Providing Gap Funding / Bridge Loan - Vetting Recommendations?

Question

Summary: I'm looking for guidance on what information I need to vet someone I'm planning to provide gap funding to.  Full details below.

I joined a Meetup.com group in my local NJ area.  The person running the group does HML, and I mentioned I may be interested in providing gap funding if he comes across anyone.  My intent was to invest some cash while I look for buy and hold deals.  He passed me someone last week, I spoke with this individual a few times, and I feel like he's got a decent deal.  I worked in wiggle room on the expenses below, i.e. longer hold time than he thinks he'll need and an extra 10% as things come up in the rehab.

Holding time
  (months):

4

Purchase Price:

250000

4.5% closing costs:

11250

mortgage:

5358

rehab (+10%):

40315

20%+ loan:

50000

interest:

2500

7% selling fees:

28000

I'd be putting down the 20% for the loan at 15% interest.  The individual I'm working with is pretty confident the ARV will be $400k+.

Sale Price (ARV):

$400,000

$390,000

Acquisition & Flip Costs

$306,923

ARV-seller fees, loan repayment, &
  interest:

$319,500

$309,500

Profit:

$12,577

$2,577

ROI:

14.4%

2.9%

The plan is to do a promissory note.  However, I'm having trouble even finding a real estate attorney who will help me draft a note.  Most seem to say they don't do it, and I literally had one tell me today he wouldn't do it because he thought it was a bad idea since I don't have a close relationship with this person (we didn't go into detail like anything from above).

Aside from the promissory note, I'm looking for some expert guidance on what I should do to vet this individual and what type of information I should collect.  I almost feel like some type of application is warranted so I have SSN, bank account numbers, etc. in case things go south.

Your collective knowledge would be appreciated!  P.S. I did search the forums, but I didn't see much related to this topic, most were people asking for funding.

Christopher Stover · Answer

@Bruce Lynn: The individual I'm speaking with is paying closing costs, mortgage during holding period, rehab, sales costs, and anything else that comes up.  They told me they have some cushion as well, which I need to verify, but I'm bringing the 20% to the table to help them get the mortgage so they can do the flip.  This is their first one on their own, minus a JV deal before it.  I don't think I'll be able to get a deed of trust since there will be a mortgage company involved, and there's no guarantee I'll get paid back, hence my question to all of you about vetting.  I'm all ears if you have a better recommendation over the promissory note.

Account Closed: Thx for the kudos. :)  I already bumped the holding time up to 4 from the 2-3 they expect (they're not doing anything too crazy rehab wise).  However, your point is well taken, and I'll re-look at the numbers with 5 and 6 months.

I wasn't familiar with the JV agreement; however, it appears it would give me some percentage of ownership in the venture.  The sample I looked at appeared it would make me liable for a percentage of expenses in the venture as well as profits.  Is this always the case?  I'm only asking for 15% interest (APY).

As for the NOI, I found something that says, "This NOI now has to be 'released' as a lien on the property before the title can be transferred..."  How would this work since I think I'd need to release the NOI before my partner could sell the property to be able to pay me back with interest.  Would I basically be a party at the closing and the title company or closing attorney would give me a check for my principle and interest at the same time I release the NOI?  Good tip on not providing funds directly to the borrower as well.

I'll continue to do some reading on the JV and NOI but thanks much for those tips.

Account Closed · Answer

@Christopher Stover I think every HML has their requirements. For an example I will give you mine.

Credit score greater than 700

If working a W2 job D/I of less than 80%

If self employed a positive cash flow of more than the monthly payments of my loan verified by their Income tax returns.

Loan is no more that 80% of the ARV of the property or up to 100% of the purchase price of the property which ever is less. I insist on being in first position.

Copy of sales contract

Title insurance.

Promissory note

Mortgage Deed

Hope this helps.

Bruce Lynn · Answer

The other trick for the buyer is to find someone who will lend with gap funding for the difference.  There are lenders that do this, but typically slim.

Promisary is interesting, but you're also telling us you are lending to someone with no money.  Otherwise they would not need gap funding.

If you don't have a deed of trust, how do you know you get paid back?

Holding time (months):		4
Purchase Price:		250000
4.5% closing costs:		11250
mortgage:		5358
rehab (+10%):		40315

20%+ loan:		50000
interest:		2500
7% selling fees:		28000