Protecting my money in a rehab partnership

[Marc Pfleger]

I am considering partnering with a contractor on a rehab and need some ideas on how to protect my investment in the property. The contractor used a hard money loan to acquire the property and would like for me to provide the rehab costs. We discussed putting a lien on the property for the rehab costs which is fine but being that there is already a loan on the property how can I ensure that my interest in the property will not go away if the contractor defaults on the hard money loan? Thanks BP!

[Chris Winterhalter]

Marc,

The best way would be to have the HML subordinate the loan. But I am assuming that isn't possible for this scenario.

How are you going to structure the deal? Are you just going to be a debt lender? If you put a 2nd lien on the building make sure the total ARV has enough potential equity in the deal to make it work. If the contractor doesn't perform do you have the capability to finish the project on your own?

Confirm with another contractor on the rehab pricing just in case something happens with the first contractor. He might say he can do the work for 50k however it actually would be 75k if you paid another contractor. Does the contractor have experience flipping houses? One of the best ways you can protect your investment is to properly manage your draws. I would include in your pricing to have a third party inspector come out every so often to make sure everything is going as planned. Be very clear about your method and approach at the beginning. Managing expectations is one of the most important things you can do in a partnership/lender scenario like this.

Good luck!

Chris