Asked to fund a $58k second behind a $172k first, borrower is a GC I've worked with for years

tender named it. I'd add that the 77 percent is the completed number and the dangerous number is earlier.

At month 2 the first has funded 114 of purchase and maybe 15 of draws, your 58 is fully out, so 187 of debt sits on a house that's torn open and worth less than the 152 he paid. Mid-rehab a half-finished house doesn't appraise at cost. If he walks in month 3 for reasons that have nothing to do with this deal, that's where you find out what a second is worth.

If you like the borrower and want to do business with him, the version I'd counter with is a smaller loan on a smaller house where you're the only lien. Your 140 buys a first position on plenty of 110 to 130k purchase deals in most of the midwest and the south.

Dumb question that I'd want answered before any of the mechanics. Why does this need two loans at all? If the first lender will do 75 percent of purchase and all the rehab, and the deal is as good as the ARV says, why doesn't the GC have 38k of his own to close?

Because he's got three jobs running and his cash is in receivables and materials. That's a normal condition for a working GC, and it's also the answer to your question, compass. He's using solder's money because it's the cheapest 58k he can find on 10 days notice.

solder, ask him directly how many projects he has open right now and where his cash actually is. Not to catch him out. A borrower running four sites who hits a payroll crunch in month 5 will pull from whatever isn't nailed down, and your interest payment is the easiest thing on his desk to skip.

The reason the first stops at 75 percent of purchase is that they've decided 75 percent is their risk tolerance on that asset. You'd be filling in the 25 percent they declined, at 14 percent, in a worse lien position than the people who said no to it. Sit with that for a minute before you look at any other part of this.

One practical thing nobody's mentioned. Whether you can make this loan at all without a license depends on your state and on the loan's purpose. Business-purpose loans to an entity on a non-owner-occupied property are exempt from a lot in many states, and a handful of states regulate lending activity broadly enough that even occasional lending or the number of loans per year matters. It varies by state and it's a question for a lawyer licensed there, not something to infer from what other lenders in the room do.

Also ask whose entity is borrowing. A loan to him personally on a property he owns personally is a different regulatory animal than a loan to his LLC.

Where did 298 come from? If that's his number off three comps he picked, it's a wish. I'd want a full appraisal with a subject-to-repairs value, paid for by him, ordered by you, and I'd want to look at how many houses in that price band actually closed in the last 90 days in that submarket. A 298 exit in a neighborhood where everything sells at 240 to 260 is the whole deal right there.

The relationship part is the part I'd lose sleep over. You said you still get referrals from him. What's your plan the day you have to send a default letter? Not a rhetorical question, I mean literally, do you send it, or do you let it ride three months because you'll see him at a job site?

People who lend to friends almost always answer that wrong, and answering it wrong is what turns a 14 percent second into a total loss.

58k of scope on a 152k house with a 298 exit means he's doing kitchen, baths, mechanicals, and probably roof and windows. You said 6k light on the electrical service. In my experience the honest budget on that shape of house lands 15 to 20 percent over, and it's rarely one big surprise, it's eleven small ones plus two weeks of delay each.

Call it 68 to 70 all in. Where does that money come from? The first lender committed to 58 of draws. If the overage lands on him and he doesn't have it, he comes back to you, and then you're deciding whether to put another 12k into a position you already don't love. Write your loan documents assuming that conversation happens, because it will.

Wait. You've got 140k that took a career to accumulate and the first loan you're considering is a second lien at 77 percent combined on a construction project run by a friend. There will be another deal in 60 days.

If you do go forward, don't self-service it. A third-party loan servicer will collect, send statements, track taxes and insurance, and issue the notices. Pricing I've seen quoted runs something like a small monthly fee per loan plus setup, and it varies a lot by state and by whether they handle default work. The reason it matters here isn't the bookkeeping. It puts a company between you and your friend when the payment is late, so the first uncomfortable letter doesn't come from you.

How long do houses in that band sit? A 9 month note on a 4 month rehab assumes 5 months to sell, and if the average days on market plus closing is 90 in that submarket, he has no room for a failed contract. Every month past maturity is a month you're deciding whether to extend or start something you don't want to start.

Five years running my own shop taught me one rule about cash that applies here. The 140 isn't lending capital until you've carved out what the rest of your life needs. If some of that is your reserve after selling your share, then the real number available to lend is 80 or 90, and a 58k position is most of it in one deal with one borrower.

I'll take the other side, partly. Seconds behind a conservative first on a real flip get done every day and they get paid off every day. The pricing isn't crazy at 14 and a point for 9 months.

What kills it for me here is 77 percent combined with no ability to cure the senior. If the first were 60 percent of purchase and total debt landed at 65 to 68 percent of a verified ARV, and solder had enough dry powder to take out the first, I'd look hard at it. Those aren't the facts.

solder, the counter I'd actually make: tell him you'll do 30k, not 58, at 14 and 2 points, he brings the other 28 himself, and you get a cross-default with the first plus written notice rights from the senior lender. If he can't find 28k, he can't absorb one bad month either, and you just learned the most useful thing in the deal.

Get your name on the insurance as an additional insured or mortgagee for your position, in writing from the carrier, not from the GC. A builder's risk policy on a gutted house is the difference between a fire being an inconvenience and a fire being your 58k. Then set a calendar reminder to check the tax bill yourself in month 4, because a delinquent property tax lien primes both lenders in most states and nobody notices until it's expensive.

What's the rental fallback? If it doesn't sell, the exit becomes refinance into something long term, and 230 of debt on a house that rents for, what, 1,900 in that price band, doesn't cover at any DSCR a lender would write. So there is no fallback. The only exit is a retail sale at close to 298, and single-exit deals are where seconds die.

What does "cure the first" actually mean here? Does solder pay the missed payments and then still just sit in second, or does he end up owning something?

Also new to this, so: the 1 point, is that paid at closing out of the money he's lending, meaning solder wires 58k minus 580 and it just shows up as a fee on the settlement statement? And does the 14 percent get paid monthly in cash by a borrower with no income from the project, or does it accrue and get paid at sale?

Sorry to interrupt the real discussion, I couldn't follow the numbers without knowing that.

You know his work. That tells you the rehab is buildable and it tells you nothing about whether he manages money, and the second one is what you're lending against. I've watched excellent tradesmen run businesses into the ground on billing cycles alone. Ask for his last three completed projects with actual purchase price, actual total spend, actual sale price, and actual days from close to close. If he can't produce that quickly, he doesn't track it, and you're the tracking system.

The alternative you mention almost as an afterthought is the better one. 140k funds a first position on a modest house at 65 percent of a real ARV, you're the only lien, you control the timeline, and you learn the entire process once with your own money at the front of the line. You give up some yield. You get to make your first mistake in a position where mistakes are recoverable.

Small thing that has bitten me twice. Permits. If the scope includes the electrical service upgrade and any structural work, the timeline is at the mercy of an inspection department, and in some jurisdictions that's four weeks per inspection round. Build the permit calendar into the 9 months before you agree to 9 months, and decide now what your extension fee is so you're not negotiating it under pressure at month 8.

Cost side for you, which nobody's totaled. Lender's title policy for your position, recording fees, a lawyer to draft the note and second deed of trust in that state, the appraisal bramble wants, and servicing setup. Call it 2,500 to 4,500 depending on state and how custom the docs are. On a 58k loan at 14 for 9 months your gross interest is about 6,100 plus 580 of points. So your net could be more like 3,000 to 4,000 for nine months of exposure at the back of the line. Does that change how it looks?

Everything I've been reading about screening tenants applies here almost word for word. Verify what he tells you against a document he didn't create. Payoff statements from his last two hard money lenders, a credit pull with his written permission, a judgment and lien search on him and his entity. If a personal guarantee is part of the deal, the guarantee is only worth what he owns, so ask what that is before you treat the signature as protection.

Don't release draws against a percentage-complete number he gives you. Line-item schedule of values, inspected before each release, and hold 10 percent retainage on each line. On a project this size I'd do four draws max and I'd walk the site myself since you can actually read it, which is the one genuine edge you have here.

And get lien waivers from every sub before each release. Mechanic's lien priority rules vary by state and in some states a properly perfected lien relates back to when work started, which can land ahead of your second. That one detail has cost people their whole position.

girder's point about walking the site is the interesting part to me. There are people who do nothing but third-party draw inspections for lenders, and solder could clearly do that work. Might be a better way into this than putting 58k behind another lender on your first try.

Run it at 265 instead of 298 and tell me what you see. Selling costs at 6 percent is 16, so net 249, against 230 of debt plus roughly 18 of interest and points and 6 of carry. That's 254 of payoff against 249 of proceeds. The deal breaks at an 11 percent ARV miss with no rehab overrun, and harrow says assume a 15 percent overrun. Combine both and the second is impaired before anyone has done anything wrong.

Pull the title commitment yourself and read the exceptions rather than the summary page. Old unreleased liens, an easement across the back, a prior owner's judgment. Also check whether previous work on the house was permitted, because an unpermitted addition included in that 298 comp basis can come off the square footage at appraisal and take 20k of value with it.

What happens on day 275? He hasn't sold, he's current on payments, and he asks for 90 more days. Write down your answer today, along with the extension fee and whether the first lender will extend on the same schedule. Their extension terms and yours falling out of sync is how a second gets stranded, and you should get the senior lender's extension policy in writing before you fund rather than asking about it later.

Reading the whole thread, the version I'd do is the one where you're first lien on something smaller and boring, or you put 50 into a lender's fund at 9 or 10 and spend a year watching how the paper actually behaves before you underwrite a deal alone. 14 percent behind 172k of somebody else's money on your first loan ever, with a borrower you can't comfortably sue, isn't the place to start learning.