A case worth studying: a second position lender who came out ahead on a luxury flip the sponsor lost money on
Worth laying out because the gap between the two outcomes on the same deal is the interesting part. Say an investor places 225,000 into the second lien position on a luxury flip and, sixteen months later, gets every dollar back plus 31,500. The sponsor on the same deal loses roughly 93,000 of his own cash. The property: a 6,200 square foot house built in the early 90s in an established high-end suburb, dated in the familiar way, wet bar, pink marble, a cracked pool shell. Purchase price 2.15M. The first lien lender funded 1.505M of the purchase plus a 640k renovation facility. The sponsor put in 645k of cash at close plus about 25k of acquisition costs. Say the second position investor comes in at month four, once the millwork and stone package come back 155k over the allowance and the renovation facility is already committed. Terms in that position often look like this: 225k, 11 percent interest accruing and paid at payoff, two points up front, a nine month term with two three-month extensions at half a point each. In this scenario 155k goes to the overage and about 70k to carry. Renovation finishes at 795k against a 640k budget. Listed at month ten for 3.795M, sits for eleven weeks, cut to 3.595M at month thirteen, offer accepted at 3.55M at month fourteen, closes month sixteen. The second lien payoff: 225k principal, 24,750 accrued interest, 2,250 in extension fees, plus 4,500 in points already collected at funding, 31,500 total on 225k over twelve months deployed. At closing the waterfall runs roughly: 3.55M gross, about 205k in sale costs, 2.415M to the first lien including its accrued interest, 252k to the second position, and the remainder to the sponsor. Against roughly 770k of sponsor cash including carry contributions, the sponsor ends up around 93k short. The part of a structure like this that matters most is what happens mid project, when subs working the overage go unpaid on schedule and a second position lender has to confirm nothing has been recorded against title ahead of them. Since recording and lien priority rules differ by state, that confirmation only comes quickly when a real estate attorney licensed in that state drew the documents and ran title before funding. What is worth keeping from a structure like this: extension fees priced into the note at funding, so nobody negotiates under pressure near the end of term, and a payoff waterfall that reads in one page. What is worth changing: requiring a monthly draw log rather than taking the sponsor's word on where the funds went.
