Good morning BP community. I am reviewing a potential private lending deal as the lender of a rehab fix and flip. I would appreciate what you think of the structure of the deal. The numbers are as follows -
Purchase price - $180,000
Repairs - $150,000
Final projected sale price - $475,000(comps with similar layout/size in same neighborhood are going for $495,000-$525,000.)
The investor has a first-lien hard money lender lined up for $306,000. They need an extra $56k to to cover a portion of purchase price and closing costs, monthly holding costs, and the first payment to the contractors(required by first lien lender). They want me as an investor to loan them $56k as a 2nd lien recorded after initial closing(first lien holder won't allow 2nd lien to be recorded until after initial closing). They initially offered me 14% for a 10 month hold, with the interest paid at the closing for final post-rehab sale. But they re-calculated their numbers and offered me 20% for a 10 month hold, with interest paid at final post-rehab sale closing.
What do you think? I don't want to provide details as to location and specifics of the house, just need some feedback on the numbers/structure of the potential deal. Thanks!
I also want to add that this would be my first private lending deal. Up until now I have only participated in real estate apartment syndications as a limited partner.
How well do you know the operator and what's his track record?
Are they bringing any money into this deal?
If they don't have any skin in this deal then it is a very high risk investment and you may end up picking up the pieces when it falls apart.
I don't believe they are putting any of their own money into the deal. I have never worked with this person before, they have 3 years experience, 1 of which is full time rehabbing. There is a timing issue with the deal with them needing the money, so I'll likely pass, I just wanted some feedback on how it looked from the surface.
My concern was also if it fell through and getting my principal back via foreclosure. Being the 2nd lien holder on my first deal gave me pause as I am not certain to be paid back if they run off with the cash and don't finish repairs.
That is exactly what may happen.
Maybe there is another way to structure this where you have more safety as far as your principal goes. See if they have equity in any other properties that you can blanket with your 2nd mortgage.
When it comes to lending return of the investment is far more important then return on the investment.
Trust your instinct. Never go in 2nd position and risk your principal without collateral!
I'd rather make 8% with 100% of my principal back and safe every time, than 20% with the chance of loosing my principal. Might as well take your money to Vegas..