The payoff came through escrow exactly as the paper said it would

The part that worried me was getting paid, not the rate. Small three bedroom flip in a working class suburb, all in at 218k purchase plus rehab, hard money senior funded 175k, borrower had about 21k of his own in and needed the rest to close. I put in 22k at 12% interest only, 2 points, six month term, second position.

Before I funded I did two things I would do again. First, I asked for the senior's note and loan agreement and read the part about additional financing, then got the senior's written consent to my junior lien on the same page as their signature. Second, I recorded my lien (my state uses a deed of trust, the instrument name and the recording steps are different state to state, so check yours) and asked the closing agent handling the eventual sale to list me on the closing instructions as a payee with a written payoff figure.

It closed at month five. I collected 440 in points at funding and 1,100 of interest at payoff, so 1,540 on 22k in five months.

The part that nearly broke it: at month three the buyer's appraisal came in 12k under contract price and the borrower cut the price to hold the deal together. After commissions and the senior's payoff there was roughly 6k left to the borrower. Another 15k off the price and I would have been the person on the phone negotiating a haircut on my own principal, because the senior gets every dollar of theirs before I see one.

What I keep: written senior consent, my own payoff statement into escrow, and reading the senior's documents before I care about the rate.

4 replies

3derekj19SB1B

The closing agent piece is the part I don't follow. Adding yourself to closing instructions as a payee sounds like a favor someone did you. Does that actually bind them, or did it work because your lien was recorded and they had to clear it anyway?

1nataliehsuSO1BPRO7

And what if the borrower had closed the sale through a different title company than the one you talked to?

1sonia_alvarez Get yoursPRO6

@plumb that's the answer to @beacon too. The recorded lien is what makes any closing agent deal with warrant. The conversation just made it smooth.

Warrant, the number I keep looking at is 1,540 on 22k with a real chance of losing all 22k if the price had gone the other way. You said 15k more off the price would have put you in a haircut conversation. What was your plan there? Take 60 cents and be done, or refuse to release and let the sale die?

0hannah_west29 Get yours

1,540 on 22k over five months is about 7% of principal, call it 16% and change annualized if you ignore the hours you spent reading someone else's loan agreement. That's fine, it isn't remarkable for a subordinate position on a flip with 21k of borrower equity behind 197k of debt.

Two things I'd want from your paper. What does it say if the property sits unsold at month nine and the borrower keeps paying you monthly? A performing junior loan past maturity is where people get lazy. And did the senior's consent letter say anything about what they do if the borrower defaults to you but stays current with them, or was consent all you got?

The payoff came through escrow exactly as the paper said it would

4 replies