Due Diligence on a PML Deal

[Joshua S.]

Hello BP,

I met someone at a REI meetup who is raising capital for an investor who does a large number of flips and buy holds around the country. The investor is knownish in the Pace Morby community and has an account here. Not naming as not sure if that breaks any rules. I've never lent before and am asking around first.

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The Deals:

Lending for closing costs and other fees

Minimum 10k

Interest is paid back to PML after 2 weeks at closing

Principle returned at 6 months

25% interest

They walk the property with two different contractors to estimate repair costs

We get photos, numbers, and address to pick which house to lend on

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Here are the protections they listed:

Promissory note

Personal guarantee

PMLs are added to the Operating agreement of the LLC that is purchasing the property - this is an equity interest in the LLC (in direct correlation to % of capital contributed to the deal). Once the property is sold, then the PML is removed from the LLC. (Note: we don't do this one for buy and holds because we are holding the property indefinitely.

Second Lien Position secured against the Deed of trust (I am aware of the difference between 1st and 2nd)

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Due Diligence I've Done/Doing:

Searched investor's name on Pacer.gov (No results)

Searched online for reviews or known lawsuits (nothing solid and no patterns of complaints)

Showed deal to other investors/lenders (general feedback is that it's higher risk but may be worth testing)

Asking for explanation of numbers. (Do the numbers make sense for all parties?)

Met local investor who has successfully lent with this investor.

Will personally interview investor on a call.

Reviewed provided settlement statements and deals they've closed. (If accurate, people are getting paid and deals are being closed)

Their (3rd party) capital raiser verbally stated they've observed PMLs being paid back.

For each property I will try to run my own comps and see if their math checks out. (What is that local market like, will property sell etc)

I would start with the minimum 10k to see how it goes first. While not insignificant, it won't impact me in a meaningful way if lost.

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Questions:

Does this scream run-away to anyone?

Are there any special legal considerations to lending that I'm not aware of? 

Will my bank give me problems with this kind of thing?

Should I do this through an LLC of my own?

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Thank you for your time.

*edit: formatting issues

[Chris Seveney]

Quote from @Joshua S.:

Hello BP,

I met someone at a REI meetup who is raising capital for an investor who does a large number of flips and buy holds around the country. The investor is knownish in the Pace Morby community and has an account here. Not naming as not sure if that breaks any rules. I've never lent before and am asking around first.

|

The Deals:

Lending for closing costs and other fees

Minimum 10k

Interest is paid back to PML after 2 weeks at closing

Principle returned at 6 months

25% interest

They walk the property with two different contractors to estimate repair costs

We get photos, numbers, and address to pick which house to lend on

|

Here are the protections they listed:

Promissory note

Personal guarantee

PMLs are added to the Operating agreement of the LLC that is purchasing the property - this is an equity interest in the LLC (in direct correlation to % of capital contributed to the deal). Once the property is sold, then the PML is removed from the LLC. (Note: we don't do this one for buy and holds because we are holding the property indefinitely.

Second Lien Position secured against the Deed of trust (I am aware of the difference between 1st and 2nd)

|

Due Diligence I've Done/Doing:

Searched investor's name on Pacer.gov (No results)

Searched online for reviews or known lawsuits (nothing solid and no patterns of complaints)

Showed deal to other investors/lenders (general feedback is that it's higher risk but may be worth testing)

Asking for explanation of numbers. (Do the numbers make sense for all parties?)

Met local investor who has successfully lent with this investor.

Will personally interview investor on a call.

Reviewed provided settlement statements and deals they've closed. (If accurate, people are getting paid and deals are being closed)

Their (3rd party) capital raiser verbally stated they've observed PMLs being paid back.

For each property I will try to run my own comps and see if their math checks out. (What is that local market like, will property sell etc)

I would start with the minimum 10k to see how it goes first. While not insignificant, it won't impact me in a meaningful way if lost.

|

Questions:

Does this scream run-away to anyone?

Are there any special legal considerations to lending that I'm not aware of? 

Will my bank give me problems with this kind of thing?

Should I do this through an LLC of my own?

|

Thank you for your time.

*edit: formatting issues

 I would want to cross collateralize it against any assets they currently have as well inlcuding their primary home. If someone is that successful in investing, there is no need they would want to pay 25% interest.

Have you seen their bank accounts and pulled credit on them?