Structure of a Loan Question

[Jason Merchey]

My question is in regard to a hard money lending outfit. The way deals are capitalized is this: an investor would fund 10% of a typical fix and flip - maybe a SFD, maybe a quad, something like that. So about $15k - $50k. 1/10th of the purchase price and the rehab budget, basically.

There is also an institutional investor, a hedge fund, which foots 90% of the purchase price and the rehab budget. So they do 90%, someone like me would do 10%. The hard money lender/originator in question would do the servicing for a cut.

Here is the crux of my question: The hedge fund lender is before me in the terms of the contract in case of a foreclosure. That is, I wouldn’t be a second lienholder per se, but I am secondary to the hedge fund money as far as being made whole. Thus, I wouldn’t have to go after anyone myself, and wouldn’t be asked to take 20 cents on the dollar and walk. Basically, the hedge fund and I would share the first position lien, but contractually, they would be made whole before me if something went south.

This for 9-10% annualized ROI depending on how experienced the rehabber is (i.e., whether they are driving a hard bargain or are in the standard class).

I am wondering if this is typical, or exotic. I am thinking 9-10% might be a bit low in return for basically a second position. I would be very diversified, though, in that I would be involved in like 10 separate deals for my $200k rather than one deal for my $200k. Would you consider this standard and diversified, and recommend it?