What to do with private money lender

Question

Hello All,

New to the site, very excited to get involved with REI.

I am thankful that everyone is open with there experiences and I'm glad I join joined.

My question is how to I avoid problems with getting with a private lender on a purchase?

I have found quite a few properties that I would like to rehab.

Thanks!

Henry Holmes · Answer

Hey thanks guys!

Before I post again I should learn the lingo.

Thanks for clearing that up.

Wish you all the best of luck out there and have a Merry Christmas!

Jeff S. · Answer

First, I'd be very leery doing business with anyone I even remotely thought was going to cheat me, @Henry Holmes.  This is not the basis for a good relationship no matter how well protected I though I was with the paperwork.  You'll always be suspicious and that's not good.

You can call your friend's father a lender, but in this case you are partnering with him, not borrowing.  It's not clear, but I assume he will buy the house in his name and perhaps fund the rehab as well?  You will do all the work and then the two of you will split the profit according to an agreed upon percentage?  If so, then this is not a loan and there would not be a note, deed of trust, or any interest involved.

In this case, you need a partnership agreement drafted by a competent real estate attorney. This document would specify all the terms of your relationship, including responsibilities and the profit split. Pretty standard stuff. If you are contributing money as well, say for the rehab, then a deed of trust might also be appropriate.  Your lawyer could advise on that and provide the necessary documents.

Alternately, you might find another lender and obtain a more traditional hard/private money loan.  This could be challenging though, since it's clear you are new to this.  Partnering on your first few deals, especially with the father of a friend who might be a bit sympathetic to you (?), could be a safer way to go.  On the other hand, there is much to be said for avoiding business relationships with friends and relatives.

Good luck, Henry.

Jon Holdman · Answer

That's more like a money partner than a lender.  What is it you're bringing to the table?  The deal and all the work?  What's your experience level?

A safer way for you is to put both of your names on title if this is really going to be a money partner deal.  Then you do all the work.  I assume you would be pulling permits and hiring licensed subcontractors but perhaps filling the general contractor role yourself.  You wouldn't take any pay for your labor as you go.  Rather, after the deal is sold and everyone is paid, including your friend's father for all the cash he's put into the deal, the two of you split the profits.  50/50 is a pretty typical starting point.

A difference in this vs. a pure loan is that you can expect this investor to be all over your deal.  You're spending their money, so they often want to help with all the decision making.  That's different than a pure loan where the lender brings the cash, gets payments, then gets paid off.  That's typically a much more hands off relationship.  But you're on the hook for the payments and the pay off, even if you lose money on the deal.

Jeremy Tillotson · Answer

@Henry Holmes put a mortgage amount on the property for the value of improvements, you can release the loan at closing. Not a lawyer so no legal advice.

Henry Holmes · Answer

The lender is a friends father and he says he will buy the property and let me rehab we split the profits.

I don't want my friends father to get greedy and cheat me out of the flip.

How can I protect myself? Where do I get a deed of trust or mortgage for the father to sign?

Jon Holdman · Answer

A private money lender is a lender, not an owner.  You would buy the property and the lender would give you a loan.  The loan is secured with a deed of trust or mortgage, depending on what's common in your state.  That gives the lender the ability to foreclose if you don't pay, but doesn't give them any ownership.

Only him on title sounds like a completely different sort of deal.  Explain what he's proposing to you.  This seems goofy.

Henry Holmes · Answer

Thanks!

Now how do I not get cheated out of the deal by them.

If he buys the property and I do the rehab, what stops him from selling with and keeping all the profits?

He already told me that it's only him on title

Account Closed · Answer

Hello

As long as you know what you getting involved with and have an exit strategy. They usually have 12 month terms and high interest rates. If used strategically it can be a great tool to increase your buys.

Good Luck