9% in a bridge fund or 13% plus two points on one second. Probably picking wrong.

You've screened the deal and not the person, which is the same mistake I nearly made with my first tenant. Six flips and photos of four isn't a file. Have you seen the HUD or closing statements from two of those, so you know what he actually bought at and sold at rather than what he says? Have you pulled his name for judgments and liens in the counties he works in? Public record access and what shows up varies by state, and in some states you won't find the sale prices at all.

A personal guaranty from someone with 18,000 to his name is a piece of paper.

I'm still learning all of this, so here's a basic question. Second position means if it all goes wrong the first lender gets paid completely before you get anything? Even if you're both owed money on the same house?

@rigging yes, that's it, in order of recording. Verity's 60,000 only exists after the 240,000 is satisfied out of whatever the house brings.

Verity, do you get to see an appraisal, or is 380,000 the borrower's number? I'd want the senior lender's appraisal, since they paid for one and they had reason to be conservative about it.

The 107% of cost is the whole post and you already found it. Two lenders are funding the project plus the carry plus his fee to himself, and he's contributing 18,000 and labor. If the house takes twelve months instead of eight, his 18,000 is gone before yours is, which is technically true and practically meaningless, because at that point his incentive is to walk and yours is to cure a 240,000 loan you never wanted.

I'd want him at 15% of total cost in cash, so about 48,000, and I'd rather lend 40,000 into that stack than 60,000 into this one.

Where does 380,000 come from? If it's a broker price opinion, ask which agent, then look at what they actually listed and sold in that submarket in the last year. Plenty of BPOs are written by someone hoping to get the listing.

And ask what the six comparable listings currently sitting on market are priced at. His exit competes with those.

70,000 on a 210,000 purchase. What's in it? If that's cosmetic plus a kitchen and two baths, fine. If it includes a roof, a panel, or anything below the floor, that budget is a wish.

I've never once seen a rehab come in on a number where the borrower couldn't hand me a line item scope with quantities. Ask for it. If what comes back is four categories and a total, price that as a 90,000 rehab and rerun your cushion. At 90,000 his cost is 300,000 and the debt is 100% of cost with no equity anywhere in the stack.

I've been on the borrower end of a second position loan and I learned the hard way what the second lender's rights look like when things slip. Ask for a right to cure in your documents, and then ask yourself honestly whether you have the 240,000 or the ability to raise it in the 30 days you'd get. If the answer is no, that right is decorative and you should price the loan as if you are unsecured with a good story.

Also get a copy of the senior note and its default terms. My gap lender never asked for mine and he'd have found a clause that would have scared him.

Sale isn't the only exit. Ask what happens if it doesn't sell at 380. Would he rent it and refinance into a longer term loan, and does the rent cover a loan at whatever rate he'd actually get today? He should be able to hand you a rent number and a debt service coverage number, and he should confirm the terms in writing with the lender he'd use rather than quoting a rate he saw somewhere. If his answer is that it will sell, he has one exit.

Take the 9%. You said you want the boring version and then wrote 400 words about the interesting one.

Forty senior loans at 70% of cost, professionally serviced, versus one subordinate position on a house you'll never visit behind a borrower with 18,000 in the game. The four points is the fee you'd pay yourself for lying awake.

@orchard the lockup is the part I'd push on before agreeing. Two years plus 60 days notice plus quarterly windows means Verity's realistic worst case for getting money back could be well past two years, and funds usually have a gate provision that lets them suspend redemptions if too many people ask at once. That clause is in the documents and it's the one I'd read first.

Verity, do you have other liquid savings behind this 60,000? That answer changes which option is even available to you.

If the fund only makes safer first position loans, why does anyone lend on the second at all? Is 4% really the entire market price of that difference, or is the fund also taking a cut off the top before Verity sees the 9?

@compass both. The fund's borrowers pay something like 11 or 12 and there's a management fee and a spread between what the fund earns and what it distributes, so the 9 is net of somebody's business. And the second position lender is getting paid for concentration as well as subordination. Verity's option B is one house. The fund is forty.

Verity, five years of running a business taught me that the risk that kills you is the one you can't spread. 60,000 in one second lien is your whole position on one borrower's judgment about a kitchen.

Practical thing nobody's said. Who services option B? Do you invoice him monthly, chase the payment, track the payoff, order the payoff statement, sign the reconveyance at closing? That's your job unless you pay a servicer, and if the loan goes bad it's your attorney and your money spent on the file.

The fund does all of that for the 1.5%.

Eight months. Where I've worked, permits alone on anything structural or a service upgrade can eat six to ten weeks before a crew starts, and inspection scheduling adds more. If his 70,000 scope has permitted work in it, the eight month term is a term, not a schedule, and you should expect an extension request in month seven.

Decide now what an extension costs him. A point a month, and put it in the note, otherwise you'll be negotiating it at the moment you have the least leverage.

How would you even know the work is getting done? The senior's inspector checks draws for the senior's benefit. Nobody's inspecting for you unless you ask for copies of the draw inspection reports as a condition of the loan. Cheap thing to ask for and it tells you month by month whether the story is holding.

Disagreeing with @orchard. There's nothing wrong with option B as a category. What's wrong is the price.

I've borrowed gap money three times. I paid 14% plus 3 points on the smallest one and 15% plus 2 with an exit fee on the last. Nobody offered me 13 and 2 for a second behind a stack at 107% of cost, and if they had I'd have taken it in about four seconds. Verity's borrower is getting a bargain and that's the signal, because it means either he doesn't know what this money costs or somebody already turned him down at a higher number.

Go back at 15 and 3, more equity from him, and copies of the draw reports. If he says yes instantly, you're still underpriced. If he can't do it, you learned what his margin really looks like.

For what it's worth, the monthly interest on option B versus quarterly on the fund matters more than people think if you're spending the income. 650 a month landing regularly is a different thing than a check four times a year, though I take the point that the 650 stops the day the borrower stops.

The fund's distribution history across the six years is what I'd chase down, including whether they ever missed one.