What would I be holding if a contractor I trust wants 25,000 for four months?

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 your state uses, and it has to be recorded at the county to matter against anyone else. A signed note with nothing recorded means you're an ordinary creditor standing in line with his lumber yard.

Get both drawn by an attorney where the property is. This is the one part I wouldn't improvise.

Your 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 you're looking at whatever's left, which might be nothing.

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% for four months on a subordinate position behind 190,000 with no cushion for a delay is thin. People lending into the gap on flips are generally pricing well above that and taking points on top, because you carry the whole loss between the senior's payoff and zero and you have no way to make the sale happen faster.

What I'd want on Thursday, and none of it is exotic:

The senior lender's payoff statement and maturity date in writing, not his memory of it.

A line item scope for the remaining work with a contractor's number on it, so you know whether 25,000 is the finish number or 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 you're standing behind. Whether the consent has to look a particular way and how priority is established depends on your state.

A personal guaranty, understanding that its value is whatever he has outside the house.

A term long enough that you aren't renegotiating in a panic. Four months on a house that isn't finished is optimistic. Price six and let him pay you off early.

Have an attorney in that state draw the documents, and confirm the senior's terms in writing rather than through him.