Hard Money Deal Structure

[Brian Morgan]

Hello All,

Looking at my first Fix and Flip and looking for some information on how a hard money deal is structured, when a seller takes back financing.

The HML I would use only lends in first position.

The deal looks like this:

ARV: $250,000
Purchase: $100,000
30,000 Down - HML
70,000 Seller Finance
Repairs: $50,000

Question is does the HML get a First Mortgage for only $30,000 or do they get a First for $80,000?

I'm thinking it is attractive to the HML because their risk is minimized at only 32% LTV. However might be tougher to convince the Seller if he has to take a 2nd behind an $80K first?

Any advice on how to write this offer would also be helpful. Still a Newbie and learning as I go.

Thanks in Advance!

Brian

[Aaron Mazzrillo]

Hey Brian,m
Why wouldn't this be attractive to your seller? They have a 2nd position behind an $80K first which still puts them at 66% LTV. Not only that, but they are getting $30K down.

I do similar deals like this except I use private lenders and put the seller's equity in 2nd and even 3rd position. Don't negotiate the deal based on what you would do. Negotiate it based on what is best for the seller.

They have a property that needs a ton of work. ($50K is not a light rehab!) They obviously don't have the cash or time (both?) to fix it up. You are taking over a bad house, giving them some cash today and safely securing their equity with a note payable at some point in the future. You need to sell them on the benefits of why it works for them.

If they do not live in the house, you should also try to get some great terms on that note. I have done zero interest, no payments for 5 years on a deal just like this. Allowed me to keep the house and net over $500 a month in cash flow. You can also put in a substitution of collateral clause so you can sell the property, move their note to you next deal, and use proceeds instead of paying them off right away.

Sounds like a home run on this one!