Paid off at month 16, and I'm the only one in the deal who made money
I've been saving toward a first purchase and I got impatient with 4 percent, so a year and a half ago I put 225k into the second lien position on a luxury flip instead. It paid off last month. I got every dollar back plus 31.5k. The sponsor lost about 93k of his own cash on the same deal. That gap is the whole reason I'm posting.
The property was a 6,200 square foot house built in the early 90s in an established high-end suburb, dated in the way those houses are dated, wet bar and pink marble and a pool shell that had cracked. He bought it at 2.15M. His first lien lender funded 1.505M of the purchase plus a 640k renovation facility. He put in 645k of cash at close plus about 25k of acquisition costs.
I came in at month 4, when the millwork and the stone package came back 155k over the allowance and his reno facility was already committed. That's why my terms looked the way they did: 225k, 11 percent interest accruing and paid at payoff, 2 points up front, 9 month term with two 3-month extensions at half a point each. He used 155k of it on the overage and about 70k on carry.
What actually happened. Renovation finished at 795k against a 640k budget. Listed month 10 at 3.795M. Nothing for eleven weeks. Cut to 3.595M at month 13, took 3.55M at month 14, closed month 16.
My payoff: 225k principal, 24,750 accrued interest, 2,250 in extension fees, and the 4,500 of points I'd already collected at funding. 31,500 total on 225k over twelve months of deployment.
At closing the escrow numbers ran roughly: 3.55M gross, about 205k in sale costs, 2.415M to the first including its accrued interest, 252k to me, and the rest back to him. He'd put in around 770k counting carry contributions. He came out around 93k short and he told me so on the phone without being asked, which is more than I expected.
The part that nearly broke it wasn't the price. It was month 12, when two subs who'd worked the overage hadn't been paid on time and I spent a week finding out whether anything had been recorded against title ahead of me. Nothing had. Recording and lien priority rules differ by state and I had a real estate attorney draw my documents and run title before funding, which is the only reason I could answer that question in a week instead of a month.
What I'd keep: the extension fees priced into the note at funding so nobody was negotiating under pressure at month 9, and a payoff waterfall I could read in one page. What I'd change: I would have asked for a monthly draw log rather than taking his word on where my 225k went.