Suggestions re lending rehab funds as a 2nd mortgage.
Rental Property Investor · Arvada, CO · Member since 2017 · 17 posts · 14 votes
Suggestions re lending rehab funds as a 2nd mortgage.
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Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
7y“My concern is I would only have a second mortgage position.”
This shouldn't be your only concern, @Sheri Lowrance. You don’t loan money to a stranger you met on LinkedIn. This is not how you build relationships, protect yourself, or determine a borrower’s capability. Exactly how many homes have they “successfully” rehabbed in one whole year? Not many, I bet.
It’s just too easy to find more experienced rehabbers who need construction money. Why get involved with a relative beginner to learn on your dime? Start attending some of the local real estate clubs where you can meet experienced flippers face-to-face. Your profile indicates you’ve done some lending, but it’s not clear how much.
As you understand of course, second position loans are extremely risky. Do you know the background and experience of the first position lender? Have you spoken to them? Are they knowledgeable and practical, willing to accommodate the issues that frequently occur with flips, or are they quick to foreclose?
I’m sure you know that a foreclosure would likely wipe out your lien. Are you willing to accept that for a 10% return? Do you know the prevailing rates for second position construction loans in your area, especially to relative newcomers to flipping? Of course, if you received even 30% but got wiped out, would it matter? That is, better know to whom you are lending.
Who would properly originate this loan for you, provide you with legal advice, and a complete set of loan documents? (Don’t even suggest your borrower. Much too much of that on this board.)
You are not going to hand an $80k check to a borrower. How will you handle construction draws?
Last, and probably most importantly, if you want to be protected as a lender you must act like a lender. This all but eliminates any interaction with the borrower in terms of their day-to-day dealings. The last thing you need is for a borrower to come back and say they would have made money if it weren’t for the paint color you insisted on. The flipping & lending businesses have been great these last 10 years or so, but there are now clouds on the horizon. When loses start to mount, like in 2008, borrowers and their lawyers will become much more aggressive to protect themselves.
If you want to learn how to flip, you might instead partner with an experienced flipper in your area, if they will take you on. Instead of lending, offer to pay all the costs, purchase and rehab, in return for a 50/50 profit split and interaction with the decisions. Perhaps find the property yourself. That adds value and is at least half the battle when flipping. This will be much safer for you and seemingly better aligned with your goals, Sheri.
It’s interesting that almost every rehabber we know says they eventually want to become a lender. I know of no lenders who aspire to flipping homes.
Good luck, Sheri.
Jeff S. – Private Lender in Los Angeles
9 Replies
- Lender · Troy, MI · Member since 2019 · 432 posts · 147 votes7y
You could consider to check the renovation cost with another person for secondary confirmation.
Confirm the Market value; after renovation with recently sold comps within 0.5 mile radius.
Understand the costs involved for maintanence and costs incurred during the resale. Then see if the profit remaining is reasonable.
How about factoring for unexpected renovation and holding costs? Say 15%.
How about the resale price is 5% lower than expected?
If you have resonable risk vs. reward; then you make decision as a go or no go.
- 7yStephanie MedellinBusiness MemberMortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
@Sheri Lowrance Can you buy and fix up a property for 80k within a reasonable distance from your home? Or is it enough for a down payment and renovation funds?
You might get a better education trying a flip on your own, rather than handing over your 80k to someone else to use. Are they going to have you on site every day participating, working, shopping for materials, and explaining everything that they are doing?
If you invest the money in a property yourself, you have more control over it and you will really learn the process first hand.
Stephanie Medellin, Loan Factory58 Reviews - Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes7y
Did he say he was going to record the 2nd? RUN if he doesn't say that. I would tour his flips and ask to see his track record. Have him show you his previous projects and what were the spreads. Get a 3rd party to verify ARVs.
I personally wouldn't to it in this market. A lot of flippers, especially new ones, are starting to get caught since the market isn't there to save them anymore. This is especially true to the flippers that buy from those companies that spam craigslist.
We did our first flip with $35k. If you find a small one, you can certainly do it with $80k. I just sold my last one, or I'd let you come take a look at one.
- Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes7y
@Sheri Lowrance my first suggestion is RUN.
A few thoughts.
1) flipping for about 1 year = newbie. Perhaps they have completed a dozen projects. Have they been kicked in the teeth yet? If not, then I wouldn't consider them experienced. If they have, get with the lenders on that project and see how they were treated.
2) How much equity is in the project? Meaning do they have any of their own money in the deal? If they buy with 100% hard money and get a 2nd from you for the fix-up then you have NO protection if they get in trouble. Perhaps they own some other real estate with equity (even 2nd or 3rd position if there is adequate equity) that you could cross collateralize with them.
3) $80K is an expensive education. Why not offer to be a goofer and help the project manager for free? There are better ways to get close to a successful flipper then lending them $80K IMO.
4) You are mixing your education and lending which is something I would not do. Lend based on the deal. Get education from someone with more than 1 year experience. 2+ years experience (think mastery) would be a minimum for me and 5+ would be my ideal.
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes7y
“My concern is I would only have a second mortgage position.”
This shouldn't be your only concern, @Sheri Lowrance. You don’t loan money to a stranger you met on LinkedIn. This is not how you build relationships, protect yourself, or determine a borrower’s capability. Exactly how many homes have they “successfully” rehabbed in one whole year? Not many, I bet.
It’s just too easy to find more experienced rehabbers who need construction money. Why get involved with a relative beginner to learn on your dime? Start attending some of the local real estate clubs where you can meet experienced flippers face-to-face. Your profile indicates you’ve done some lending, but it’s not clear how much.
As you understand of course, second position loans are extremely risky. Do you know the background and experience of the first position lender? Have you spoken to them? Are they knowledgeable and practical, willing to accommodate the issues that frequently occur with flips, or are they quick to foreclose?
I’m sure you know that a foreclosure would likely wipe out your lien. Are you willing to accept that for a 10% return? Do you know the prevailing rates for second position construction loans in your area, especially to relative newcomers to flipping? Of course, if you received even 30% but got wiped out, would it matter? That is, better know to whom you are lending.
Who would properly originate this loan for you, provide you with legal advice, and a complete set of loan documents? (Don’t even suggest your borrower. Much too much of that on this board.)
You are not going to hand an $80k check to a borrower. How will you handle construction draws?
Last, and probably most importantly, if you want to be protected as a lender you must act like a lender. This all but eliminates any interaction with the borrower in terms of their day-to-day dealings. The last thing you need is for a borrower to come back and say they would have made money if it weren’t for the paint color you insisted on. The flipping & lending businesses have been great these last 10 years or so, but there are now clouds on the horizon. When loses start to mount, like in 2008, borrowers and their lawyers will become much more aggressive to protect themselves.
If you want to learn how to flip, you might instead partner with an experienced flipper in your area, if they will take you on. Instead of lending, offer to pay all the costs, purchase and rehab, in return for a 50/50 profit split and interaction with the decisions. Perhaps find the property yourself. That adds value and is at least half the battle when flipping. This will be much safer for you and seemingly better aligned with your goals, Sheri.
It’s interesting that almost every rehabber we know says they eventually want to become a lender. I know of no lenders who aspire to flipping homes.
Good luck, Sheri.
Jeff S. – Private Lender in Los Angeles
- Rental Property Investor · Arvada, CO · Member since 2017 · 17 posts · 14 votes7y
Wow! Excellent advice! Thank you very very much, everyone! I really appreciate it!
I decided to pass on this deal. I am going to a big REI group meeting this week and will schedule more one on one coffee meetings with successful flippers to find a good fit using this advice. I don't have a large enough cash reserve or line of credit to fund a typical flip in my area, Denver, which is very expensive. By the middle of April I will have $115K line of credit at a 3.99% rate for the next 2 years, and I have about another $160K line of credit at a variable rate now. So, that only leaves $275K total I could finance. Given that this is below the typical cost of homes in my area, what kind of profit split would you recommend if I funded, say 50% fo the total cost of the project? Or what about if it was 75%? Any other recommendations that haven't been mentioned already?
Thank you again!
- Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes7y
@Sheri Lowrance there are lots of options with $275k even in our market. Keep looking asking.
- Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes7y
I borrowed $200k on a 2 flips I last year. One sold for $350k and the other I kept as a rental. I refi'ed out the hard money into a conventional loan on the rental.
I'm giving 2 points and 8%APR lately to my HMLs. As an experienced flipper, it's cheaper for me to go that route over partnering(It always has been cheaper even with higher rates). I imagine anyone else experienced would say the same.
Don't ever lend in 2nd position. I've already started to see a few deals go bad, and guess who gets screwed? Have your own attorney draw up the docs. Make sure it includes a personal guarantee and have them fill out a financial statement. Make sure to verify!
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
as others mentioned.. highly risky.. and rate FAR to low.. the flipper is in essance getting hundred 100% financing and has no skin in the game.. one thing that could sway the deal though is some cross collateral. But generally speaking 2nd position should be making 20% or more.. and or equity.. and be done by folks who have the ability to cash out the first and take over the project.
should NOT be done by someone making a loan with the hopes to learn how to do this.. it could go fine.. but you could find yourself wiped out just as easy.
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