HML Gap Funding Advice

[Rachelle Gonzalez]

I am considering an investment opportunity in which I would act as the Gap Fund lender and am looking for advice as this is a new territory for me. The borrower is looking to purchase a residential property (flip) using HML as the primary source of funding for the Purchase ($200K) as well as for the Rehab costs ($180k) with a conservative ARV of $525k. HML is funding 85% of Purchase price plus rehab costs. HML is charging 11% plus 3 points. My role would be to provide about $35k to cover all fees due at closing, plus an additional -/+$20,000 that would ultimately be used for 6 months of holding costs to be paid by borrower to HML. The borrower (friend) does real estate flipping as a full-time job and is their sole source of income. They have been flipping several properties each year for about 5+ years. They seem to be a pretty experienced flipper. They are offering a 50/50 split of the profit.

My questions:

Is a 50/50 split of profit a typical profit split in this type of lending scenario?

What protections should I request to be included in the lending contract between myself (investor) and borrower (property purchaser) to better protect my investment?  I understand that 2nd position does not provide much protection and am looking to know if there is something better I should request to be included in our contract.

Would it make sense for me to request the use of an escrow account to hold the $-/+ 20k that the borrower would ultimately be using to pay HML holding costs?

Any other protections I should request to be included in our contract that ultimately provides me with additional protection and thereby reducing my risk? 

Based on the above figures, does this appear to be a good deal for me to enter into? 

Any input that you feel would be helpful is greatly appreciated.  I am trying to do as much upfront research as possible before making a final decision.  Thank you in advance.

[Chris Seveney]

Rachelle Gonzalez
The question I always ask people whether friends or not is if they have been doing this full time for 5 years then why would they need $40k to pay the hard money lender fees.

Are they putting any cash in the deal?

If you do lend make sure you record the note with the terms as if you do not then every contractor who works on the property if they file a lien and your not recorded you move that much further down the line.

You should also get a copy of the 1st loan terms as it may stipulate they may not be allowed to borrow additional monies in it which makes that loan in default and they could call it at anytime. It’s also good practice to understand the terms of the other loan.

I would also ask for a personal guaranty.

Lastly did they give you any profit figures / analysis along with a construction estimate and comps? That way you can review to see if there is a profit in the deal and get an idea what/how much profit their is in the deal.