What a private loan to a flipper actually is, and the questions worth asking before wiring the money

The note is the promise to pay. The thing that ties the promise to the house is a separate document, a mortgage or a deed of trust depending on which the state uses, and it has to be recorded at the county to matter against anyone else. A signed note with nothing recorded leaves the lender as an ordinary creditor standing in line with the lumber yard. Have both drawn by an attorney where the property sits. This is the one part not worth improvising.

The 240,000 case is the one to plan on and it's still not the bad case. The bad case is he runs out of time, the hard money lender's term ends, they start foreclosure, and the house goes to a sale where it brings 205,000. Then 190,000 plus their fees and default interest and legal costs comes out first, and whatever's left, which might be nothing, is what remains. Ask when the senior loan matures. If it matures in three months and he's telling you four, that's the whole conversation.

He said he's put 40,000 in and the lender is in for 190,000 on a 168,000 purchase, so the lender funded the purchase plus some rehab. Where did the 40,000 come from and where did it go? If the budget is spent with the house unfinished, either the scope grew or the estimate was wrong, and both of those tell you something about whether 25,000 is really the last check.

Ask to walk the house. Sounds obvious and people skip it. Ten minutes standing in it tells you whether 25,000 finishes it or starts the next phase.

The thing I'd struggle with is that he's a guy you know. If it goes long and you have to send a formal demand letter to someone you'll see at a job site, do you actually do it? I genuinely don't know if I would, and that's a reason to charge for it or pass.

On price, 10 percent for four months on a subordinate position behind 190,000 with no cushion for delay is thin. Money lending into the gap on flips is generally priced well above that with points on top, because the lender carries the whole loss between the senior's payoff and zero, with no way to make the sale happen faster. Before wiring anything the checklist is not exotic. The senior lender's payoff statement and maturity date in writing, not secondhand. A line item scope for the remaining work with a contractor's number on it, so it is clear whether 25,000 finishes the job or is a payment toward it. A recorded second lien with the senior's written consent, since most hard money documents prohibit further encumbrances, and recording without consent can trip a default in the loan standing behind it, though how consent must look and how priority is established depends on the state. A personal guaranty, understood to be worth only whatever the borrower has outside the house. And a term long enough to avoid renegotiating in a panic, since four months on an unfinished house is optimistic; pricing six and letting early payoff be the upside is safer. An attorney in that state should draw the documents, and the senior's terms should be confirmed in writing rather than through the borrower.