We're lending a house flipper $20k at 15% for 60 days...thoughts?

Question

Hello! This is my first post on BP but I've been reading articles for a while now.

We are new to the REI world but my husband's brother owns a small rental property and has a team of brokers and a lawyer who he works with. Through his connections, he was introduced to a professional realtor by trade who specializes in short term house flips. Her usual lender was tapped out and she needed a small loan. We agreed to lend her $20,000 to be paid back after 60 days at 15% interest. She is putting a property she owns free and clear as collateral. The lawyer reviewed the paperwork and has blessed it.

As our first foray into real estate, this deal seems too good to be true. The only thing we have to do is transfer money to someone and 2 months later we will get it back, plus 15% interest, and if she doesn't pay, we get to put a lien on a house worth $75k. As a healthy skeptic, when something seems too good to be true, I assume it probably is.

So, question to the more experienced among you, and any other private lenders out there: What are the hazards of this approach? Any things we should be paying attention to that might have been overlooked? Does this sound like a "good deal"? Are there any red flags we should look for?

My husband doesn't know I am posting about this, and he trusts his brother, but I believe it's always a good idea to seek outside advice and I've found this community to be supportive and knowledgeable. Any feedback you can offer is much appreciated!!

Thank you!

Wayne Brooks · Answer

As @Tim Lindstrom pointed out, 15% sounds great, but for 2 months, it's only $500.  2 months is not enough time though to rehab, market, sell and close though.

A HML will, and you should, require lender's title insurance on the mortgaged property (you'll have a "lien" on it from day 1), and the borrower pays for the mortgage drafting and recording.

Also, a lien search on the Borrower.  If they have any outstanding judgments, Those will be liens, Ahead of your mortgage on any property in that name.  I'd check the borrower, individually along with any associated LLc's, corp.s, etc.  at Sunbiz.org, and PB county Clerk of Courts search.  A bit of work though for a $500 return, but you need to protect your money.

If you want any quick local research, PM me.

Stephanie Castro · Answer

Thanks everyone for the replies! It's amazing to get the different perspectives from others with experience. I really appreciate you sharing your time and input.

The contract spells out that the amount to be repaid is $23,000, so there will be no doubts about how to calculate the interest. There are provisions that this amount must be repaid within 60 days (doesn't matter whether she actually sells the property or not, that is not a condition of repayment in the agreement). And there are also provisions for what to do if she requires an extension (additional interest applies, details are spelled out in contract).

@jeff s Thanks for the info regarding the business purposes only - I added something to that effect to the agreement and will have the lawyer review. We will also look into what you mentioned about initiating the lien immediately, perhaps my brother in law knows about doing that, but it was news to me, so thanks!

We did a title search and lien search on the collateral property and it looked good. I actually learned the value of the house that's being used as collateral is closer to $125k (judging from purchase price and comps). It is mentioned in the documentation by address, and the clauses to do with transfer of title in the event of default were signed off on by the attorney.

I'm just nervous because this is our first deal like this, but the replies here, in addition to legal advice we obtained, have really helped put my mind at ease. Thanks so much, all! If this works out well, I would definitely do more deals like this.

Jeff S. · Answer

I'll echo the other's comments, @Stephanie Castro.  Are you getting 15% of $20000 in two months (.15 x $20000 = $3000), or is the 15% annualized ($20000 x (.15/360 days per year) x 60 days) = $500?

What will happen if this flip takes longer than 60 days (as all do).  How will the additional interest then be calculated?  On a daily basis? Is your paperwork clear on this?  So you don't get impatient when it happens, six months is a much more realistic term to rehab and sell a home.  If it takes less, then great.

"… and if she doesn't pay, we get to put a lien on a house worth $75k"

Which house?  You are not loaning against the flip but against some other house. Don't wait. You should record a mortgage (i.e. a lien) against that house when your loan closes.  By the way, how do you know it's worth $75k? I'm not suggesting an appraisal on a $20k loan, but at least have her show you and your husband some recent sales comps.

Listen to @Wayne Brooks and make sure there is a title search to confirm she really does own the secured property and that it's free and clear.  Have her buy a lenders title policy for you at closing.

Make sure she has fire and hazard insurance on the property, naming you as the lender. If this other house is also a flip (??), make sure her policy also includes a vacant dwelling and builders risk rider.

Or, is the house she's putting up her personal residence?  Is the loan to her or to an entity?  No matter what, make sure you get a handwritten statement from her explaining the use of the money.  That is, she intends to use the money to rehab and flip 123 Main Street, Boca Raton, FL for a profit.  This makes it a business purpose loan and avoids Dodd-Frank and the Safe Act (check with your attorney to confirm there aren't any nuances in FL law).  You'll be in a world of hurt if she uses any part of the money for a vacation, defaults, and then claims you secured her home for a non-compliant personal loan.

Nothing you're doing is too good to be true, Stephanie, and 15% is realistic return on a flip loan. Pretty standard stuff.  I just hope everything you've read from everyone here duplicates the advice you received from your lawyer, who is experienced in lending.  Yes? You're wise to protect yourself and your husband.  Good luck.

Ryan Dossey · Answer

That's a pretty quick turn around. Secured by another property and approved by the powers at be. Sounds like a safe deal to me.

DL Martin · Answer

Stephanie;

Trust but Verify.

You are 100% correct in using Bigger Pockets as an unofficial vetting mechanism.  You have very likely stumbled upon an investment avenue that may not only be profitable to you and your husband, but obviously scratches a "real estate itch" that has been bugging you. Otherwise you would have never even found this forum.

As stated above, it's seldom a bad idea to have a legal opinion (real estate lawyer) even if it just involves having a lawyer give his/her stamp of approval to a contract that you and your husband have created.

This serves a couple of purposes. It not only helps to safeguard this deal, but it helps lay a foundation for future lending deals should this one prove to be profitable.

Good Luck!

DL

p.s.  Introduce your husband to this forum so that he can help you wade through the feedback that you get from this post! Two heads are better than one!

Wayne Brooks · Answer

@Stephanie Castro

"clauses to do with the transfer of title in the event of a default..".  Huh?  An "attorney" might have signed off on "that", but it is likely BS.  The only way to enforce a mortgage is to go thru the foreclosure process.  Any 'agreement" that seems to short cut that, is generally unenforceable. Your mortgage needs to be recorded, the day you fund the loan, with an updated title search.  Sounds solid otherwise though, except someone willing to pay 90% interest with that much equity....would make me look under every rock.

Crystal Smith · Answer

15% interest in 2 months.  That's 90% on an annualized basis.  Pretty good.  An idea to protect your interest:  Depending on what the monies will be used for;  (example:  $ for the renovation);  you can escrow the funds w/ a 3rd party (Title company, lawyer) that would only release funds after work is completed & inspected.  You may release some up front for borrower to get started but the remainder goes to a 3rd party.  The borrower knows that the funds are available but you maintain some control to ensure the $ go where you expected them to go.  Establishing an escrow will increase the cost of the money but ....

Ryan Dossey · Answer

This sounds to me more like they ran into some costs that were unanticipated vs a traditional "rehab" so I don't see the turn around being a problem. Sounds like you got a good deal to me. Not to mention you may have someone who wants more loans in the future. If you can get that return several more times a year that adds up fast.

Bob B. · Answer

Is there a 3 day "right of rescission" when placing a lien on a personal residence when the loan is for business reasons?

Tim Lindstrom · Answer

I have never loaned money before, so please take my comments in that context.  Sounds like you would be a hard money lender.

Is she paying any points up front, or just the 15% interest?  I assume the interest is the annual return ($3000), so it would be $500 for 2 months carry.

That seems like a lot of risk on my $20,000 for $500.

We're lending a house flipper $20k at 15% for 60 days...thoughts?

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