Would you fund this note?

[Jeff Caravalho]

Hi BP, I'm being offered this note secured by a deed of trust for the following:

Duplex:

Side 1: 4x2

Side 2: 2x1

Sqft: 1,578

Total beds 6, total baths 3

Total Monthly rental income: $2,100

Deal Details

$290,000 Fair Market Value

$80,000 Total Loan with requested loan

27.59% LTV of FMV

Loan Request:

$80,000

1st Position Loan

12 Month Loan

12% Interest Rate

$800 Monthly Payments (Only 38.1% of rental income!)

The investor has a portfolio of properties. He is pulling money out of this one to fix up three of his other properties to sell on the market to retail buyers. He expects to have his other properties remodeled and sold by the end of next Spring (May 2017). The loan should be paid back between June and July 2017).  He will use the 3 rehabbed properties and others to 1031 into apartment or commercial.  I asked why not just go to traditional lender, they said this:

"As I'm sure you know, four mortgages from traditional institutions has become a glass ceiling (this includes a person's personal home). Fannie Mae did up the limit to 10, but it is nearly impossible to find a bank that will do more unless you do a portfolio loan. With a portfolio loan, then the bank would go up to about 60% of value for 5+ properties.

So if an investor has 4 properties financed, owns others outright, financially it is cheaper to take out a high interest rate loan on one for a short amount of time than go through all the hopes of doing a larger loan. And it allows the investor to keep all their houses as separate projects and not bundled. Most investors would take the 4% all day if it were possible. A portfolio loan would cost a couple points and only go as low as 6.5%, plus it would be amortized so payments would be higher than an interest only. And these types of loans take 2-3 months to do. It's good for a long term strategy, but not short term."

Things I found out about property:

1.  There are 18K in liens, mostly taxes.  Blamed it on property manager, who he fired.  They want to use some of 80K to clear property title. My 80k would  be 1st an only lien, property is free and clear other than liens.

2.  Lot is shown as zoned R-1 on county web site.  Garage has been converted, looks like they added 2/1 in garage, county site shows garage conversion.

My buddy is telling me beware, but LTV is great and it's secured by deed of trust w/ power of sale.

It almost seems to good to be true, and we all know what that means...

I understand this would have to go thru a broker because of usurious rate (12%)

This would be reviewed by my RE attorney, before any signing...

Thx for your thoughts

[Chris Seveney]

Which state is this in ?

1. Do not lend unless it is in an LLC. If the property is not in an LLC then kill the deal as the usury/interest rate can be extremely problematic.

2. Lend the $80k but take $18k of it to pay the taxes. If taxes do not get paid it can be sold at tax sale and your note is wiped out

3. Hire an agent to do a BPO based on it being a single family home

4. Run your own title search if you have not done so already to make sure you are in first position

Based on the info if, if your in a first position note you care more about the property than the borrower as worst case situation is the borrower defaults and you foreclose on the property. Based on the numbers you would have plenty of equity to resell the property at foreclosure