All Forum Posts by: Colby Burt

Colby - A few things to consider from a private lender POV:

- Her exit strategy is to cash-out refi and pay off both loans but you would be paid last since the HML loan would be secured against the property and need to be paid off at the time of refinancing. What if the property doesn't appraise for the value she expects it to come in at? Keep in mind that rates are still rising and prices are steadily decreasing in many markets. You will have to decide as the lender if you feel comfortable or not with her exit because if she's not able to do a full C/O refi, then you will be stuck withe some money in the project that can't be paid out immediately. Then what would you both do? What other exits does she have? Will it pencil out to do a DSCR loan, if she can't get the STR loan with higher LTVs?

- If you decide to proceed with a JV agreement only, you may also want to consider having her sign/notarize a Deed of Trust (or another security instrument like a mortgage depending on where you live) that you can keep on hand but not record, so you aren't violating her junior lien issue with the HML. This will give you some security that you could record, if you had to. Though, you may be underwater with little to no equity as another commentor mentions, if the rehab isn't done properly or completed at all. Since you are basically gap-funding this deal, you aren't secured with ANY sort of equity buffer protection at all, rendering a 2nd lien position sort of useless in this instance since there isn't any protection. The only major benefit to being secured is helping her to do a rate and term refinance, which would be cheaper, with a higher loan balance on the property. And it also ensures you get paid out at the refi, rather than hoping she cuts you a check after it closes. But secured loans can be better than unsecured loans, in many cases.

- If you sign as a borrower on the mortgage, you are not securing your own principal capital investment as a lender. Rather, you are becoming a co-borrower on the loan which actually makes you liable for that HML loan, which you wouldn't want to do unless you are negotiating some sort of equity split and not just acting as a lender who gets interest income. I would not suggest trying to be a borrower without an equity split that incentivizes you for the added risk. You don't want to assume her financial liabilities as a lender only.

- A personal guaranty is only as good as the person's net worth. Going after one's primary home, in most cases, is extremely difficult with state's creating consumer and homestead protections so that people don't become homeless. And if your borrower has very little personal assets, then you could be suing with little to no return. I would caution from using a PG without really understanding her net worth or income potential. It could be a huge legal hassle that isn't worth it to you. 

If you want to learn more about how to do private loans safely and securing, I have a BP blog that has some articles which may be helpful. Including how to do 2nd position loans in a safe manner. 

Lend2Live: The Private Money Matchmakers (biggerpockets.com)

You two could've created an LLC together and negotiated equity in the deal for the money you are putting up and then you're not a debtor but an equity stake holder and don't have to worry about being paid back or being in a lien position. We do deals all the time where people are added to Operating Agreements because they bring something to the table like: Money, Credit Score, or Experience which allows for better terms on the loan.

The reality is that if there is a default, you probably won't have any security anyway if you're in a 2nd lien position.

A default on your friends deal is most likely to happen during the rehab portion of their project. Which means that the as-is value won't be enough to get you paid back, if they were to default while home was in construction/gutted.

You're taking a high risk position by just offering 2nd position debt. I'd try to structure it where you are a partner on this deal.

@Colby Burt It depends on what you are trying to do. 

1) You could go to Bob and tell him about this great 100k house you want to buy and rent. Bob says he'll lend you the money. Now, you and Bob negotiate if he will lend you all the money, or if he wants you to have some skin in the game. Maybe you sweet talk Bob into only putting 5K of your own money into the deal, but you are holding the title. Bob may want a higher interest rate, like 7-10%, because he is taking a risk.

2) You could also go to Bob and tell him about the house, but also that you also pre-qualified for a loan for 80k. You have the 20k as well (the bank checked), but you want to save that for a rainy day. You ask Bob to give you a loan for the 20k, paid back over 5 years at 10%.

So in short, a private money lender gets paid back over time in this scenario. In a BRRRR, the private money lender (if using one) typically gets paid back in full after the refinance, within a year at most. If you screw up and the bank's LTV is less than the amount you lent, you're stuck making up the difference (or default on the private loan if you don't have the cash).

You could go with a private / hard money lender initially and refinance in 6 - 12 month.  It will kill your cashflow initially, but it will get you into the deal.

Evan Berg, I'm actually a current partner with Kris.