The cure right I never used is the one I'd pay for again

Small position, 50k, but it's the first one I did where the paper worked the way I wanted, so I'm writing it down.

Deal was a single family flip in a first ring suburb, purchase 195k, rehab 68k, borrower's own equity 22k. Senior hard money at 224k from a lender I've seen paper from twice before. I came in at 50k behind them, 12% interest paid monthly, 2 points, 6 month term with one pre-priced 3 month extension at a flat 1,000. Exit was a sale, not a refi, which is the only reason I looked at it at all.

What took three weeks was the intercreditor. The senior's default position was no acknowledgment of my lien at all. What I ended up with, after their counsel struck about half of what mine asked for: notice to me within 5 business days of any senior default, my right to cure senior payment defaults and add those advances to my balance, a 90 day standstill running from notice, and their agreement not to increase the senior principal without my consent. That last one is the clause I care most about and the one nobody asks for. The version I've seen go wrong is the senior advancing more into a struggling deal without telling me and burying the junior, and I'm not interested in finding out how that feels.

I also required an interest reserve, 3,000, funded at closing from the borrower's side and held by me, which covered five of the six monthly payments. So I was never in a position where his cash flow determined whether I got paid.

What nearly broke it: the buyer's appraisal came in at 292k against a 305k contract and the deal repriced to 296k. Borrower's profit went from about 26k to 17k. I got principal, 2,970 of interest, and the 1,000 points at closing on day 178. Total return on 50k for just under 6 months was about 3,970 plus the point, call it 15.9% annualized.

What I'd keep: pre-priced extension, funded interest reserve, and the no-increase-in-senior-principal clause. What I'd change: I paid my own attorney 2,400 to negotiate an intercreditor on a 50k position, which is 4.8% of principal in legal fees. That math only works if the same senior lender will accept the same form next time. I've asked and they said probably.

Answer

1karen_whitfieldPG4APRO7

The no-increase clause is the right ask and it's the one seniors resist hardest, because protective advances are how they defend their own position when a rehab stalls. Getting it on a 50k piece says more about that particular lender than about your negotiating, so I'd test whether it survives when the senior is a fund with a credit committee rather than a shop where one person signs.

Move one variable and this looks different. If the exit had been a refi instead of a sale, your 6 month term plus one 3 month extension is a 9 month window on an event that depends on a rate environment you don't control, and your standstill starts running from a notice that only tells you the borrower already stopped paying. The sale exit is what made a 90 day standstill adequate. On a refi I'd want 180 and I'd want the borrower's takeout application in my file before funding.

Second variable. The appraisal came in 13k light and the borrower absorbed all of it because he had 26k of projected profit. Take that projection down to 12k and the reprice puts him underwater on his own equity, at which point he's arguing with the buyer instead of closing, your 6 months becomes 9, and you're deciding whether to cure. Your position was fine. The reason it was fine is that there was 22k of real equity plus profit beneath you, and I'd write your minimum for that down as a number rather than a feeling.

On the 2,400 in legal: amortize it across the next three deals with that senior and it's under 2% each. If they change the form, you're paying it again.

The cure right I never used is the one I'd pay for again

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