All Forum Posts by: Roy Gottesdiener

I've built my private lending business around 2nd lien position loans - it accounts for roughly 45-50% of my loan volume. Here's some thoughts: 

- Don't lend in 2nd position behind hard money or any short-term loan like construction loans. Even if you aren't gap funding, you could lose any equity stake with punitive default interest and also risk the HML calling the note due because they disallow 2nds without an intercreditor subordination agreement.

- On the subject of gap funding, just don't. There isn't any equity stake to protect your principal capital investment. So unless you add additional collateral from their SoRE, then don't do it. Period.

- Request and verify their schedule of real estate (SoRE). You need to understand how much their network is if you are going to request a Personal Guaranty. These PGs mean NOTHING without a high net worth and are only meant to be used in cases of deficiency - meaning the collateralized subject property doesn't have enough equity to make the creditor whole. It's what you would do AFTER a foreclosure proceeding, in most cases, not prior. 

- Be sure you vet out the borrower's multiple exit strategies beyond resale. Do they have cash position to come to close in case they can't sell for what they owe? Do they have the ability to refinance or is the CLTV too high or their credit not great? Do they qualify for a DSCR loan with estimated market rents (use long term average rents, not suped up STR or MTR rental income to be safe). Can the property repay with cashflow (not typically looked at for SFR but for 2nds we do on properties like mobile home parks with super low LTV, we have to know they can pay off with property income and not a refi since most bank loans I've seen on these asset classes is closer to the 50-55% LTV mark.)

Just a few thoughts off the top of my head. There's a lot of ways to lose on 2nds but there is also a lot of ways to generate solid returns and higher interest yields with this strategy. In nearly 10 years of doing PML, we have a sub 3% default ratio with a near zero principal loss (lost 2K on 9-figures funded in my tenure, which isn't too shabby given our stance on junior liens.)