A 10% debt deal on a portal. Where do I sit in the stack?

Looking at a first position mortgage offering on a crowdfunding portal. $10,000 minimum, 10.0% annual rate paid monthly, 12 month term with two 3-month extension options at the borrower's election, loan amount $1.85M against a stated as-is value of $2.6M. Single family rehab, four houses in one metro, cross collateralized.

What I have: an offering summary, a borrower track record page saying 31 prior projects with zero losses, and an appraisal date of nine months ago.

What I can't work out. The summary calls it first position, but the platform is the named lender and I'm buying an interest in an LLC that holds the note. So I'm not on the deed of trust myself. Does that matter in practice if the borrower stops paying? Who forecloses, who pays for the foreclosure, and does that cost come out of my principal?

Also the extension options bother me. If the borrower can extend twice at their choice, my 12 month loan is an 18 month loan whenever it suits them, and I don't see an extension fee listed anywhere.

The rate is fine for what I want. I've been trying to move toward lending rather than owning and this is the cleanest looking entry I've found. I just don't want to discover my position is thinner than the word "first" suggested. Anyone read one of these all the way through?

6 replies

2nicole_adeyemiPassivePRO5

Nine month old appraisal on a rehab loan is the number I'd chase. As-is value of $2.6M against $1.85M is a 71% LTV, which sounds comfortable until you ask whether that $2.6M was as-is or after-repair. Those two get printed in the same font and mean completely different things. If it's ARV, your real day one coverage is much thinner.

Cross collateralized across four houses helps you and hurts you. One bad house doesn't sink you, but you also can't get released from a good one early.

4laurenkim53Passive

Free extensions are a giveaway that the sponsor expects to need them. On the ones I've looked at in smaller rural markets the extension usually costs the borrower half a point to a point. No fee means no pressure to finish.

2ehernandez74PO2BPRO5

parcel's point about as-is versus after-repair is the one I'd resolve before anything else, and I'd want it in writing from the platform rather than from the summary page.

The other thing I'd ask: 31 projects with zero losses covers what period? If all of it is 2019 to 2022 in a rising market, it tells you the borrower can finish houses. It doesn't tell you how they behave when the exit price comes in under budget.

1megan_doyle15 Get yours

What does cross collateralized actually mean here, all four houses secure the whole loan? Sorry, still learning the words.

3ryanmck27SC2C

rigging, yes. Each of the four properties secures the full $1.85M rather than a quarter of it, so the lender can go after any of them for the whole balance.

tender, the piece I'd add is servicing. Ask who collects payments, what happens to the monthly if a payment is late, and whether the platform keeps servicing if the loan goes into default. Some of them hand distressed loans to a third party and the fee for that comes out of recovery.

A 10% debt deal on a portal. Where do I sit in the stack?

6 replies