Can more then one lender have first position

Question

Hey BP I am about to go under contract on my fourth deal and I am giving private money A shot. I was wondering if I could give more then one private lender first position on my property. I have A few people interested in lending to me but cant afford the full purchase price or rehab. If I was all into A property for $100,000 and had four private lenders give me $25,000. Could I give them all first position and they would own 25% of the property each if the deal where to go sideways? I just want to know what I can offer A private lender that cant afford the whole loan to make them feel safe in addition to A promissory note and making it A personal recourse loan.

Jeff S. · Answer

The answer is a qualified yes, because it’s state specific, @Daniel Vineis.

The first mortgage or deed of trust recorded on a property is in first position.  The next recorded mortgage or deed of trust is in second position, etc.  You cannot record two loans simultaneously, however, you can have several lenders on one loan if it’s fractionalized.

If legal in the state you obtain the loan, a fractionalized loan will allow several individuals to participate in one first position loan.  Here they and share ownership of the loan based pro-rata on the amount they contribute.

Fractionalized loans are legal in California, for example.  They must be originated by a licensed CA real estate broker.  Up to 10 individuals can have their name on one note and the associated deed of trust, along with their percent interest.  This would be recorded in first position, though any position is legal.   It shouldn’t shock you that in CA, there are many other rules and restrictions, including a net worth requirement.

There are brokers here who specialize in fractionalized loans.  These are a great way to diversify with smaller amounts of cash per loan.  They also have a security exemption in CA, which avoids issues with pooling money.

Why do you keep capitalizing the letter A, Daniel? Very annoying.

Don Harris · Answer

Yes, do it all the time. In my SDIRA it’s “undivided interest” . IRA 1 , 25% undivided interest, IRA 2 , 75%, undivided interest. Matter of fact , just took a property back and we were 80/20 %  It’s position owners of the debt and thus became 80/20% owners the property when it was deed back to us

Daniel Vineis · Answer

@Jeff S. Thank you very much this was really helpful. Would you happen to know if fractionalized loans are legal in North Carolina?

Kenneth Garrett · Answer

@Daniel Vineis

I have created an LLC where each member is assigned shares whereby in general there all In first position.  Have an attorney draw the document and the operating agreement.  I have not heard the term fractionalized Loans as @Jeff S. has described.   I would bet there are different terms for the same concept.  It is possible to develop a creative way to achieve multiple investors in a first lien position, but it’s creative.

Jeff S. · Answer

“They also have a security exemption in CA which avoids issues with pooling money.”

Probably bad form to quote myself from above, but there was a reason I wrote that.  You can form an LLC, sell memberships to investors, and loan the money in the name of the LLC (or similarly, buy the property in the name of the LLC).  This is not a fractionalized loan nor another name for the same concept.  It’s the syndicated mortgage pool model many hard money lenders (and equity funds) operate under, though usually through several LLC’s. Here, you are generally selling a security to your investors.  These have no security exemption.

To comply with the law, selling a security generally requires a registration with your state, or federally through the SEC.  Plus, many more documents and disclosures.  There are also many restrictions from whom you can accept money.

Can you find attorneys to create a multi-member LLC for you?  All day long.  Do most attorneys understand lending and security law or the nuances behind taking money from silent partners?  What do you think?

Some real estate investors like to distinguish themselves by labeling their advice as “creative.”  Sorry, but not all the “creative” advice given here is legal.

Be careful of the advice you get here, @Daniel Vineis.  Especially from me!! I don’t know whether fractionalized loans are legal in NC.  If you are going to encourage others to loan you money, which could be a life-changing amount to them, please have them speak to a lending attorney. Remember, they're the lender, not you.  Also, lending attorneys are not the same as a real estate attorney.  You should sit in on these conversations.

Bob Reinhard · Answer

@Daniel Vineis

There can be only 1

Don Harris · Answer

@Randy

@Randy Rodenhouse incorrect assumption. This is  note that  We originated, like many others.. unfortunately we had to take it back by deed in lieu

Randy Rodenhouse · Answer

@Don Harris  You are referring to undivided interest in an established note you are buying.  They are referring to originating a note with multiple lenders as a fractionalized note.  There are many rules around such transactions.

Jonathan R McLaughlin · Answer

I learned something new today, thanks @Jeff S. as I hadn't heard of fractionalized loans. Be careful though, if you are describing this to 4 different investors as four different first position loans thats a no-no. Watch "The Producers" for what happens when you do that....

Daniel Vineis · Answer

@Mike Malloy Thank you that makes a lot of sense.

Can more then one lender have first position

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