Fractional note at 11 percent or the same lender's fund at 9 preferred

Run the idle-cash drag before anything else, because it eats most of your 200 basis points.

If the average note lives 7 months and you sit in cash for 1 month between deals, you're earning for 7 of every 8 months. That's 87.5 percent uptime. 11 percent times 0.875 is about 9.6 percent. The fund's 9 is on committed capital with no gap, assuming they stay fully deployed and the preferred actually pays in cash rather than accruing. So your spread is closer to 60 basis points than 200, and you're taking single-asset concentration for it.

Two things that would change that math. One, ask for a share of the points. On a $400k loan at 3 points that's $12k, and your 25 percent share would be $3k on a 100k position, roughly 300 basis points of extra first-year yield. Most lenders say no, some split one point with participants, and it costs you nothing to ask. Two, ask what their actual redeployment gap has been. If they have deal flow and can place your payoff same week, uptime goes to 95 percent plus and the fractional wins on paper.

The fund number I'd want is their deployment ratio over the last four quarters. A fund sitting on 20 percent cash and paying you 9 on the whole balance is earning that money somewhere, or it isn't, and either answer tells you something.

A two page term sheet is not a document set. Before you fund the fractional I'd want the co-lender or participation agreement, the servicing agreement, the note, the deed of trust, the title commitment, and the lender's insurance certificate showing who is named as mortgagee.

The clauses I'd read first:

How your interest appears in the land records. Some arrangements record you as a fractional beneficiary on the deed of trust, others hold your interest through the lead lender as agent with nothing recorded in your name. Whether a county will even accept fractional beneficiary recording varies by state, so ask them to show you a recorded example from that county rather than describing it.

Majority control language. You already spotted extension and workout. Also look for whether the majority can subordinate, release collateral, or accept a discounted payoff, and whether "sole discretion" appears anywhere near those verbs.

Protective advances. If the borrower stops paying taxes or insurance, can the lead advance and charge your share, and can they call capital from you? A participant who can be assessed has an open-ended liability, not a fixed 100k position.

And whether either of these is being offered to you as a security depends on how the structure is put together, which is a question for a securities lawyer to read before you wire, not after.

You're diligencing the loan. Diligence the lender, that's where the loss comes from.

What I ask for, in writing:

Every loan they originated in the last three years that went past its original maturity, with what happened to each. Not a default rate, a list. Extensions are where the truth is.

How many they've foreclosed, how long it took in that state, and net recovery against principal plus accrued. If the answer is "we've never had one" and they started in 2021, they haven't been tested.

Who sets ARV. In-house desk review, a licensed appraiser, or a broker's opinion. Then ask for a case where the exit came in below ARV and what the participants got.

On the fund side, the PPM answers you want are how they value a non-accrual loan, whether the preferred accrues if collections fall short, what the gate and suspension provisions say, and what the related-party servicing and asset management fees are. A 9 percent preferred with a suspension clause and a 90 day notice period is not liquid at month 13, it's liquid when they say it is.

sable, the reason I'd lean fund on a first position with a new relationship is that the fund forces them to eat their own workout costs. But that only holds if the manager has real skin in the fund alongside you.

The file math on option A is better than your post implies, so make sure you're worrying about the right thing.

70 percent of 470 is 329, plus 90 of rehab is 419, and the loan is 400. Against ARV of 690 that's 58 percent. Against total cost of 560 it's 71 percent. Both of those are fine numbers if ARV is honest. Stress ARV down 12 percent to 607 and you're at 66 percent, still inside a foreclosure and resale with accrued interest and legal.

The gross spread is 690 minus 560, so 130k, about 23 percent of ARV before selling costs and 9 months of carry. After 6 percent to sell and roughly 40k of interest and points, the borrower's profit is thin. That's the thing to underwrite. A borrower with 30k of upside walks away faster than one with 90k, and a borrower who walks turns your 58 percent LTV into a 14 month legal process where you're funding the taxes.

So: is the 90 rehab budget a real scope with line items and a contractor bid, or a number that makes the deal work? Ask for the scope, the draw schedule, and whether draws are inspected before funding or released on photos. Ask what happens to your share if the budget runs 20 percent over and the lead lends more. On a 12 month note the risk is time and scope, not value.

Reading ledger and canton back to back, 60 basis points to never have to do any of that sounds cheap to me.

The part I'd push on is the redemption language, because that's what you're actually giving up. A 12 month lockup plus 90 days plus a suspension clause means your money could be there for two years in the exact market where you want it back. If the fund pays 9 and I can't get out when loans stop paying off, I've bought a bond I can't sell rather than passive income.

Basic one on the fractional. If the borrower stops paying, who files the foreclosure and who pays the lawyer? Does that come out of the loan proceeds first, before the four of you split anything?

And is there a personal guarantee on a loan like this, or is the property genuinely the only thing standing behind it? Everything I've read says hard money underwrites the asset, which I read as meaning nobody bothers with the guarantee, and I'm not sure that's right.