what if the "flip" flops?

[Account Closed]

I am getting into making hard money loans for rehabbers/flippers/investors. One prospective borrower is a guy who plans to "flip" the property within a 3 month period and is looking for a HML.

Any advice, other than making sure there is a low LTV, on protecting myself in case of a "flop"? I heard getting the borrower to sign a "Quitclaim" in case of default is a good idea since it eliminates the need to go through foreclosure.

TC

[J Scott]

In general, just make sure it's a great deal...if it's a property that you'd be happy to foreclose on and own yourself (at whatever amount you're lending), then you can't lose...

Along those same lines, just make sure that the investor is actually using the loan to finance the deal (and not finance a new car, for example). Have regular inspections, and only provide draws on the cash *after* the work has been completed.

Signing the quit-claim will certainly make the foreclosure a bit quicker/easier, but in my experience, most investors in this situation won't put up a fight if they can't pay.

Also, a 3-month loan for a flip is VERY short. In fact, it's not even enough time to resell to an FHA buyer, which in this market, may compromise a large part of your buyer demographic.

I would highly consider extending the loan to at least 4 months, and more likely 6-12 months; at very least, have terms in place for the investor to extend the loan if necessary.

Lastly, stick with experienced flippers. Those looking to jump into this market may be more at risk of default than a typical market...so stick with those who have experience and a solid track record...