Employee approached me about doing a secured promissory note

2 Replies

I recently had one of my 1099 employees approach me about helping him deal with some back taxes that have come to a head and he is running out of options. He owes $60,000 to the IRS from 2004 taxes and he has asked me if I would do a secured promissory note with his house as collateral. His house is worth $180,000 and he only owes 8,000 on his mortgage. He would be willing to a 68,000 note (8k to wipe out mortgage and 60k for back taxes) @ 9% with a 36 month term. He has been with my company for 10 years and I'm not really worried about his ability to pay back the loan plus the LTV is sub 50% so I feel I'm safe on that end. Any other concerns I should be factoring in and would you do this deal? I have a large amount of cash sitting right now waiting for the right multifamily deal but this would require much less work on my part.

Because he lives in the property it's likely a consumer loan requiring a boat load of disclosures, licenses and restrictions. Best to go through a loan broker familiar with consumer loan origination. LTV is good and it sounds like ability to pay is there.

Originally posted by @William Stinson :

I recently had one of my 1099 employees approach me about helping him deal with some back taxes that have come to a head and he is running out of options. He owes $60,000 to the IRS from 2004 taxes and he has asked me if I would do a secured promissory note with his house as collateral. His house is worth $180,000 and he only owes 8,000 on his mortgage. He would be willing to a 68,000 note (8k to wipe out mortgage and 60k for back taxes) @ 9% with a 36 month term. He has been with my company for 10 years and I'm not really worried about his ability to pay back the loan plus the LTV is sub 50% so I feel I'm safe on that end. Any other concerns I should be factoring in and would you do this deal? I have a large amount of cash sitting right now waiting for the right multifamily deal but this would require much less work on my part.

 I was going to suggest wiping out that little $8k mortgage so you're in first position, but it looks like you already got that.

Check with a RE lawyer (make it a loan fee to cover it) to ensure that the way you wish to do it is on the up-and-up. Have as much paperwork (the note, etc) already done so you get the most out of your lawyer time and don't need to go in for round two.

According to what I recall from staying 100% awake and attentive, I promise, during my most recent continuing education class, a lot of the compliance requirements go away if you do a) 2 or fewer private mortgages in a year and b) lend less than $1m in a year.

FYI an institutional lender would ensure that the borrower doesn't get a dime of the borrowed funds until AFTER escrow disburses funds sufficient to cover the IRS stuff directly to the IRS, without passing through borrower hands. So the $68k would go to escrow, they pay off existing mortgage, they pay off IRS, borrower gets whatever change is left over. Buffer it a few grand to $70k to save you some back and forth (the IRS debt is accruing interest as we speak). I think it is reasonable for IRS to get paid before borrower touches funds, since the reason he's borrowing the funds is because he has a track record of NOT paying the IRS. 

And, obviously, get lender's title insurance so you're covered if he misses next year's tax bill too...