Finding Private Lenders and Trust Deed Investors for a Secured Second Position Note

[Marjorie Josaphat]

I am a Los Angeles real estate investor currently exploring the acquisition of a multigenerational property that will house my elderly parents and provide long-term rental income potential.

I am in the process of obtaining updated financing preapproval and evaluating different capital stack options. One structure I am considering is a secured second-position note from a private lender or trust deed investor to supplement a conventional first mortgage.

I am not currently seeking funding. Rather, I am trying to better understand how experienced investors and borrowers build relationships with private lenders before they have a specific property under contract.

For those who have successfully used private second-position financing:

1. Where did you find your lenders?
2. Are self-directed IRA investors active in this space?
3. What terms are common today for a second-position note?
4. What underwriting information do private lenders typically want to review before expressing interest?
5. Are there particular investor groups, organizations, or communities you would recommend for networking with trust deed investors?

I appreciate any guidance and lessons learned from those who have experience on either the borrower or lender side.

Thank you.

[Jeff S.]

There are a few issues with this deal, @Marjorie Josaphat. First, since the use of the money will be for a family purpose (moving your parents in), you will not be able to obtain a business purpose loan. This cuts out most private lenders, who are generally not licensed to make these loans. This doesn’t mean that no private lenders exist. It means they will have to be licensed to make consumer purpose loans and comply with all TILA, RESPA, and state disclosures.

Do a search at the California Mortgage Association website. Go to the Member Directory and enter “consumer purpose” in the search bar. A handful of lenders who make these loans will appear. Here’s a link.

The other issue is that you’re looking for a second-position loan. Few P/HMLs make these, but they do exist. One recent issue is AB 130, which passed last July and makes it almost impossible to foreclose on a second lien in CA. Without getting into the weeds, an astute lender will originate the loan with one servicer and keep that servicer through maturity. This will make it easier to foreclose on a second, if necessary, and make the loan more appealing.

Good luck to you, Marjorie.