Should I be 2nd on the mortgage

[Ken Moyer]

Hello everyone,

I’m new to Real estate investing (own 2 rental properties). I recently connected with a couple who is doing fix and flips in my county. I saw one of their properties and was impressed with the rehab.

They offered me a deal of 20% apr on my $25k investment on their next property. They also said I could assist with the rehab as a learning experience and if the deal goes well maybe become a project manager for them to learn more.

After consulting with my attorney and going over the paper work, I would be the 2nd person on the mortgage after the hard money lender who is lending more than myself.

Since I will be the first lien holder, they will not provide a personal guarantee.

My lawyer informed me that I’m not very protected since I’m second on the lease.

What are your thoughts? I appreciate any feedback

[Jeff S.]

To clarify, @Ken Moyer, you would not be in second position on a lease, or second position on a mortgage, you would be the lender (i.e. beneficiary) on a new mortgage that is recorded in second position. Second position mortgages are about as risky as they come.

If for some reason this couple defaults on their loan to the first position lender, the first could foreclose and it is extremely likely that you would be wiped out. If they defaulted on your loan, could you pay off the first to protect your interest?

“Since I will be the first lien holder, they will not provide a personal guarantee.”

This statement makes no sense. You will have a second position lien, not a first, and of course you can demand a personal guarantee of your loan. Whether it’s worth the paper it’s printed on is another story.

Don’t do this, Ken. With due respect, you’re over your head and don’t seem to understand what you’re getting into.

It’s sounds like you are basing your judgement, in part, because you were “impressed with the rehab.” Since most brand-new shiny rehabs look great, that’s a terrible reason. How long has this couple been in the business? How well do you know them? How many successful flips have they done. How many were unsuccessful? What are the numbers behind these deals that lead you to believe they know how to buy a profitable flip? Do you agree with their criteria? Even though it might be worthless, the fact that they are perhaps suggesting they will not offer a personal guarantee is a red flag for me.

I don’t understand why they would offer that “if the deal goes well maybe become a project manager for them to learn more.” Do you have construction management experience on flips? If not, why would they offer a job to a lender? Why would they have to wait to see if the deal goes well?

Please understand that I’m not trying to be pigheaded with the questions, Ken. It just seems that at this point, you are not ready yet.