Private lending security question

DE · Member since 2019 · 22 posts · 2 votes

Hi, I was approached by a friend with an opportunity to invest. His plan is to get a loan from me (promissory note) and then use the loan as the down payment from the bank. After talking to an attorney, he explained first/second position and that the bank would likely not take a second position. Likewise, it doesn't seem prudent for me to take second position, even with a personal guarantee, as it seems much more risky and I am putting in the initial money that would make the deal happen.

Questions:

1) Are HMLs almost always lending out the full amount?

2) What options/alternates are there to try and make the deal work? Even multiple second positions on his other properties doesn't seem like much security. JV deal? If so what profit margin should I expect?

Would like to explore options before I approach the attorney again.

Thanks!

0 Reply

20 views

3 Replies

Jump to latestLatest

Sort by

Russ Draper
Investor · Boston, MA · Member since 2015 · 398 posts · 147 votes
7y
You didn't think of something: the bank won't use your down payment for the other buyer. They will want him to have his own money, they specifically ask if any of the down payment is borrowed. If he is honest and says yes (as he should) they likely won't give him the loan.
Hard money loans can lend more than the value of the property if they trust the person. They will want to recover their asset though, more than a bank would!
If you are going to be a hard money lender you should get a very high rate, last time I looked into it the rates were 8% or more plus a 1% fee (or more)!
Being honest, I wouldn't invest in this deal based on the little information I have, you shouldn't either!
0 Reply
Carl Cheung
OP
DE · Member since 2019 · 22 posts · 2 votes
7y
Originally posted by @Russ Draper:
You didn't think of something: the bank won't use your down payment for the other buyer. They will want him to have his own money, they specifically ask if any of the down payment is borrowed. If he is honest and says yes (as he should) they likely won't give him the loan.
Hard money loans can lend more than the value of the property if they trust the person. They will want to recover their asset though, more than a bank would!
If you are going to be a hard money lender you should get a very high rate, last time I looked into it the rates were 8% or more plus a 1% fee (or more)!
Being honest, I wouldn't invest in this deal based on the little information I have, you shouldn't either!

Ah, didn't realize the bank would not loan if the downpayment was borrowed. Sure, I understand higher risk for higher return but as you said, this may be much more risky than a usual HML. Thank you for your insight.
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Carl Cheung:
Originally posted by @Russ Draper:
You didn't think of something: the bank won't use your down payment for the other buyer. They will want him to have his own money, they specifically ask if any of the down payment is borrowed. If he is honest and says yes (as he should) they likely won't give him the loan.
Hard money loans can lend more than the value of the property if they trust the person. They will want to recover their asset though, more than a bank would!
If you are going to be a hard money lender you should get a very high rate, last time I looked into it the rates were 8% or more plus a 1% fee (or more)!
Being honest, I wouldn't invest in this deal based on the little information I have, you shouldn't either!

Ah, didn't realize the bank would not loan if the downpayment was borrowed. Sure, I understand higher risk for higher return but as you said, this may be much more risky than a usual HML. Thank you for your insight.
its not a hard and fast rule there are certainly HML who will allow you to borrow knowing your down payment is an equity partner or borrowed its called gap funding we do It all the time.. and we marry to many of the top HML lending home Iron bridge lima one.
its quite common.. what U will find with this type of investment is the person you lending the money to needs to be ready for prime time if not you could find yourself in a bad situation ..

Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.