Hard Money Lending on a Subject 2 Property

3 Replies

Hello everyone!

Bottom Line Up Front: How can a hard money loan be secured on a subject 2 property?


A local wholesaler is purchasing a duplex that he intends to keep as a rental. He's negotiated a purchase price of $125K for the property and it has an ARV of about $190K. He has also negotiated with the owner to sell it via subject 2. He has approached me about a hard money loan for the closing costs and minor rehab work that will cost between $15-$20K. Since he wants to keep it as a buy-and-hold rental, he plans on refinancing inside of a year to pay off the original owner as well as my loan.

Given the local rental rates, it should cash flow well and I understand his strategy, however, I'm concerned about how to collateralize my loan to him.  I know it's standard for hard money lenders to take out a lien on the property or get a deed of trust, but since this is a subject 2 deal, the bank will be in first position should things go south and the buyer fails to make payment (and the original seller fails to make payment as well).   Am I correct that getting a lien on the property to secure my hard money loan is of little value since I'd be in a position behind the bank?   If so, how do I mitigate my risk with the loan? Is there a way to secure it with the property as collateral given it's a subject 2?   

I intend to consult a real estate attorney next week but thought I'd throw the question out to the community before hand to see what you all thought.

Thanks in advance for the advice!


You could secure your loan with 2nd position lien (deed of trust) but that, as you suspected, is of little value since there is little (no) equity cushion.  Unless borrower has other property you can use as collateral I'd forget it. 

@Rob Nichols I'm not an HML, but if a person can't come up with 15-20k and they are trying to buy/hold a nearly 200k property, they are getting ahead of themselves. He needs to wholesale the property until he is in a position to have some cash reserves to be a buy/hold investor. IMO.

Thanks for the advice @Robert Leonard and @David C.  I appreciate it!

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