A customer recently asked if I would take on a second mortgage on his home with me as the lender for a remodel. The mortgage would cover the ‘over and above cash on hand’ portion of the project and amount to about 15% of the total job. He has cash for the rest and I will still eat and cover overhead. Has anyone had a similar rxperience?
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Personally, I don't think I would do this - even if I had the money - lol.
I think that the most important question you should answer is how you would protect your investment. Would you (could you) foreclose if things went bad?
sounds like somebody looking for a sucker. Jim
When I have heard of this, the contractor has a source of financing thru a bank or other lender, and they finance the project for the client using this source rather than their own money.
If you are lending your own money, I would be sure the client has quite a bit of equity and that you record a deed of trust correctly to protect your interest. It would probably take a lawyer to write you an effective note in a situation like that.
DITTO davidmeiland
When I have heard of this, the contractor has a source of financing thru a bank or other lender, and they finance the project for the client using this source rather than their own money.
If you are lending your own money, I would be sure the client has quite a bit of equity and that you record a deed of trust correctly to protect your interest. It would probably take a lawyer to write you an effective note in a situation like that.
I know that many remodelers have several sources of financing and carry the applications, or at least pre-qulaification paperwork with them to initial meetings.
These tools should be introduced at an appropiate time, and as a convenience, not a necessity. If the HO decides you are only interested in the money and getting paid.... it could turn any deal south.
No experience but let me ask you this: are you in the remodeling or the mortgage lending business? (your name says it all?)
As for me, I stick with my specialty.
I have done something similar for 2 different customers for roofing projects.
I don't think either of them ever owed me more than $4000 at any time, and I think each of 'em was paid off in under 15 months.
I hada previous track record with both of these customers, was prepared to lose the $4000 but figured the chances of loss were virtually nil with these to customers.
VERY few folks I would do this for---and both paid 30-50% down on the project.
Stephen
Bad idea. You're not in the money lending business. There are all sorts of protections and policies that banks have in place that you don't. There must be a reason why they can't get money from a bank. There are so many ways this can go bad for you it's not worth what you might gain.
Just the fact that they want to do a remodel but don't have the money is an indication that they aren't good managing money.
There must be a reason why they can't get money from a bank. There are so many ways this can go bad for you it's not worth what you might gain.
Another way to look at this is opportunity for gain.
I've privately carried several mortgages, including seconds. It's pretty simple to assess risk and plan accordingly. Given today's rates, I have no problem with the prospect.
Lending institutions are bound by rules/ratios that don't encumber the private noteholder. Sometimes a diamond can be found in the dust bin of rejected borrowers. Sometimes there are other reasons for an HO to want to avoid normal lending channels. Doesn't matter what the HO's motivation, just risk/gain assessment by the potential noteholder.
The far and away best return I've gotten was from a rejection situation. I looked at the credit report and laughed. Obvious why they were rejected- and proceeded to loan the money requested. At the end, just before foreclosure, I tallied the return. With associated late fees, it worked out just over 30% annually. Interest rate was barely over what a good-standing borrower would have faced. Wish I could find another.
It's a different hat for a contractor to wear, but not necessarily a poor fit.PAHS Designer/Builder- Bury it!
I was thinking along the same lines as you with a similar situation to Vantom's. The loan would be less than my own actual labor I put into the job. thanks for the comments guys.
not to mention------ there is a secondary market for these types of notes.
might even be possible to make the loan, do the work, sell the loan at a discount on the secondary market---and still come out ahead of where you would be if the project was an all cash deal.
I would agree-it's a different hat and a different opportunity------- but definitely not for everyone.
In fact--if I was a bit smarter I would be kind of interesting in developing investments in that secondary/discount market myself. It's another tool for making money without climbing on roofs.
Stephen
If you want the secondary market you need to tailor the note to expectations, which will change somewhat locally. I've dealt with that market minimally here, don't find it attractive.
Pretty sure every market has private money available, both coming and going. It's a matter of finding it and fitting in.
For me, the noteholder, LTV (loan-to-value) is the main issue. That note to the crappy borrowers was a first for $45K on a $95k purchase, $50k equity. Risk? I didn't see much. You do want to know where you stand with bankruptcy, etc. The note was paid off the day before the courthouse steps auction, had grown to $53k. The only reason to foreclose was they didn't make enough payment to carry the expenses and my family member partner didn't like the smell.
Negative amortization I have no problem with. Sometimes it's best for everyone involved even if that wasn't the original intent. Currently advising someone about a purchase involving a life estate. That's trickier.
If I could find another crappy borrower with low LTV, I wouldn't hesitate to take out a home equity loan. After years of frustration, I finally figured out how to get one. We don't fit normal guidelines at all well. So you get creative.PAHS Designer/Builder- Bury it!
just to add my two cents, I agree with tom. I don't know anything about this but like the idea. I have heard of difficulties arising with deeds of trust? in that you have to be first in line and IRS comes first, property taxes (county govt) second. as long as you are aware and no surprises then fine, just do your homework.
in reading rich dad poor dad, there was a quote from ray crock made after a speaking engagement at a business college class. ray was invited to the local campus tavern after class and accepted. in the course of conversation ray asked the assembled group if they knew what business he was in. big laughs, ray asks again, this time in a serious tone. finally one student says "ray who here doesn't know you are in the hamburger business"? ray says wrong, I am in the real estate business.
if memory serves correct mcdonalds is the nations 2nd largest private land owner behind the catholic church, and the combining of business enterprises is the secret of that company's success. now if i could just remember that i am a businessman with a hammer and not a craftsman with a business.....
One other factor. What is in front of you. And do you have the assests to pay it off.If there is 1st then, and it goes bad he will have to comeup with enough cash to pay off the first, no matter waht the LTV.
Not a problem.
You need to be prepared to show up for the auction on the courthouse steps. And as I mentioned, there's always a local supply for financing. Sometimes a large gain opportunity
My one foreclosure, I was ready, looking for a bargain. Unfortunately the borrower got refinanced the day before the auction. Worse, she hooked up with a shark who insisted on a deed-in-lieu-of-foreclosure before financing. Didn't know anything of the sort was legal, but I wouldn't do it anyway. Instead of getting a portion, or all, of her substantial equity, she lost everything, lives in subsidized housing.
I'd been nice enough to previously offer to buy the house and let her stay in half (zoned duplex), or pick a realtor and list it. Had the auction occurred, the several small incumbrances that were filed after my 1st probably would have lost out.
I know a guy here who was in arrears on an apartment building. Went to the lender and bought the discounted 1st. Foreclosed on himself. The 2nd holder (previous seller) was at the auction, declined to bid, just wondering how much he was going to lose (everything). I was there, not to bid, but with a client who was. He didn't get the bargain he'd hoped. Still an excellent deal for the 1st noteholder, the owner.
LTV is pretty much everything.PAHS Designer/Builder- Bury it!
about 10yrs ago i was up early wash'n down the deck of a friends fathers boat that i was say'n on in ft lauderdale... i was admire'n a boat in the next slip... and chat'n with the guy that was drink'n his coffee on deck... i commented about the boats name... something like... "black gold" and asked if he was in the oil business...
he said "nope... roofing".... I asked.. commerical? "nope... single family homes" was his reply....
for the next hour i sat on his rear deck drank his coffee and we talked roofs... this continued for a couple more days... super nice guy....
here is the short story...
dude (boat owner) needed a roof on his house... went down the list in the yellow pages getting quotes and meetig roofing contractors... He'd get the price and ask if they financed... none did... moreover one told him he'd make millions and get every job if he could finance...
set the ball to roll'n...
what he now (or at the time did) only reroofs... $100 down... zero interest and $89 a month.... for 120 months... $25 late charge... and he puts a second on the home... this was based on 25sq single story home... the reason the no interest was he didn't want it paid off except the full amount over 10yrs or in 2yrs when the house sold he wanted the full due amount...
he told me he had 8 crews and 2 tear off only crews with dump trucks.... he furnished the shingles which he purchased by the truckload... he furnished the nails, felt, compressors, guns... everything all on a service like truck... almost all his jobs were either one day or 2 day... one day jobs the tearoff guys there before light and the roofers usually finished intime to start another job... the tearoff guys could do a second house same day... which the roofers would start on and finish the next morning...
anyway... the whole business was based on him financing every job and charging what seemed to be about 3x the going rate at the time.... he did tell me the salesman made the $100 down plus $5 a month for the term of the contract... and that the $25 late fees purchased his boat... seems the low late fees were there to encourage them to be late and he said about 20% paid late every month usually the same ones.... said his bank would loan him money on the notes he held (did this at first to pay his costs) but that now he has the cash flow to keep rolling... at the time i think he told me he had over 3000 notes...
thought some of you guys would find that as interesting as i did... because of it I almost went into the roofing business...
p
Yes, that was interesting, very. Not that it'd ever suck me into the roofing business. Can't imagine anything that could. Partly that I lack financial motivation.
What it demonstrates is the opportunity for a totally different sales approach. He was careful to write the notes such that they reinforced his model. I do the same, but with a different model. Late fees are icing on the cake. I write per diem late fees and sometimes prepayment penalties.
Notice that he didn't say anything about LTV. When you're doing large volume, averages work. 1 or 2 at a time is pretty risky if you're averaging.
Thanks for sharing that.
I once was friendly with a collection agency owner in Denver. The business fascinated me- from afar. He told me a lot of how it worked. One day pulled out a Denver Post Sunday edition where he was featured on page 1.
His fame was that he'd figured out how to take folks' houses from them for past due medical bills. Legally? Yup, until they changed state law because of him.
I'm more tuna than shark. Couldn't enforce a deed-in-lieu-of-foreclosure on somebody here even if it is legal. PAHS Designer/Builder- Bury it!
I would think the interest rate would have to be in the high teens to even consider the risk you would be taking on.
I wouldn't ask a mortgage broker to build my addition.
Jon Blakemore
RappahannockINC.com Fredericksburg, VA
There any number of finance companies who will carry this note for you. They are in the financing business and they will pay you a finders fee for taking the application just like a broker. A lot of home improvement folks get themselves partnered up with a financer like that. The Trade shows even see a few booths manned by reps from financers signing up remodelors.
Greentree and Countrywide are two names. The bank you do business with might also be interested.
You can bet your bottom dollar that if they are not interested, you should not be either
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