Buyout Private Lender Fees and get 50% Equity in home??

Question

So I have stumbled upon a very unique deal and I would like to get some opinions on it. Here is the scenario.

Investor owns a property that has an assisted living business being ran out of it. They mortgage is currently being held by a private lender. They are behind on their payments and need to come up with a bulk amount in order to stop foreclosure. They have an agreement to sell the property and the business in August of this year. They are looking for a short term loan to get current with private lender. In exchange they will split the remaining equity after the sale of the property as well as holding second position on the property until the sale goes through.

Numbers

Appraised Value - $600K
Current Private Loan Amount - $320K
Late Fees/back payment: - $95K
Requested loan amount - $130K
Total equity after sell - $280K
Total split after $130K payback - $150K/2 = $75K

So in total, for a two month loan of $130K my return is going to be $75K ~ 57%

These are fairly round numbers, not including closing costs, but the gist is there.

Has anyone ever structured a deal this way? Any thoughts or advice will be appreciated.

Rick Pozos · Answer

@Dustin Cady I would say if you knew the person really well and knew the whole back story of what was going on, then go for it. It would be a great deal. With lots of unknowns, you could get wiped out really quick.

Jason Dillard · Answer

@Dustin Cady look at this from 2 directions. Get ownership of property so you are in complete control. Attempt to buy the note or catch it up with terms that the property can afford. You have to be ok owning this if the buyer does not come through. I would not give any cash to seller until the buyer performs.

Michael Reach · Answer

The profit potential seems impressive or maybe TGTBT. I would have three skeptical questions:Why do they need to borrow $130k when their arrearage is $95k and they are just trying to forestall foreclosure for 2-3 months?If the business has thus far failed to generate sufficient revenue to make the mortgage payment why would someone be buying the business?What would your return be if you made the loan but the borrower didn't pay the arrearage and the 1st lien holder foreclosed?The 1st lien has $320k UPB but also $95k in arrears. In other words, they owe $415k on a property worth only $600k. To put that another way, their current LTV on a non-owner occupied commercial property is already 69%. Its hard for me to imagine the property would sell for more than 70% of market value at a foreclosure auction and any other buyer is just a plan at this point.My advice, as a rank newbie you should probably ignore, is: Stipulate in the note, to the extent possible legally, that the proceeds of the loan are solely for payment of the first lien (arrearage and pre-payment of next 3-6 months months payment) and ensure the closing agent gives the money directly to the lien holder.Change the terms of the loan to be strictly interest and points for only a 3 month term and let the borrower worry about the equity. $130k with 50 points financed at 15% for 3 months interest only and a single balloon payment should yield about $75k which is 230% annualized. That gives you the same return as the equity split and if everything about the deal is kosher, the the borrower should not have any complaints with those terms. If he does, maybe the equity isn't there after all. By forcibly prepaying the first lien for 4-6 months and then setting up a three month term, you put yourself in a position to be able to foreclose before the first lien holder if it comes to it. That would give you control over the property for only your initial loan plus legal fees and the cost of making payments on the existing loan.You could also try to by the first lien at a deep discount from the first lien holder. That gives you flexibility to either do a workout with the borrower for terms they can handle or hold it for two months till the supposed sale happens and get the spread between what is owed and what you paid. Or you could foreclose. But I'd be very cautious of this property. Good luck evicting a bunch of assisted living patients that had their money taken by the big-bad previous owner. Unless you want to get into the assisted living business.

Rick Pozos · Answer

1) how could someone get 95k in arrears on a 320k loan?? Seems like something is going on kinda fishy. The business should be paying its own bills. Maybe the owner is taking money he shouldnt??2)They are in arrears 95k but they want 120k as a 2nd loan?? WHYYYYYYYYY They have not shown themselves responsible with the money that they have been given and can not run a business that is almost always very profitable. I would not believe that there is a buyer in August. Unless you know these people quite well, I would RUN away from this one. Please realize that 2nd liens go away when the 1st forecloses. This means that if they take your money and do not catch up on the mortgage you lose everything!!!Plus if they owe just over 400k on a 600k property AND run a profitable business that someone is about to buy, they should be able to refinance with a bank with NO issues. This smells fishy in so many ways.

Dusty Cady · Answer

@Michael Reach @Rick Pozos - Thank you for the input and insight. After reading your posts and giving it some more thoughts we are going to walk (run) away from this 'deal'. There are way too many variables and red flags all around it.

Dusty Cady · Answer

@Jason Dillard Great points. Thank you!