Private Lender Question

15 Replies

Hi all - 

I have a private lender that told me to write out a proposal for her to be my bank on my first investment.  I have a question for BP.  I would like to use the private money to purchase the property and fund part of the rehab.  I am wondering how I structure the deal since the backing for the loan will be the property?  

Since I will be paying cash for the property I will need that on hand in order to make the purchase, but I wouldn't ask her to give me any cash if there isn't a property to back up her loan.  I know I am over thinking this, but I can't get it straight in my head.  I would appreciate if anyone could help a newbie out...

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couple ways...we fund most all our rehabs with private lenders...

But typically your private lender sends the purchase amount to the title company to close on the property. 

A mortgage gets recorded to secure their interest

They give you the rehab money. 

Every once in a while I get someone who insists on just giving me the money, i write them a promissory note, then I fund closing, and record a mortgage.

To give security for such deals I have recorded a mortgage on a different property to secure their interest, that way you have cash to write cash offers. Otherwise technically they are financed offers. Although I admit I write them as cash offers. 

Instruments between you and  your lender;

Promissory note spelling out terms

First mortgage on the property for lender

Insurance naming lender as mortgagee /  additionial insured.

Does that help

Here is what I would do.First you have the cash to buy the property. And then you are going to use private money to fund part of the rehab. I would use part of the private money to fund the purchase of the property, and pay cash for the rehab. Just like Dell said above. There are certain things that should be in place to make sure your private lender´s loan is secured and insured.

Promissory Note – If you do not have one you can find examples online.

The Deed – Their name should be on the Deed since the helped purchase the property, either first or second on the deed.

Insurance – Again they should be first payee or second payee.

Once the property is sold you should have them sign a release of promissory note. Stating that the note is paid in full and all terms were meet.

Their name on the deed creates a certain liability they may wish they did not have....ask me how I know :-) 

A first mortgage will significantly reduce their liability if someone should happen to sue the property owner for anything related to the renovation, or property disclosure issues even a year after the sale

When I fund through my IRA my name does not appear in any of the documents and my interest never shows on the deed. Only my account number and the company where the account is held is stated. This provides some privacy but even with this precaution I have had properties on which I held mortgages tied up in litigation when the plaintiff filed suit against my borrower.

When I fund a purchase I simply wire funds into an escrow account. The title company holds the funds until the the day of the closing and then distributes them as needed. It has never happened, but if for some reason the transaction were not completed the funds would be returned to me (to my IRA) by the title company.

It is rare for me to allow a borrower to leave a closing with any of my money.  If I fund some of the rehab an escrow account is created to hold repair funds.  The funds are disbursed according to terms spelled out in the escrow agreement.  Draws on the escrowed funds are made upon proof that specified repairs have been completed (photographic or in person visits), upon presentation of an invoice from the contractor and receipt of the contractor's release of lien.

Thanks everyone. I think I have it figured out now. I am meeting with her on Thursday and I will suggest the route that she just wires the money to an escrow account prior to closing. Then I will put her as first mortgage on the property. I'll see what her comfort level is on the rehab money. I would have no problem having her distribute in draws as you suggest @Jeff Rabinowitz  .

I have never bought any real estate before so this is all new to me.  I didn't even realize you put the mortgage holder on the insurance...  Oh well I joined Bigger Pockets to learn which I have been doing a lot of lately.

When we were talking a few weeks ago I was mentioning to my private lender that I was thinking about finding some hard money to use for a flip.  She said that is an option but it is expensive money and told me to avoid it if possible.  At that point I asked her if she would be interested in investing with me, and she said to work something up.  I am struggling with what is an acceptable offer.  I obviously want the cheapest money I can get, but I don't want to offend her.  I am thinking 7-8% annually interest only payments.  Is that laughable or am I on the right track?

@Dell Schlabach  sounds like you have a story up there??

Agree with @Jeff Rabinowitz  I would borrow at that rate but wouldnt lend at that rate. 

Having said that, there are plenty of people who think a 5-6%return is spectacular, others who think 10-12 is way to low. 

I would just ask her what interest rate she is looking for. 

Our private money ranges from 6_10% with the majority being at 10%, and no points. 

Short version of the story...I rehabbed a house, where my "lender" was in tile on the property. Eleven month after closing on the house, he got served papers suing him personally, his corporation, the listing realtor, buyers agent, home inspector etc. everyone except me, since I was not on title. 

Apparently the house flooded at some point, according to them,  my lender should have known the almost unknowable,  He had not seen the house until a couple days before the close on the sell side.

Proper disclosures were done, provided to listing agent who forwarded to buyers agent, but buyer never recieved them. 

$6000, in legal fees for my lender to date,  multiple mediation session, it looks like its going to court, joy! :-(  ... a position a "lender" most likely doesnt want to be in. 

First mortgage position would have propected him from this, and I would be the party named. 

Wow that sounds rough for your "lender" @Dell Schlabach  .  I hope it get resolved as best it can at this point.

Thanks @Jeff Rabinowitz  and Dell for the tips on the numbers.  I'll just go chat with her and see what she is thinking.  After all she is doing me a favor just as much as I would be doing for her.  I'll let you guys know how it goes!

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In the case I was involved in, my borrower was sued for a harm to the plaintiff which occurred before I had done business with the borrower and which had no relationship to the properties I funded. I was not on title but I did record the mortgage on the property and this is a public filing. The plaintiff added my IRA to the suit as a conspirator. (He was looking to seize the properties I had liens on and to destroy my relationship with the borrower.) The plaintiff knew I had no culpability within weeks of the suit being initiated yet it took nearly 3 years of legal fees to free 3 of the properties from the suit. The 4th property still has a cloud on title even though the plaintiff withdrew from the suit 6 months ago.