Is 9 percent in a pooled bridge fund better than 13 percent plus two points on one second lien?

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?

@megan_doyle15 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 it's already been found. Two lenders are funding the project plus the carry plus a fee to the sponsor, who is contributing only 18,000 and labor. If the house takes twelve months instead of eight, that 18,000 is gone before anyone else's is, which is technically true and practically meaningless, because at that point the sponsor's incentive is to walk and the lender's is to cure a loan they never wanted. A sponsor at 15% of total cost in cash is a fairer ask, which on this deal would be about 48,000. Lending 40,000 into that stack beats lending 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.

On the borrower end, a second position lender's rights matter most when things slip. Ask for a right to cure in the documents, and then assess honestly whether the borrower has the 240,000 or the ability to raise it in the 30 days typically allowed. If not, that right is decorative and the loan should be priced as if unsecured with a good story. Also get a copy of the senior note and its default terms before closing. Skipping that step is a common way a gap lender gets surprised by a clause that would have changed the pricing.

Sale isn't the only exit. Worth asking what happens if the property 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 produce a rent number and a debt service coverage number, and confirm the terms in writing with the lender he'd use rather than quoting a rate seen somewhere. If the answer is that it will sell, he has exactly 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.

@karen_whitfield the lockup is the part worth pushing on before agreeing to anything. Two years plus 60 days notice plus quarterly windows means the realistic worst case for getting money back could run well past two years, and funds usually carry a gate provision that lets them suspend redemptions if too many people ask at once. That clause is in the documents and it is the one worth reading first. A useful question before deciding between the two options: is there other liquid savings behind this $60,000? That answer changes which option is even realistic.

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?

@jessreyes12 both. The fund's borrowers are typically paying something like 11 or 12 percent, and between the management fee and the spread between what the fund earns and what it distributes, the 9 is net of somebody's business. The second position lender is also getting paid for concentration as well as subordination. Verity's option B is one house. The fund is forty. Verity, the risk that kills a portfolio is usually the one that can't be spread. Sixty thousand in one second lien is a whole position riding on one borrower's judgment about a kitchen.

Practical thing nobody's said. Who services option B? Invoicing monthly, chasing the payment, tracking the payoff, ordering the payoff statement, signing the reconveyance at closing, that's the lender's job unless a servicer is paid for it, and if the loan goes bad it's the lender's attorney and the lender's money spent on the file. The fund does all of that for the 1.5%.

Eight months is an optimistic term on anything with permitted work in scope. Permits alone on anything structural or a service upgrade can eat six to ten weeks before a crew starts, and inspection scheduling adds more on top. On a 70,000 scope with permitted work in it, the eight month term should be treated as a target, not a schedule, with an extension request expected around month seven. Deciding now what an extension costs, a point a month written into the note, avoids negotiating it later at the point of 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 @karen_whitfield. 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, monthly interest on option B versus quarterly on the fund matters more than people think for anyone spending the income. 650 a month landing regularly is a different thing than a check four times a year, though the point stands that the 650 stops the day the borrower stops. The fund's distribution history across the six years is what's worth chasing down, including whether they ever missed one.