Private Lending — What Documents Should I Always Require?
Robert HoffmanBusiness Member
Member since 2026 · 16 posts · 7 votes
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Private Lending — What Documents Should I Always Require?
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Matthew CrivelliBusiness Member
Lender · MA · Member since 2021 · 1k+ posts · 1k+ votesQuote from @Robert Hoffman:
Hi all,
I recently started doing some private lending and would appreciate input from those with more experience.
So far, I’ve been lending in 2nd position behind a hard money lender on fix-and-flip projects, typically around $50K per deal.
The borrower operates his real estate business through an LLC, and I invest the money through our real estate investment LLC. The first two loans were with someone I trust, but I want to tighten up my process going forward and ensure I'm properly protected.
For those who actively lend, what documents or protections do you consider non-negotiable on every deal?
I didn’t record mortgages on the first two deals because the amounts were smaller, but I’m rethinking that approach as I continue lending.
Appreciate any guidance from those doing this consistently.
Non negotiables
1. 1st position only (recorded)
2. Credit check
3. ARV Appraisal
4. Verify experience (base leverage off experience)
Maybe after a well established relationship i would be more comfortable relaxing these guidelines. You are better off lending 100% in first position then giving even $10 in second.
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27 Replies
- 7moMatthew CrivelliBusiness MemberLender · MA · Member since 2021 · 1k+ posts · 1k+ votesWhy lend in second position? You are essentially lending to people who don't have the cash to operate their bussiness correctly. If they get foreclosed on you are going to have a hard time recouping the money, second position get nothing until the 1st is 100% satisfied. Many times there is nothing left for the 2nd at the end. Without the loan on title you are putting your self at even more risk. The way you currently lend, you will get burned with little recourse, it's only a matter of time.
Quote from @Robert Hoffman:
Hi all,
I recently started doing some private lending and would appreciate input from those with more experience.
So far, I’ve been lending in 2nd position behind a hard money lender on fix-and-flip projects, typically around $50K per deal.
The borrower operates his real estate business through an LLC, and I invest the money through our real estate investment LLC. The first two loans were with someone I trust, but I want to tighten up my process going forward and ensure I'm properly protected.
For those who actively lend, what documents or protections do you consider non-negotiable on every deal?
I didn’t record mortgages on the first two deals because the amounts were smaller, but I’m rethinking that approach as I continue lending.
Appreciate any guidance from those doing this consistently.
Non negotiables
1. 1st position only (recorded)
2. Credit check
3. ARV Appraisal
4. Verify experience (base leverage off experience)
Maybe after a well established relationship i would be more comfortable relaxing these guidelines. You are better off lending 100% in first position then giving even $10 in second.
Freedom Capital Funding, LLC523 Reviews- Member since 2026 · 16 posts · 7 votes7mo
@Matthew Crivelli 1st position is the hard money lender funding 90-95% of the deals. I provide the closing money and operating costs for the project is my understanding.
Breakaway Tax Advisors510 Reviews - 7moFrankie VozziBusiness MemberMember since 2025 · 335 posts · 82 votes
Quote from @Matthew Crivelli:
Why lend in second position? You are essentially lending to people who don't have the cash to operate their bussiness correctly. If they get foreclosed on you are going to have a hard time recouping the money, second position get nothing until the 1st is 100% satisfied. Many times there is nothing left for the 2nd at the end. Without the loan on title you are putting your self at even more risk. The way you currently lend, you will get burned with little recourse, it's only a matter of time.Quote from @Robert Hoffman:
Hi all,
I recently started doing some private lending and would appreciate input from those with more experience.
So far, I’ve been lending in 2nd position behind a hard money lender on fix-and-flip projects, typically around $50K per deal.
The borrower operates his real estate business through an LLC, and I invest the money through our real estate investment LLC. The first two loans were with someone I trust, but I want to tighten up my process going forward and ensure I'm properly protected.
For those who actively lend, what documents or protections do you consider non-negotiable on every deal?
I didn’t record mortgages on the first two deals because the amounts were smaller, but I’m rethinking that approach as I continue lending.
Appreciate any guidance from those doing this consistently.
Non negotiables
1. 1st position only (recorded)
2. Credit check
3. ARV Appraisal
4. Verify experience (base leverage off experience)
Maybe after a well established relationship i would be more comfortable relaxing these guidelines. You are better off lending 100% in first position then giving even $10 in second.
That’s a fair perspective, and you’re right that second-position lending carries materially more risk especially if the lien isn’t recorded. In those scenarios, the margin of safety has to come from strong equity, conservative leverage, and a borrower with a proven exit.
Some lenders choose 2nd position strategically for yield or speed, but it only works when downside protection is clearly defined. As portfolios scale, tightening standards and prioritizing recorded liens is usually the natural evolution.
Appreciate the insight it’s a good reminder that structure matters more than rate.
- Member since 2026 · 16 posts · 7 votes7mo
Quote from @Matthew Crivelli:
Why lend in second position? You are essentially lending to people who don't have the cash to operate their bussiness correctly. If they get foreclosed on you are going to have a hard time recouping the money, second position get nothing until the 1st is 100% satisfied. Many times there is nothing left for the 2nd at the end. Without the loan on title you are putting your self at even more risk. The way you currently lend, you will get burned with little recourse, it's only a matter of time.Quote from @Robert Hoffman:
Hi all,
I recently started doing some private lending and would appreciate input from those with more experience.
So far, I’ve been lending in 2nd position behind a hard money lender on fix-and-flip projects, typically around $50K per deal.
The borrower operates his real estate business through an LLC, and I invest the money through our real estate investment LLC. The first two loans were with someone I trust, but I want to tighten up my process going forward and ensure I'm properly protected.
For those who actively lend, what documents or protections do you consider non-negotiable on every deal?
I didn’t record mortgages on the first two deals because the amounts were smaller, but I’m rethinking that approach as I continue lending.
Appreciate any guidance from those doing this consistently.
Non negotiables
1. 1st position only (recorded)
2. Credit check
3. ARV Appraisal
4. Verify experience (base leverage off experience)
Maybe after a well established relationship i would be more comfortable relaxing these guidelines. You are better off lending 100% in first position then giving even $10 in second.
Matthew, thank you for the reply. Maybe my original post was a little confusing. The gentleman has been flipping 75-100 homes every year for the past five years. I am just getting involved as a private lender. The process is usually that he has already closed on the home, and he is now looking for an additional 50-100K investment. He sends me an email with the property address, estimated ARV, construction budget, and funds requested for investment, and the rate he's paying. I would assume for the holding costs, renovations, and anything else it will take to get the flip listed for sale. Kiavi usually lends him 90-100% on the flips he buys, so I think he is simply just trying to keep his personal cash out of the deal, but he does keep pretty large reserves in case anything goes wrong.
Breakaway Tax Advisors510 Reviews - 7moMatthew CrivelliBusiness MemberLender · MA · Member since 2021 · 1k+ posts · 1k+ votesIt really doesn't matter how many flips the guy has done. People who flip a lot tend to be cash poor. When you have ten projects going at once and you don't have the capital to keep the wheels moving, it can be a recipe for disaster. For example, I had a guy call me a few months ago with a similar story. "I make a million dollars a year, I've flipped 10 houses in the last 12 months! Well, we pulled his credit and background, he has 100k tax lien outstanding, his credit score was 600, late payments on mortgage accounts. He had a great story, but he was drowning in debt and was looking for a bail out. If you lend in second position you will get burned Robert. Especially when you're lend on a hand shake type deal, it is only a matter of time.
Quote from @Robert Hoffman:
Quote from @Matthew Crivelli:
Why lend in second position? You are essentially lending to people who don't have the cash to operate their bussiness correctly. If they get foreclosed on you are going to have a hard time recouping the money, second position get nothing until the 1st is 100% satisfied. Many times there is nothing left for the 2nd at the end. Without the loan on title you are putting your self at even more risk. The way you currently lend, you will get burned with little recourse, it's only a matter of time.Quote from @Robert Hoffman:
Hi all,
I recently started doing some private lending and would appreciate input from those with more experience.
So far, I’ve been lending in 2nd position behind a hard money lender on fix-and-flip projects, typically around $50K per deal.
The borrower operates his real estate business through an LLC, and I invest the money through our real estate investment LLC. The first two loans were with someone I trust, but I want to tighten up my process going forward and ensure I'm properly protected.
For those who actively lend, what documents or protections do you consider non-negotiable on every deal?
I didn’t record mortgages on the first two deals because the amounts were smaller, but I’m rethinking that approach as I continue lending.
Appreciate any guidance from those doing this consistently.
Non negotiables
1. 1st position only (recorded)
2. Credit check
3. ARV Appraisal
4. Verify experience (base leverage off experience)
Maybe after a well established relationship i would be more comfortable relaxing these guidelines. You are better off lending 100% in first position then giving even $10 in second.
Matthew, thank you for the reply. Maybe my original post was a little confusing. The gentleman has been flipping 75-100 homes every year for the past five years. I am just getting involved as a private lender. The process is usually that he has already closed on the home, and he is now looking for an additional 50-100K investment. He sends me an email with the property address, estimated ARV, construction budget, and funds requested for investment, and the rate he's paying. I would assume for the holding costs, renovations, and anything else it will take to get the flip listed for sale. Kiavi usually lends him 90-100% on the flips he buys, so I think he is simply just trying to keep his personal cash out of the deal, but he does keep pretty large reserves in case anything goes wrong.
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- 7moKenneth GarrettPro MemberInvestor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
@Robert Hoffman
I would require a note and mortgage or deed of trust depending on your state. I do not like second position unless you know the person very well and they can execute. Instead of 2nd position have them secure it with another property where you are in first position. Run it through a title company.
I’ve lent and borrowed many times. I have only used private money with people I know and have built a solid relationship.
They should also provide you with details of the project. Financials, comps, exit plan, alternate exit plan etc. for my lenders I provide them a 3-4 page synopsis of the project that details everything.
- Member since 2026 · 16 posts · 7 votes7mo
@Kenneth Garrett he's flipped 100's of homes. I am learning the private lending game. So definitely going to start asking for these things on the next deal.
Breakaway Tax Advisors510 Reviews - Rental Property Investor · New Braunfels, TX · Member since 2021 · 288 posts · 255 votes7moHe's flipped 100's of homes yet he still needs someone to finance his closing money and operating costs???? HUGE red flag in my opinion.
Quote from @Robert Hoffman:
@Kenneth Garrett he's flipped 100's of homes. I am learning the private lending game. So definitely going to start asking for these things on the next deal.
- 7moJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Mike Kirby:
He's flipped 100's of homes yet he still needs someone to finance his closing money and operating costs???? HUGE red flag in my opinion.Quote from @Robert Hoffman:
@Kenneth Garrett he's flipped 100's of homes. I am learning the private lending game. So definitely going to start asking for these things on the next deal.
EXACTLY if they were starting out or your a JV partner like I do thats a whole different kettle of fish but to loan in second for someones operating cash flow is high risk to the extreme. loan docs as @Jeff S. are the least of your problems and easiest to get right
- Member since 2026 · 16 posts · 7 votes7mo
Quote from @Mike Kirby:
He's flipped 100's of homes yet he still needs someone to finance his closing money and operating costs???? HUGE red flag in my opinion.Quote from @Robert Hoffman:
@Kenneth Garrett he's flipped 100's of homes. I am learning the private lending game. So definitely going to start asking for these things on the next deal.
He is running a flipping/investing company using other people's money. I have seen this done by several folks. He tries not to use any of his own money for the deals and keeps cash reserves in case of an emergency. Maybe this isn't the norm, but he's pretty well known where I live and a good friend of mine. We golf often, so I trust him a lot, but I still want to protect myself as I expand my private money lending.
Breakaway Tax Advisors510 Reviews - Member since 2026 · 16 posts · 7 votes7mo
Quote from @Jay Hinrichs:
Quote from @Mike Kirby:
He's flipped 100's of homes yet he still needs someone to finance his closing money and operating costs???? HUGE red flag in my opinion.Quote from @Robert Hoffman:
@Kenneth Garrett he's flipped 100's of homes. I am learning the private lending game. So definitely going to start asking for these things on the next deal.
EXACTLY if they were starting out or your a JV partner like I do thats a whole different kettle of fish but to loan in second for someones operating cash flow is high risk to the extreme. loan docs as @Jeff S. are the least of your problems and easiest to get right
Jay thank you for the response. As I said, I am new to the private lending part of real estate. I know how to do the tax and accounting side from my day job, but I haven't flipped homes or run an investment company, so to me it sounds reasonable. He has 15-20 flips going at once. Kiavi provides him with 90-100% of the cash on most of the flips he buys, but then he raises capital to cover whatever else he needs to get the deal to listing. This is where I have been coming in and loaning him 50K for a few deals so far. He's paying 15% on the money so I can't complain but I know not every deal will work so I want to make sure I get my money back no matter what.
Breakaway Tax Advisors510 Reviews - 7moJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Robert Hoffman:
Quote from @Jay Hinrichs:
Quote from @Mike Kirby:
He's flipped 100's of homes yet he still needs someone to finance his closing money and operating costs???? HUGE red flag in my opinion.Quote from @Robert Hoffman:
@Kenneth Garrett he's flipped 100's of homes. I am learning the private lending game. So definitely going to start asking for these things on the next deal.
EXACTLY if they were starting out or your a JV partner like I do thats a whole different kettle of fish but to loan in second for someones operating cash flow is high risk to the extreme. loan docs as @Jeff S. are the least of your problems and easiest to get right
Jay thank you for the response. As I said, I am new to the private lending part of real estate. I know how to do the tax and accounting side from my day job, but I haven't flipped homes or run an investment company, so to me it sounds reasonable. He has 15-20 flips going at once. Kiavi provides him with 90-100% of the cash on most of the flips he buys, but then he raises capital to cover whatever else he needs to get the deal to listing. This is where I have been coming in and loaning him 50K for a few deals so far. He's paying 15% on the money so I can't complain but I know not every deal will work so I want to make sure I get my money back no matter what.
well if you have a water landing thats the issue you will not get your money back Kiavi will but you wont unless your client cuts you a check.. thats the point everyone on this thread is making..
- Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes7mo
Youre playing with fire stacking behind hard money. Just go into this eyes-open because you will very likely be wiped out if it goes sideways.
Min docs you should be getting off the top of my head:
Note and Mortgage/Deed of Trust
Loan agreement if this loan has draws or other similar features
Personal Guaranty (assuming your lending to the entity)
Business Purpose Use Affidavit
Pledge of Leases/Rents
Copy of Entity Articles of Organtization and Operating Agreement and Cert of Good Standing
Corporate Memo/Resolution to authorize the loan if there is more than one member in the entity
Lender Title Insurance, CPL, and Closing Instructions
Borrower Cert and Auth for the 1st position lender to release info to you. Whether this is honored will depend on the lender.
Your attorney should be drafting and reviewing these docs and the chain of title/title commitment. They will redline any unreasonable exceptions in the title policy and provide accurate closing instructions. Do not DIY your docs.
I personally would try to get a pledge of equity/cross-collateralization with another property in these circumstances. While your security in the subject property isnt completely worthless, it's likely not far from it. If there are a lot of non-RE assets, you can consider a UCC filing as well.
- Investor · Phoenix, AZ · Member since 2025 · 40 posts · 20 votes7mo
@Brett Synicky any input on this angle?
- Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes7mo
You’re asking the right question, and honestly, most people don’t ask it until something goes wrong. I’ve been in credit and lending for 35 years, including time at large banks, and the biggest mistake I see newer private lenders make is treating “small dollar” loans as if the rules somehow don’t apply. The risk doesn’t scale down just because the loan amount does.
At a minimum, I look at private lending the same way I was trained in institutional credit, just applied practically. That means I always want a promissory note, a properly recorded mortgage or deed of trust, and a clear understanding of lien position. Even in second position, recording matters. If things ever go sideways, the difference between being documented and recorded versus “understood” is night and day.
Because the borrower is operating through an LLC, I also treat that as non‑negotiable documentation. I want the LLC docs, operating agreement, and a personal guaranty from the principals. In my experience, relying on the entity alone almost never makes sense at this level, especially on fix and flip projects where execution risk is real.
On the underwriting side, I care less about volume of documents and more about quality. I want a credit report, not because it tells the whole story, but because it tells me how this borrower handles obligations when things aren’t perfect. I want a clear scope of work, a realistic budget, and I want to understand the exit before I fund, not after. If I can’t clearly explain how I get paid back in a downside scenario, I slow the deal down. We also get a "Schedule of Experience and Real Estate Owned" to not only see what they have now for properties, but what they've done over the past 36-60 months to ensure that they know what they are doing. I also get a personal financial statement and then I get bank and brokerage statements for the last 3 months to ensure that they have the liquidity and reserves for a rainy day.
Regarding lending in 2nd position, I've literally done thousands of 2nd position loans in my career, mostly with banks. The key is not to get too aggressive with the LTV. I see people on here all the time lending to 100%...that's nuts. Remember that if they quit paying the first, the accrued interest, fees, and legal costs from that loan push your lien position out to a higher LTV as they trump your position, so you need to make sure that if you are lending in a subordinate position, that the borrower has strong skin in the game and that you're protected with a lower LTV position.
As for not recording on the first couple of deals, you’re not alone, but you’re also right to rethink that. Recording doesn’t mean you expect a problem, it means you’re prepared if one shows up. Private lending is about stacking small, smart decisions over time, not trusting that relationships alone will protect your capital.
The short version is this: treat every deal like it’s the one that will be scrutinized later. Solid docs, recorded security, personal accountability, and conservative assumptions. That approach has kept me in the game through multiple cycles, and it’s usually what separates people who lend for a while from people who lend for decades.
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes7mo
Loan documents are the least of your worries, @Robert Hoffman. You’re working with someone who has flipped hundreds of homes, so he has presumably taken out hundreds of loans, yet he’s clearly not shared how others lend to him safely? I’m sure he loves that by not recording a mortgage, you have no recourse to his properties and are making loans that are not much safer than handshake deals. Why, again, do you trust this person?
Do you know if the state in which you are making these loans requires a lender’s license? Are you below that state’s usury requirements?
How have you protected yourself in the event you must foreclose?
One of the most popular lawsuits in private lending now is for your borrower to claim your loan was for a consumer purpose, even though they represented it as a business purpose loan. The penalties for this can be extraordinary because the disclosures and licensing are different. What are you doing to protect yourself against this claim? If the terms “business purpose” and “consumer purpose” are unfamiliar to you, then you need a lending attorney. To get an enforceable set of lending documents in the state of the property, you need a lending attorney. Who will do your title work? Your lending attorney. How are you developing the property insurance requirements that will protect you, and which your borrower must meet?
I’m not trying to scare or overwhelm you, Robert. OK, I am. But you must really spend some time with a lending attorney who can explain your state’s lending process, pitfalls, and requirements that you should enforce. Lending attorneys are not the same as real estate attorneys.
I suggest you go to a few real estate clubs in your area and meet some local P/HMLs. Ask which lending attorney they use. You’ll likely hear the same few names. Also ask which investment property insurance brokers they get their info from. Learn to evaluate a flip without relying on your borrower and create a repeatable process you can use when asked for a loan. Write it down. We send ours to all prospective borrowers.
Last, for heaven’s sake, you are not a bank, don’t lend in second position and make sure you always use a recorded lien.
- Member since 2026 · 16 posts · 7 votes7mo
Quote from @Jeff S.:
Loan documents are the least of your worries, @Robert Hoffman. You’re working with someone who has flipped hundreds of homes, so he has presumably taken out hundreds of loans, yet he’s clearly not shared how others lend to him safely? I’m sure he loves that by not recording a mortgage, you have no recourse to his properties and are making loans that are not much safer than handshake deals. Why, again, do you trust this person?
Do you know if the state in which you are making these loans requires a lender’s license? Are you below that state’s usury requirements?
How have you protected yourself in the event you must foreclose?
One of the most popular lawsuits in private lending now is for your borrower to claim your loan was for a consumer purpose, even though they represented it as a business purpose loan. The penalties for this can be extraordinary because the disclosures and licensing are different. What are you doing to protect yourself against this claim? If the terms “business purpose” and “consumer purpose” are unfamiliar to you, then you need a lending attorney. To get an enforceable set of lending documents in the state of the property, you need a lending attorney. Who will do your title work? Your lending attorney. How are you developing the property insurance requirements that will protect you, and which your borrower must meet?
I’m not trying to scare or overwhelm you, Robert. OK, I am. But you must really spend some time with a lending attorney who can explain your state’s lending process, pitfalls, and requirements that you should enforce. Lending attorneys are not the same as real estate attorneys.
I suggest you go to a few real estate clubs in your area and meet some local P/HMLs. Ask which lending attorney they use. You’ll likely hear the same few names. Also ask which investment property insurance brokers they get their info from. Learn to evaluate a flip without relying on your borrower and create a repeatable process you can use when asked for a loan. Write it down. We send ours to all prospective borrowers.
Last, for heaven’s sake, you are not a bank, don’t lend in second position and make sure you always use a recorded lien.
Jeff, I appreciate the response. I go to our local real estate investing meetups every month, and it's there that I met this gentleman a few years back. My original post may be a little confusing, but I play golf with this gentlemen I trust him. He's been flipping 75-100 homes a year for the past 5 years. He buys flips using Kiavi as his main lender but they don't usually provide 100% of the deal so he goes out and gets 50-200K to fund the rest of the flip to get it ready to sell. I signed a very basic promissory note listing the property address, but I don't think it will protect me if something goes sideways. The guy would pay me back unless things really went bad, but I want to expand my lending activity, so having the right process in place now will make me feel much better going forward.
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- Lender · Boston, MA · Member since 2021 · 125 posts · 64 votes7mo
Robert - note, deed/mortgage (2nd lien), JV agreement, and get added as additionally insured on insurance policy. Make it a personal guarantee. To be honest though, the best and most important security is a strong deal and a good relationship with the borrower. You can also ask for cross collaterization so if a specific deal goes sideways you aren't totally wiped out in the foreclosure.
A lot of hard money lenders will not allow that second lien on the HUD but some will. If they do not you guys can ask title to do it for you after close. And if they won't you can file it on your own pretty easy thru the county. Just get a wet signature pre close for a little extra security.
Lot of people on this thread are having their minds blown about why someone would lend in 2nd position. I bet he is getting 2-3x the return as a 1st with a fraction of the capital deployed.
- Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes7mo
This is the second time recently I have seen someone in these forums say that you can give a loan in second position simultaneously to another loan and just not disclose it or "work with title to keep it off the HUD" or whatever because the first lien lender wont allow it.
This is straight up fraud. Do not get involved with this. You could face time in prison, a lawsuit from the title insurer who issued the closing protection letter, as well as a suit for tortious interference from the 1st lienholder.
If you close the 2nd lien loan after the first lien is fully closed to provide some type of cashout after the fact, then fine, that's just a new loan in a separate transaction. If youre providing funds for closing on the initial deal but dont have your loan closed at the time of funding, meaning the borrower doesnt sign the promissory note and pledge the collateral via a mortgage/deed of trust as part of the transaction where the debt is created in exchange for receiving the funds, then at best youre unsecured, and you may not even have a loan at all. If youre giving a loan to fund the intial closing but deliberately acting to conceal this fact from the 1st lien lender, youre committing fraud.- Member since 2026 · 16 posts · 7 votes7mo
Quote from @Patrick Roberts:
This is the second time recently I have seen someone in these forums say that you can give a loan in second position simultaneously to another loan and just not disclose it or "work with title to keep it off the HUD" or whatever because the first lien lender wont allow it.
This is straight up fraud. Do not get involved with this. You could face time in prison, a lawsuit from the title insurer who issued the closing protection letter, as well as a suit for tortious interference from the 1st lienholder.
If you close the 2nd lien loan after the first lien is fully closed to provide some type of cashout after the fact, then fine, that's just a new loan in a separate transaction. If youre providing funds for closing on the initial deal but dont have your loan closed at the time of funding, meaning the borrower doesnt sign the promissory note and pledge the collateral via a mortgage/deed of trust as part of the transaction where the debt is created in exchange for receiving the funds, then at best youre unsecured, and you may not even have a loan at all. If youre giving a loan to fund the intial closing but deliberately acting to conceal this fact from the 1st lien lender, youre committing fraud.He owns the property and has already closed when I have been coming in to give him the additional money. This is all very new to me, as I can tell you the tax and accounting ramifications and how to present it for private lending pretty easily, as this is my day job. Still, the actual lending of money is very new to me, and I do not know anyone in my circle who is also private lending to see how they work with this gentleman—just trying to protect myself if/when a bad deal happens. He has told me every investor has always been paid back, but legal protection is better than words.
Breakaway Tax Advisors510 Reviews - Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes7mo
Quote from @Robert Hoffman:
Quote from @Patrick Roberts:
This is the second time recently I have seen someone in these forums say that you can give a loan in second position simultaneously to another loan and just not disclose it or "work with title to keep it off the HUD" or whatever because the first lien lender wont allow it.
This is straight up fraud. Do not get involved with this. You could face time in prison, a lawsuit from the title insurer who issued the closing protection letter, as well as a suit for tortious interference from the 1st lienholder.
If you close the 2nd lien loan after the first lien is fully closed to provide some type of cashout after the fact, then fine, that's just a new loan in a separate transaction. If youre providing funds for closing on the initial deal but dont have your loan closed at the time of funding, meaning the borrower doesnt sign the promissory note and pledge the collateral via a mortgage/deed of trust as part of the transaction where the debt is created in exchange for receiving the funds, then at best youre unsecured, and you may not even have a loan at all. If youre giving a loan to fund the intial closing but deliberately acting to conceal this fact from the 1st lien lender, youre committing fraud.He owns the property and has already closed when I have been coming in to give him the additional money. This is all very new to me, as I can tell you the tax and accounting ramifications and how to present it for private lending pretty easily, as this is my day job. Still, the actual lending of money is very new to me, and I do not know anyone in my circle who is also private lending to see how they work with this gentleman—just trying to protect myself if/when a bad deal happens. He has told me every investor has always been paid back, but legal protection is better than words.
I was specifically referring to the post in here that mentioned that you can get your docs signed before or at closing but then deliberately not record and not report this on the HUD so that the 1st lien lender wouldnt find out. If youre lending after the borrower owns the property and has already closed the 1st lien transaction, then you should be fine legally. The question is whether this is wise.
To spell out why this is risky, here is what could potentially happen: The borrower defaults on the first lien, which is hard money. The HML likely has a default interest clause, somewhere between 15%-24%, so that the interest rate on the hard money lien shoots up to this rate. Since the borrower isnt making payments, this higher interest, plus whatever other fees, cause the balance to rapidly accrue. When this deal eventually goes to foreclosure, that entire balance on the first lien has to be paid in full before your second lien gets a cent. If the balance is higher than what the property sells for, then youre wiped out.
So, if the property is purchased for $400k with a 90% LTV hard money loan, and then you lend the remaining 10% ($40K) plus money for the rehab, then the CLTV is over $400k. If the borrower defaults and it takes anywhere from 4 to 15 (or more) months to get to foreclosure, all while the borrower isnt making payments, then that balance on the hard money loan grows by the month from $360k at a rate $6k-$7k per month in unpaid interest, plus whatever other allowed fees and costs. The 1st lien balance could easily be over $450k before it gets to settlement at auction. If the property sells for $450k, then there is nothing left for you to be paid with. This is an oversimplification and there a few ways you can defend your lien, but it will require lots of cash on your part.
- 7moAaron ZimmermanBusiness MemberAccountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
Are there opportunities to do co lending where you could be in a first lien position?
Brick House CPAs53 Reviews- Member since 2026 · 16 posts · 7 votes7mo
Quote from @Aaron Zimmerman:
Are there opportunities to do co lending where you could be in a first lien position?
If I were to finance the entire project and leave the hard money lender out of it.
Breakaway Tax Advisors510 Reviews - 7moAaron ZimmermanBusiness MemberAccountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
@Robert Hoffman got it . Perhaps you could get a couple investors to be in that position
Brick House CPAs53 Reviews
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes7mo
Human psychology is so interesting when it comes to money. The perception is that a small loan in second position feels safer: the big lender has already signed off on the borrower, so that makes you feel good, and the amount is smaller, even better. But in reality this is much riskier than funding the whole deal in first position.
It's the same with noobs wanting to buy a 150k property in the hood, because it feels "less risky" than spending twice on a quality property.
- Member since 2011 · 152 posts · 113 votes7mo
Note, mortgage, assignment of rents, escrow agreement that spells out any draws that are available for rehab funds, personal guarantees of everyone, including their spouse, even though the borrower is borrowing with a business entity, the all important deed in lieu of foreclosure so that if things go sideways, you just record the deed with no foreclosure process needed, and perhaps a mechanics lien waiver, which is signed between your borrower and their lead Contractor.
- Real Estate Consultant · atlanta · Member since 2026 · 10 posts · 2 votes7mo
Robert, great question, and you're right to be thinking about this early. The list of documents mentioned by Matthew, Kenneth, and Patrick is spot on. As you scale, managing the collection, verification, and storage of all those documents for every single deal becomes a major operational bottleneck.We've seen many private lenders start with a simple checklist, but it quickly turns into a full-time job chasing down Notes, Mortgages, PGs, operating agreements, insurance certs, etc. This is before you even get to underwriting.Automating this document workflow is key to scaling your lending business without hiring a huge back-office team. A good system can automatically request, categorize, and flag missing or incorrect documents from the borrower, so you only spend time on the actual decision-making.It's a solvable problem that pays for itself in your first few deals.
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