When lending ~15k to rehabber short-term, what to look out for?

Question

I have been (briefly) pitched by a rehabber who needs $$ to rehab multi-units, occupy and resell 18-24 months later. Promises 8% and percent of profit upon closing. Claims it'll be secured by 1st lien (I have to mention that these are lower but not lowest end properties).
Since it will (if I decide to pursue after doing DD) my first lending venture, what should I look for? 
Thank you in advance!!

PS I have a traditional Roth, and currently decide between the custodians and facilitators for SD IRA.

Ann Bellamy · Answer

If you are going to lend money, a few things to watch for are:

1.  Make sure you are really in 1st position.  Second position mortgages get wiped out regularly. Make sure to tell your attorney running title that you expect to be in 1st position.   
 
2.  8% is very low, although not uncommon for private funds.  A percent of profit is great, but who is monitoring the disbursements, which ultimately determine the profit? Not to cast aspersions, but I've known of a few rehabbers who pad their expenses when they are dealing with a profit split.  Make sure there is a mechanism in place for monitoring all financial activity.

3.  The biggest issue is the SAFE act.  If you are lending money to someone who is going to live in the property, that is a residential loan.  The SAFE act requires all residential lenders be licensed, and I can almost guarantee you won't want to jump through those hoops for a small $15,000 loan.  You can hire a mortgage broker to handle the residential paperwork, but that doesn't preclude the lender licensing.  Check with a savvy RE attorney familiar with private lending issues in your state.

4.  Repeat - get a good real estate attorney familiar with private lending in your state.  Can't stress that enough.  Don't try to lend without one.

Mike G. · Answer

A few thoughts:
- Do not give your money to the investor; send it directly to escrow.
- Make sure the investor knows what he's doing.  Visit one or two previously rehabbed places, or better yet, current rehabs where you can see work in progress.  If possible, speak with a couple of his contractors to make sure they were paid.
- If the investor does not have a lot of experience, double check the estimated cost for the renovations.
- Double check the After Repair Value (ARV) of the property yourself and compare it to the number the investor presents to you.  If something happens and you end up having to foreclose on the property, this ARV is what you will be trying to sell the property for once you complete renovations.
- In your contract with the investor, make sure there is a statement that indicates the money is only to be used for the purchase and renovation of the specified properties.
- Make sure the Note has a date by which the money plus interest must be paid back.

Colleen Bigler · Answer

A loan am't of $15,000 falls into Article 7 of real estate law. That is, if a first. Those loans has a whole set of ugly rules. As a hard money lender and investor of trust deeds personally, I would always use a broker who is not subject
to usury laws and who's experience will keep you out of trouble.

Colleen

J Scott · Answer

Real estate laws are going to be state specific, so I imagine "Article 7 of real estate law" refers to statutes in a specific state.

It appears you're in CA, while George is in MD, so it's probably fair to say that whatever Article 7 is doesn't apply to George.

Just a guess, though...  :D

Chris Colvard · Answer

I totally agree with Jeff!

Why such a small 1st position loan on a MF?

Jeff S. · Answer

Something smells here, George.

Interesting that a rehabber would be able to purchase a multi-unit building with all cash and not have $15k to complete the job.  I assume all cash since he claims you’ll be in first position.  He could spend $15k in an afternoon, so clearly he’s getting other money for this 18-24 month project.  Where else is it coming from?  Don’t they want to be in first position too?  Will your money be pooled in a first position note?  Please don’t answer yes.

Jeff

Bryan Scott · Answer

George,

#1 - Have you seen the property?
#2 - If answer to #1 is no, make it yes, by going to property to verify all assumptions.  If you cannot do this, have someone you trust do it for you.
#3 - Verify/confirm rehab estimates/costs and actually meet the GC who the buyer intends to do the work?  Are they real, licensed, qualified, to do the rehab?
#4 - If an investor/buyer/borrower wants me to fund their project, they can expect me to be VERY involved in what they are doing with MY MONEY!  Once I confirm the numbers and validate the deal, trust me, I will ONLY release rehab funds at certain, pre-defined stages, which normally track the permit process; carpentry/framing, concrete, electrical, plumbing, drywall, finish, final CO, etc.
#5 - Oh, let's not forget..., What experience level does the borrower have?  Are they doing the GC work themselves, or are they going to hire a real GC, and, have you met the GC as well?

In summary, there are lots of snakes and alligators ready, willing and able to deprive you of your hard-earned private or hard money capital.  Deal with the above, make sure the contractor is licensed and insured, make sure you are named as additionally insured on the hazard insurance, which is most definitely reflective of the fact that the project is a construction work in progress, be a member of an LLC who owns the property with an operating agreement, etc..  By all means, use of an attorney who understands real estate and these types of deals is a minimum requirement.  Best of luck to you and the project!

Douglas Wolf · Answer

Hi George, give me a shout out in private and i will help you if i can.. Thanks Doug

When lending ~15k to rehabber short-term, what to look out for?

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