BiggerPockets

Hello,

I'm considering providing private money for a rehab deal that is primarily funded by a hard money lender. My contribution will cover closing costs and financing costs and be approximately 15% of the total investment. My plan is to only do the deal if I can put a second lien on the property subordinate to the HML lien. My questions are:

1) Once the first and second leins are in place, can the amount of the first lein increase? Can the HML increase their lien amount for penalties, unpaid interest, anything else? My fear is that in the event the HML forecloses, they may increase their lien to an amount that squeezes me out of any profits when the property ultimately sells and I won't recoup my principle.

2) How difficult and expensive is it to file a second lien? Do I need an attorney to do this?

I appreciate any responses!

Pay a good attorney to come up with the doc's you need - this should set you back around 1-2K - but you can reuse them.

Filing the lien isn't a big deal - after you close you take the note/mortgage down to the county courthouse and generally for $25 your set.

All of that is the easy part. If your in second position your really SOL if something happens. If the HML forecloses and ends up with the property you get nothing - zero - you only get something if someone buys the HML interest and they have to deal with you to make it complete.

But if the buyer is at 100% financing and the HML forecloses and your in second position - you get zip.

Be 100% prepared to lose this money before you invest it.

All - Thanks for your input!

As it turns out, the HML is not willing to let me take a second on the property. That is, if I put a lien on the property they will back out of the deal. So I'm not going to provide the loan. In talking to a few local investors, it sounds like HMLs typically will not allow a subordinate lien to be placed on the properties they fund. Have you heard similar in your geographic areas?

Sanford

The HML wants to be sure the borrower has the ability to complete the deal at break even, at least. The HML knows conditions in your area, and knows if the borrower can't make the deal work with their max LTV, its not a deal.

If the HML lends 70%, and that covers purchase and rehab on the property, the borrower will need about 10% of ARV of their own money. They will net a profit in the 10-15% of ARV range. Realistically, 10%, since things always go wrong. If they don't have that money, and have to borrow it (that sounds like the deal here), that cuts into their profit even further. That makes it much more likely that any hiccup in the deal results in the borrower just walking away, leaving the HML with the property and you out in the cold. HMLs expect that if the borrower can't sell or can't refi, that they will just painlessly turn the property over (deed in lieu of foreclosure.) If there's a second involved, it gets much messier, and much more likely they will have to spend money on legal fees to deal with a default.

If the borrowor can't swing the deal with their own money and the money from the HML, they shouldn't be doing the deal.

If this is someone you trust to perform, offer to partner with them. They do the work, you put in the money and the two of you split the profits 50/50 when its sold. That should net you a much larger chunk, which they won't like. But that compensates you for the very large risk you're taking.

Be prepared to end up fighting with this person and to no longer be friends.

Jon/Kevin - Thanks for the input. At this point we are in fact discussing how we might structure this as a JV.

Steve - Good question. I guess my reluctance to doing that is that I may want this HML to fund my deals in the future. I'm going to try to work with everyone involved in the transaction by being upfront and honest. I would think that building the relationship is more important than one transaction. Is that fair? Or, do investors typically see HMLs as necessary evils with which a strong relationship is not important?

Thanks All!
Sanford