2nd Position Deal advice

4 Replies

Hi, I've done a few hard money loans in first position. First, though a company then on my own. I was recently approached for a 2nd position deal, which I've never done before, but the terms sound so horrible to me that I'm not even sure it's worth negotiating. Your thoughts? I'm currently receiving 12% annual on my first position loans. The foreclosure estimate is about 150k and about 87k is owed on it. Of course, they don't have any "skin in the game." Here is the promissory note I was sent:

Principal amount: $ 35,000 Date, 11 OCT 2017.

FOR VALUE RECEIVED, I (Borrower) promises to pay. You, (Lender) the sum of Thirty Five Thousand dollars ( $35,000 ).

A repayment shall be made in one installment consisting of $38,500 on or before 16 April 2018

as a payment in full.

An initial loan of $35,000.00 is being made to Summit Holdings Group. Total interest will be

paid in the amount of 10% of the initial principal for a total repayment of $38,500 with the

principal amount being $35,000.00 and interest in the amount of $3500.00.

It is expected funds shall be paid back by 16 April 2018. If there are any delays in completion of

the project, Borrower shall notify the Lender in writing via email.

This note may be prepaid by the Borrower at any time in whole or in part without premium or

penalty. This note is guaranteed by XXXXXXXX Group.

The Borrower must promptly inform the Lender of any change in name or address.

If the Lender prevails in a lawsuit to collect on this note, Borrower will pay Lender’s court costs,

collection agency costs, and attorney’s fees in an amount the court finds to be reasonable.

This note was executed on this 11 day of OCT 2017 and I acknowledge receipt of a completed

copy of this instrument. Funds were received in cash evidence of such shall be by the signing

and presenting of this note by the Borrower. 

The ONLY way to accept a 2nd is to be prepared to buy out the first if it defaults. As a HML myself, I prefer 1st position only and my borrowers have skin in the game. On top of that, your loan is too small to make any decent amount of money. IMO--pass.

Ditto. Plus no mention of a mtg, and no Personal guarantee.

Yeah. This is an unsecured note without confessed judgment provisions and with a guarantee by a Group. Garbage.

Thanks for the input. So, assuming I really wanted to do a deal with this guy (but more for my own education), what would I counter with? 

1. add a personal guarantee (with confessed judgment provision--so I can go after him for $$$)

2. ask to put a second lien on the deed (is this even possible?)

3. higher interest rate

Assuming I was willing to buy out the first mortgage, how would I set that up?

This is a situation where they are paying the owed back payments on the house, fixing it up, then selling it, probably giving the home owner a little something.

My other thought was to ask to be a 50/50 partner rather than earning the 10%. 

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