What actually secures a small gap funding position, the lien or the guarantee

Ten closings with an agent who understands the investor side beats a clever fee structure most of the time. Paying the standard commission and fixing the exclusivity term tends to get more houses bought, faster, than optimizing the fee.

Every gap deal I've heard about that got paid back got paid because the borrower wanted to keep borrowing. That makes me think the guarantee and the relationship do the work and the lien is decoration.

Though reading @sonia_alvarez's point about title pulling payoffs, I think I was confusing "what made him pay" with "how the money physically moved." Those aren't the same question.

Is a second lien the same as an assignment of the sale proceeds, or are those two different documents doing similar jobs? Both get mentioned in this context, and it is worth being precise about whether a deal would ever want both.

@raj_mehta14 they are different. A recorded second deed of trust or mortgage puts the holder on title behind the senior. An assignment of proceeds is a contract claim on money, and whether title honors it depends on the escrow company and on state practice, so it is weaker on its own. The thing to read before either one is the senior's loan documents. Plenty of hard money notes say the borrower cannot grant junior liens without written consent, and recording one anyway can be an event of default under the senior loan. So that "protection" can be the thing that blows up the deal it is protecting. Get the senior's docs from the borrower and get consent in writing, or do not record. Whether a particular clause is enforceable the way it reads is a question for a lawyer in that state.

The clauses that matter are not the lien grant. They are notice and cure. If the senior can default the borrower and start a foreclosure without ever notifying the junior lender, that lien is a lottery ticket. Written notice of borrower default plus a defined window to cure by making the senior's payments turns it into a real decision with time to make it. The second is payoff notice. The senior should be obligated to give the junior a payoff statement on request. Without that, there is no way to tell whether the junior's cushion still exists after months of accrued interest and protective advances.

This is being treated as one question when it's really two. The lien determines what gets recovered if things break. The exit determines whether recovery is ever needed. They price differently, and both have to be underwritten. On a small piece, a mediocre lien behind a senior with a 65 percent loan amount and a borrower with a signed refinance term sheet beats a perfect lien behind a senior at 80 percent of a hopeful ARV. The cushion is arithmetic, so run it at a distressed number, something like 70 or 75 cents on the ARV actually believed, and see whether the position survives.

Numbers, since none are up yet. Say ARV 520k, senior funds 400k across purchase and rehab, and a junior position of 60k sits behind it. Total debt 460k. At a distressed 75 percent of ARV, gross proceeds run about 390k, call it 360k after costs. The senior takes all of it and is still short. The 60k junior position is gone at that point, and a guarantee is the only thing left standing. So the lien does nothing in that scenario. It matters in the normal scenario where the asset sells at 500k and the payoff goes out in order. That is the honest split. Worth checking where the math breaks down for any specific deal.

Before any of this, pay for a title search and read it yourself. On a small deal I looked at as a passive piece, the borrower had a judgment recorded from an old business and had described himself as clean. He wasn't lying in his head, he'd forgotten. That one search changed the price I would have accepted, and it cost less than a set of loan docs.

@aaron_fitz10 your poll has a "both or nothing" option and that's where I'd land, but I want to know what people give up to get both. If I insist on a recorded lien plus a guarantee plus notice and cure from the senior, does the deal just go to the lender who asks for less?

@chriswalton8 yes, sometimes, and the speed of your yes is part of what you're selling.

One thing from studying for my license that surprised me: how you'd enforce a junior lien is very state specific, judicial foreclosure states versus non judicial, timelines, and whether a deficiency judgment against the borrower is even available. Don't assume what you read on a national blog applies where the property sits. Ask a local attorney what a junior position actually gets to do there.

Gap funding quotes commonly require both the recorded second and the personal guarantee. Few lenders offer a choice between the two; most treat them as a package rather than alternatives.

If a borrower resists recording, that's information, and it's usually about the senior's consent clause @dmitri_248 mentioned.

The part that stops me is fixed cost. On a 45k piece, docs drawn by a real attorney plus recording plus a title search ran a friend of mine somewhere around 2,200 to 2,800 depending on the state. At 13% that's the first two and a half months of interest before you've earned anything. It's why people talk themselves into a handshake, and I understand the temptation even though I think it's a mistake.

Reading @hannah_west29's math, the instinct is to want to argue with the 75% while leaving the 400k senior alone. The senior number is the one an investor is actually trusting, since it is someone else's underwriting of both the purchase and the rehab budget. That is the piece that changes how a gap piece gets sized, more than the junior lien percentage does.

The version worth wanting is the one where a lender can say out loud what they get in a default and be right about it. If the honest answer is I get to sue a guy, that's not really a lien versus signature question. That's a no.

One thing to add for anyone tempted by junior pieces on land instead of houses. No rent, no rehab that creates value on a schedule, and an exit that depends on a buyer or an entitlement showing up. I've held ground for eleven years happily as an owner. I wouldn't want to be second in line on it for nine months at any rate.