you do?