Private Lending: Question About Promissory Note Details

[Sean Coonce]

Context

First time investing with a PDX flipper (great at what he does) and happens to be a good friend. He is raising private capital and the deal seems bulletproof, but would love feedback to better understand if I'm asking the right questions.

Property Details

The property is a probate sale at a solid $160k w/ closing costs. I am contributing the purchase price and from there, there are a few options:

1. Immediate Flip: 3-4 months; essentially wholesale the house to another developer w/ plans.
2. Rehab and Sell: 10-12 months; complete teardown and rebuild (already has plans drawn).
3. Light Rehab and Hold: time and return unknown.

Depending on the market, we're likely looking at options 1 and 2. 

Deal Details

I'm providing the capital for the entire purchase and he is grabbing another $320k for the teardown (should we move w/ option #2). Here are the details: 

• 10% simple interest on the principle; full payment including principle plus interest due 12 months from loan dispersal or upon sale of the home. 
• No pre-payment penalties.
• If option #2, additional return of 1.25% paid off the final sale price of the home.
• Late payment occurs 30 days of 12 month due date; 1.5%/month accruing per day from the original due date.
• I will be on the Deed of Trust in first position.

Is there anything missing that I'm not seeing? Would you lend on this?

[Rick H.]

You are putting up 100% of purchase price AND cost of improvement and your (current) friend is contributing locating the deal, experience and all the work. 

If everything goes as planned you stand to profit "X" and take a passive role. That's what most al lenders want: an easy role as capital provider and receive a predetermined profit in the form of interest of interest plus incentive Y.

Besides State and Federal compliance for lenders, the real test could come should things not go as planned. Especially if your borrower's project goes sideways and you, as lender, determine that you must seek liquidation of the collateral and foreclose. 

Hopefully, of course, everything goes as planner. Of course, you learn little when things go as planned. The real education and character testing occurs when they don't.