@Jim Stanley I'll give you a 2nd opinion that is contrary to most of what you heard. I'll preface it with a statement that you should be extremely confident in the capability of the primary flipper, the rehab plan and the ARV of the subject property before ever jumping into this kind of arrangement. With that caveat / understanding:
What you are talking about is called GAP funding. I have made several GAP fund loans and have utilized GAP funders on flips of our own. It is a higher risk investment. You get paid 2nd and you generally have little to no decision making control.
You need to make sure that you have a note AND a recorded lien. You should be provided full access to the rehab plan and costs at the front of the project (even if you have no say in the day to day decision making). You should have full access the rationale in setting the expected ARV. Your agreement needs to be explicitly clear in what happens IF extra funds are required (for any reason). You can ask for, but may not be given, full access to the running expenses on the project.
As Jay pointed out, the primary risks are the project encounters an unexpected problem that results in increased cost and/or time. The lien is really only as good as the margin in the project. If the selling price doesn't cover expenses, your note is exposed unless you were able to get a personal guarantee on the note (and the flipper actually has the resources to do so). This is typically unlikely. It is possible to foreclose from 2nd position but it's complicated, generally requires more investment in legal fees and then other investment to do ‘something' with the property. So you need to get a premium for the increased risk. I would not do it for 10% APR: we typically do ours at 8 - 12% fixed rate for the flip up to a max of 6 months.
So, it’s not necessarily a bad proposition but you need to know who you are investing with and be very confident in the deal as it is higher risk.
