hard money loan used as downpayment for bank loan (new constructi

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Hi, i'm new to hard money lending and am considering a deal where I'd loan 150k (gated for land purchase, arch plans, grading, foundation). Once the bank loan goes through I would be second position which I know is not ideal. I've tried to make sense of NC foreclosure laws and figure out if I would have a right to pay out the bank in the case of foreclosure but it appears more like the bank would foreclose and if there was enough money, my debt would be repaid.

Is this a foolish loan?  Could I use other real property not involved in the loan to act as collateral once I move to second position or from the beginning? 

Hi Dana -- First and foremost, I would make sure you fully understand the value of the property you're lending on. Land deals can be a fickle beast, as the value is often times linked to whether you can get it perked, entitled, etc. If that doesn't happen it could drastically reduce the projected value and put you and the banks loan at risk. If you feel confident that the property value is more than enough to cover your loan and the banks loan, that at the very least is a good start.

Regarding foreclosure, anytime you are not in first lien position, it is a bit precarious. This isn't to say you shouldn't do it, but be cautious. In North Carolina, if a property gets foreclosed on, it will go to auction. On the most basic level, if someone bids on the property and it is enough to pay off the first lien position, then any excess proceeds would go to you. Where it gets a little nerve-wracking is if the first lien position holder chooses, they can set the minimum bid price, which typically includes their lien, legal fees, delinquent interest and whatever else are reasonable costs they are trying to get back as a result of the default. In either case, if no one bids on the property or the bid isn't enough to cover all of the fees above you, the property would default back to the first lien position holder and COMPLETELY wipe away your lien.

If the borrower is up for it, adding additional collateral isn't a bad call. You would likely just do that from the start.

Hope this helps!

As a 2nd position lien holder, you can step in and pay the 1st off, or take title to the property and make monthly payments on the 1st. Google the Garn St Germain Act. This law allows a subordinate lien holder to take title and not have the loan called on the basis of the due on sale clause. When lending in 2nd, I definitely would want to verify the borrower and deal is solid.