The interest reserve made the note look current right up to the payoff statement

I lent 50k as a second position note into a BRRRR on a small single family, 12 percent, interest only, 12 month term, repaid from the refinance. Monthly interest arrived on time every month for eleven months. I filed the statements and felt clever.

Then I read the payoff statement at the refinance and worked backwards. The 50k I sent had funded a 6,000 interest reserve held by the operator, and my monthly payments were coming out of my own money. He wasn't paying me from rent or from anything else. He was mailing my capital back to me in slices and I was recording it as income. That was in the note. Section on disbursement of proceeds, one sentence, and I read the note twice and still didn't connect it to the check arriving each month.

The refinance came in about 19k lighter than the operator's model, mostly rate and partly an appraisal under his ARV. First position got paid, closing costs got paid, and there was 31k left for me. He signed a personal note for the 19k balance and is paying it at 200 a month, which pencils out to somewhere past 2030 if nothing changes. I have no security. The property is gone from my collateral position because the release was recorded at the refinance.

What I'd do differently. I'd ask where the first three months of interest come from, in writing, before funding. I'd ask what the refinance is modeled at and what the deal looks like at a rate two points higher, because that number was never shown to me and I never asked. And I'd have wanted to know what happens if the refinance comes in short before that was a live question instead of a settled one. Anyone lending into someone else's refinance should probably have a lawyer read the note in the state the property sits in, because I clearly can't be trusted to read my own.