Private lending from my HELOC

[Adam Keffer]

Hi All,

I current have a HELOC opened for $130,000 against my home (owned free and clear). The current rate is 4.94% last I checked (variable rate).

I have a friend who has been flipping houses for a few years now and has a good track record of success in doing so. He has approached me in regards to lending to him for a current project (already in the works, I would be buying out another lender who needs to cash out prior to closing).

Proposed details are below:

Purchase Price: $92,250

Rehab Budget: $100,000

ARV: $275k- $325K

Loan Info: $70,000

Interest Rate: 15% APR

Term: 6 - 9 months

Monthly Payment: $875 (Payment due on day agreement is signed monthly)

6 Month interest: $5,250 (Committed interest amount, interest calculated on a per diem basis after 6 months)

Daily Interest Per Diem: $29 / per day after 6 months

My question is, is this a good idea? Are there things I should be taking into account that I am not?

Thanks,

Adam

[Jeff S.]

Sorry, @Adam Keffer, but it appears that neither you nor your potential borrower know the first thing about lending on a flip. You have no business doing a deal like this with money that could cost you your home.

This is a rescue loan. There is a reason that the lender you are funding-out wants to be paid back before the project is completed. There are always stories behind these types of loans and, in spite of what you will be told, they are never good. Plus, this is a completely unsecured loan.

You have absolutely no recourse to any of your friend's properties or even to him personally since, as you wrote, he holds his properties in an LLC. Why do you have reason to believe that he would all of a sudden sign a mortgage (that is, lien) against any any of his properties if he defaulted on your loan? Even if he did, what would your lien position be? Half of me says you are being taken advantage of, but I really suspect your friend just doesn't know what he's doing.

I could go on about late fees, default interest, usury, lien position (which doesn’t exist), title and hazard insurance requirements, legal disclosures, personal guarantees, tax payments, etc. Aside from all that, do you really think it’s a good idea to do business with a friend?

Do yourself a favor and pass. If you insist however, then find an experienced hard money lender in your area to originate this loan for you, through a closing attorney. Hard money lenders are used to lending on flips and will know how to properly evaluate this deal financially as well as your friend’s ability to repay. A closing attorney will not.

An experienced HML will have vetted paperwork that will adequately protect you. They will also explain your (substantial) risks here and the lending process in general. Alternately, if this HELOC money is burning a hole in your pocket, they might have better loans you could invest in.

Watch yourself, Adam, and good luck.

Jeff S. – Private Lender in Los Angeles