First, @Jeff S. THANK YOU VERY MUCH FOR YOUR DETAILED AND THOROUGH RESPONSES AND ADVICE! THAT'S WHAT I LOVE ABOUT BP!
Some of your questions and concerns are rightfully so especially since I haven't given you those answers already. And even then when answered they're still great concerns that I need to consider.
1. I do not know if the 1st lender will prohibit a 2nd mortgage on the property and I'm assuming (from the borrowers mouth) that I'm 2nd in line, so I need to do my own research to determine that truth. Any idea how I can do that? The property is owned in a Land Trust.
2. I did hear/read if filing the 2nd mortgage, Doc Stamps may be charged which I would surely pass on to the borrower and depending on what those would be, it's up to them if it makes sense to pay them on a $10k loan.
3. I'm not familiar with having the mortgage executed, but not filed and filing when necessary down the road. By doing that, when the property is sold, would it even show up that I have a lien on the property? Presumably not since nothing was filed. So, the only purpose would be so that I have some harder docs as recourse if needed in court.
4. Totally get the not asking for payment concerns and after re-thinking it, I would prefer to have them. Or (and this is just hypothetically thinking out loud when more comfortable with a borrower)... give them options. X % with no payments (higher) or X % (lower rate) with payments.
5. Very true about the Personal Guarantee/ LLC only having 1 asset that's already pledged to 1st lender. That was my thoughts are that the sole purpose of the LLC is to protect you personally.... so why would anyone then also give you a Personal Guarantee for something controlled through the LLC.... I know I wouldn't.
6. I know the Promissory Note doesn't get recorded, but I have it as recourse should I go to court. Not sure about the notary part, because I thought that's what would make it legally binding along with both lender/borrower signatures. So, that I'd want to confirm with an attorney.
7. I won't waste time trying to convince you to feel comfortable with the buyer because you aren't involved. I totally get your concern about me referencing them having a "highly recommended coach". However, I am in the same REIA group as the coach, borrower, and lots of others. They are new rehabbers, I'd say they have about 8-10 deals under their belt in the past 2 years and their coach looks over their shoulder on all of them. So, I trust the "deal". And I too believe in their coach, but again I'm not trying to sell him/them to you. That's for me to decide if I'm comfortable with them.
8. I've learned now the only way to protect myself is have the property as collateral (have a mortgage tied to my note). And I also know that even if I did get 2nd mortgage on this (assuming it's ok with the 1st lender), I'm still not guaranteed anything since I'm sitting behind the 1st lender... and rightfully so since I'm only putting up $10k and he's closer to $90k.
9. I also was told today that the Promissory Note (even notarized... if what you said above isn't true)... still might not hold up in the courts even though it says I would be repaid when property sells. Basically a Promissory Note alone doesn't mean much at all in a court battle, if anything, no matter what it says or who signs it. Even more reason to have it secured by the property with a mortgage (1st, 2nd, anything).
10. The reason for the longer payback period in relation to the property being LISTED is... on average in Orange county (Orlando) it takes 60 days to get an offer on the MLS... in this buyers experience it's taken 4-5 months to get a house sold and if the new buyer has traditional financing that could take 30-45-60 days to close... So, going by that and his past experience, we set it at 6 months maturity date. I firmly believe they have every intention to pay me back right when the house sells (just my gut feeling for the type of people they are). However, without being tied to a mortgage on the property... I don't have a way of knowing if the property sells... other than me watching it like a hawk from day 1 of it being listed. No title company will be calling me to pay me off since I'm not anywhere on the records. I just have my Promissory Note in my drawer (which now I'm learning is almost useless for protection purposes). So, trust me on this one... this part alone of not knowing makes me a little uneasy even though I do think these people are good people and act in good faith.
11. Very good point to wonder why they need $10k for a property going onto the market in 1 week. This money is not bailout money, it's to be used to further grow their business. They want it to ramp up marketing and for deposits on offers they're currently putting in. The Promissory Note would be tied to the sale of the current project though. So, it's basically a Personal Loan (to the LLC) and promise to be repaid once a specific property sells (the most current one).
I'm not saying me explaining myself or answering your red flag questions now justifies this being a good deal for me, but hopefully those details give you some more insight to it. HOWEVER, I've decided I'd feel more comfortable doing a loan that is more secure. So, I plan on doing something with the same people down the road, but in a more secured fashion as Joint Venture where I put some equity into the deal and would be secured by a mortgage.
BUT, even doing it that way, by me being the smaller lender, I would presumably have 2nd mortgage (assuming 1st lender agrees). So, I now that a 2nd mortgage isn't the best guarantee, but it's better than just a Promissory Note because with 2nd mortgage I'm still behind 1st lender. Reality is, I don't have money yet and not comfortable being 1st lender on a project. But, starting small with something like this $10k to put up some rehab money on a project is a way I can get into the biz. So, do you have any advice for doing a JV deal with a partner who is only putting in this smaller amount when another bigger lender is covering the majority of the project? Or just don't do it at all unless you are the big lender with 1st mortgage?
Thanks again, you guys are great!
