Investing in 2nd position hard-money loan

[Ítalo Mendonça]

Hi BP, 

I've come into an opportunity to lend some capital to a flipper. They've secured most of the capital needed for a flip (deal is 110k purchase + 120k rehab --> 440k ARV appraisal) and are looking for a 2nd loan for cushion.

I'm aware this is quite a bit riskier then to be in 1st position, as well as the fact that the first lender (also hard-money) wouldn't be happy if he found out the flipper is looking for additional capital, even though he does have some, though limited, skin in the game.  My question to you is: what is the general course of action for me in case he defaults?

I'm aware that if he defaults on both loans, I will get my money after the first lender has been made whole, in theory. But what if he defaults on my loan while continue to pay the lender in first position? Are my hands tied in that case?

Thank you all for the help!

[Don Konipol]

@Ítalo Mendonça

If he defaults you can foreclose, subject to the first lien. The first lien holder would probably then foreclose himself, as your foreclosing would trigger a default provision of the mortgage or deed of trust. You then would need to pay off the first lien, or lose the property to foreclosure. Also a small possibilities the first lien holder would allow you to step into the borrowers shoes and make loan payments.

All this is probably an academic exercise because if a property with an uncompleted rehab has a second lien in place of the required equity, there would be no equity for the second lien holder to worry about. 99% chance with a second in this type situation there is no equity above the first until rehab is complete, despite what the flipper wants you to believe.