How do you structure a loan note to flipper

Question

Hi all,

I've never done this process before so any input or suggestion would be appreciated.

I was presented to these deals, I deleted the address just for privacy purposes but I spot checked in zillow, the estimate value of these houses are in the ballpark.

So this what he emailed me,

1)investor needs $52,000, for house ARV: 115k

346/mo (8%) 5 years or 10% for a year, Full due amount: 72,000, ROI:72% (I dont know where he got this 72% from)

2)he needs $62,000, ARV: 130,000, 415/mo (8%) or 10%, Full due amount: 86,000, ROI: 72% (again, I dont know where he got this 72% from)

at this moment, I assume I will be the 1st lean holder on the property, so if the loan defaults, I have the right to foreclose on the property.

Here are my Questions about this note deal:

1. Are those a good deal? if not how would you revise it to be a good deal? in another word, how do you structure a good deal that protect me in the future. Anything I should be aware of?

2. If I agree to lend the money, could I open self direct IRA now on the fly and utilize self to fund this deal? due to yearly contribution is only $5500/individual & $11000/couple. And are the other options on saving from tax?

3. If investor and I reach agreement, what are the typical fees and costs to get this deal close?

4. Should I do title search and BPO since the investor buying it and doing the flipping and rehab on the property?

5. And if there's a lien on the house, who will be responsible ? the deed owner or me (lien holder)

6. Lastly, what are the typical exit strategies (eg, short sale, foreclose, .) cuz it's NJ a judicial state, which sometimes could take a while in foreclose process, is this true?

in my opinion, this is a decent deal if I structure it right, and one of the reason is ARV is way higher than how much I'm invest in, but I could be wrong, so your expert advise is appreciated.

Thank you so much all!!

Tyler Sterns · Answer

In my area a typical hard money loan is 3-5 points 10-15 percent interest rate, 1-2 years interest only with a balloon payment. Sometimes you see better rates if the flipper is experienced and has a track record with the lender. Borrower typically pays all fees including appraisal fee, title fees, attorney fees for docs, insurance, etc. Your interest rates seem low and no points makes it even that much worse of a deal. But maybe the interest rates quoted are standard in your market. You could ask around and see what other private money lenders charge.

Yes you are right that if the borrower defaults your exit strategy would be foreclosure unless you want to sell your non performing note for pennies on the dollar. For that reason you would be nuts not to use an attorney to draft your loan docs and have a title company run a title report and issue a title policy.

Any liens that occur after your loan would be the responsibility of the borrower and would be subject to your loan. Some exceptions could be tax liens, municipal liens and whatever liens in your jurisdiction have Super priority over first lien mortgages. If your borrower stops paying his property taxes you would have to step in and make payments or risk losing the house.

How do you structure a loan note to flipper

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