How we structure second-position gap funding on our Atlanta flips
Member since 2026 · 9 posts · 0 votes
Sharing how we set up gap funding on our Atlanta flips, since I get asked about the structure a lot. Our primary lender covers most of the purchase and the rehab budget. What's left — the down payment gap and closing costs — is usually $35,000 to $45,000 per property. That piece comes from a private gap partner, secured by a recorded second-position lien, on a 6-month term, repaid when the property sells or refinances. Before a partner commits, we show the full underwriting: purchase price, rehab scope and budget, ARV with sold comps, timeline, and exactly where their lien sits. Everything is documented in writing, and partners get updates while the project runs. Their capital is treated as a loan, not a speculation — but to be clear, returns are not guaranteed and real estate always carries risk. Happy to answer questions on the structure. — Raul, Anchor Point Development
From the lending side the two things that make or break a second-position gap like that are combined LTV and whether the first lender allows junior liens at all. A short recorded second is workable when total leverage still leaves room and the sale or refi exit fits inside the term. Gap partners should also understand where they stand if the senior lender has to foreclose — even a simple acknowledgment from the first is better than finding out later. The package you described (scope, ARV comps, exact lien position) is what keeps those files fundable.
Raul, the structure is sound, but the math is what actually funds it. On a $300K purchase, $60K rehab, $420K ARV, a senior at 85% of purchase plus rehab funds $306K. Your $40K gap takes total debt to $346K, or 82% of LTARV. That ratio is what your gap partner is really buying, not the $40K. At a 12% interest-only second, that tranche carries a 24% annual debt constant, and the combined debt constant on $346K is what your exit must clear.
Adam is right that the first lender's consent is binary, not negotiable. Marc, an intercreditor with cure rights and a standstill is worth more than 200 basis points of coupon. Without it, the second is equity wearing a debt costume. Price it that way.
Two things I would tighten. Size the interest reserve to peak outstanding on the S-curve, not the average draw. Rehab spend is back-loaded, so a 6-month term on a linear assumption understates carry by 30 to 40%. And unlike land development, there is no horizontal infra per pad to amortize here, so every dollar of carry hits the second's recovery directly. Hold a 20% exit coverage cushion above senior payoff, second, carry, and 8% selling costs.
What is your peak combined LTC in the worst month of the draw schedule, and does your first lender's intercreditor actually grant cure rights?
Laying out the full underwriting and exactly where the partner's lien sits before they commit is the right habit, and putting the risk in writing is too.
The piece I'd look hardest at is the term. A 6 month gap note can come due before the senior loan does, since many senior flip loans run 12 months. If a project slips, the junior note matures while the house is still unsold. Writing an extension option into the gap note up front usually costs less than negotiating one when you're already late. Some senior lenders also want the down payment to be the borrower's own cash and will ask where it came from. So the gap money is worth disclosing to them as a source of funds, not just clearing as a lien.
Raul — solid structure, and the documentation habit is the part most people skip. A few checks I'd add from the takeout side, since that's where a lot of gap funding gets tested.
First, decide up front whether the exit is a sale or a refinance, because they underwrite very differently. A sale is mostly about the appraisal and the net after both payoffs. A refinance is about the rent. A refinance lender sizes the new loan from the rent divided by PITIA — principal, interest, taxes, insurance, and HOA if there is one — so the loan amount is driven by the rent, not by what you're into the deal for. Just as an illustration, $2,000 in monthly rent divided by $1,600 in PITIA is a 1.25 ratio. If the rent doesn't support a loan large enough to pay off both the senior and the gap, plus closing costs, the gap partner is effectively relying on a sale, not a refinance — worth knowing before anyone commits.
Second, the second lien shows up. It's on title, and the takeout lender will see it and will want to know how it's being handled at closing, so the gap partner should expect to provide a payoff and a release. That applies at the start, too: as others noted, the senior has to allow it, and the gap should be documented as a loan, not as something informal.
Third, watch the maturities against the exit timeline, not just against each other. A six-month gap with a twelve-month senior loan is fine if the project finishes in five months. It gets tight if a refinance needs more time after the rehab, or if the appraisal comes back below the number the refinance was sized on. An extension option agreed in advance, with the cost and the trigger spelled out, is cheaper than negotiating one when the clock has already run out.
The structure itself is sound — senior first, gap disclosed and documented, both secured. The test I'd run on every deal before funding is: if the exit is a refinance, does the rent actually support paying everyone out? If the exit is a sale, does the net after both payoffs still leave a cushion for selling costs and a lower-than-expected appraisal? If both of those hold, it's a much easier yes.