Lent a flipper $40k and never recorded anything against the house

This was two and a half years ago, before I'd read anything useful. A guy I'd known for a while, done two flips, seemed competent, was short on the rehab money for a third. He needed $40,000 for four months and offered me 12 percent plus $2,000 at payoff. On $40k for four months that felt like a lot of money for doing nothing.

We signed a promissory note. I found a template online, we filled in the blanks, we both signed it, and I wired the money. That was the entire process. No title company. No attorney. No deed of trust or mortgage recorded at the county. It genuinely did not occur to me that the note by itself doesn't attach to the house. I thought the house was the security because we'd talked about the house.

What I found out later, after things went bad, is that there was a $128,000 hard money first already recorded on that property, and it had a clause requiring the lender's consent before any additional debt. So even if I'd tried to record something I'd have had a fight, and I'd have been in second position behind a loan that, with default interest and fees, ended up eating essentially all the value in the house.

The flip stalled. Permits, then a foundation issue, then his money ran out. Month 4 came and went. He wasn't hiding, he just didn't have it. He eventually sold the house rather than finishing it and the first lender took what it took. Over the next 26 months he paid me back in pieces, $500 here, $2,000 there, mostly out of other jobs. I've got $31,400 of the $40,000. No interest, no $2,000. He still says he'll finish and I half believe him.

What I'd do differently, plainly. I'd have run a title search before wiring, which would have shown me the $128k first and would have cost me a couple hundred dollars. I'd have recorded a lien, and whether that's a mortgage or a deed of trust depends on the state, so I'd have used a local attorney to prepare it instead of a template. I'd have asked what position I was in and gotten the answer in writing. And I'd have looked at his budget, because $40,000 to finish a rehab that a $128,000 loan had already funded should have been a question rather than an opportunity.

6 replies

4stephen_ok9CO2CPRO6

You're being fair to yourself about the lien but I think the lien is the second mistake. The first one is that you were funding a rehab overrun. Money that shows up after the original budget is gone is the riskiest money in the deal, because by definition the plan already failed once. A recorded second on that house would have made you a secured creditor of a project that had no equity left. Same loss, better paperwork.

0jessreyes12AU1APRO8

I want to ask the embarrassing one since that's my whole thing here. If bramble had recorded a second and the first lender's document said no additional debt without consent, what actually happens? Does the recording just not count, or is it valid and the borrower is in default with the first lender?

5samantha_ruizAU4APRO6

@compass generally the recording is still a recording and it still sits in line behind the first, and the consequence lands on the borrower, whose senior loan documents say he's in default for putting it there. That gives the senior lender the right to call the loan. How the specific clause and remedy work depends on the documents and the state, so it's a real estate attorney question rather than a forum one.

@bramble the piece I'd add from my own bad month. Getting paid $500 at a time for 26 months is worse than a clean loss, because you keep the file open, you keep the relationship half alive, and you never book the number and move on. I had a $12k version of this and I finally wrote it off in my own head so I'd stop thinking about it. He still pays sometimes.

1carlos_nunezActive

As the guy who's been the borrower asking for the emergency $40k, I'll say the honest thing. When I'm at that point I'm not lying to you, I'm just wrong. I believe the number I'm telling you. The correct response to a borrower in that state isn't better documents, it's no. @meridian has it right.

2ryanmck27SC2C

The detail I'll carry out of this is that you thought the house was security because you'd talked about the house. That's such an easy way to be wrong and nobody says it out loud.

Lent a flipper $40k and never recorded anything against the house

6 replies