Protecting your Investor when BRRRRR'ing

18 Replies

Hi BP, I have been diving deep into the BRRRRR strategy the last few months. And there is one part that I want to be clear on. If you could help me clarify it I would greatly appreciate it! When finding a private lender, Lets say a family member or friend who is willing and able to invest more or less the entire amount for the purchase and rehab of a property. I read in the BRRRRR book that we protect the investor by putting a first mortgage in their name as to basically give them the property if the deal goes upside down.. Now is this the only way we give them peace of mind if their money is tied up in the deal? What else is put in place to prevent an investor or lender of any sort from coming after your personal property if you've taken $100k for the deal? Thank you Everyone!

@Robert Trevino an ideal BRRRR candidate will have enough built in equity that the property should easily cover the debt. That, in itself, is good protection for the lender. For the borrower to have personal finances protected, the property should be purchased by a well setup LLC. An attorney in your state should be able to help you set up that protection

And the other side of the coin, if you dont buy a great deal and things go wrong and you end up getting foreclosed on the lender can seek a deficiency judgement against you. And why shouldnt he/she. They lent 100k, they want to get that back and interest. If I would have to sell your property for 80k I am going to look for 20k by putting a judgement against you. I dont know if an LLC is protection from a deficiency judgement. Just buy great super duper deals and make lots of money and there will be no problem.

2nds can also come after you if they get wiped out.

https://www.nolo.com/legal-encyclopedia/deficiency-judgments-after-foreclosure-texas.html

Fill out a Quit Claim form with them, both parties sign and notarize. If things go south, they can file the Quit Claim and take over all your rights and interest in the property.

@Rick Pozos , that is what I was wanting to know. The obvious answer is buy a great deal. But I am a person that wants to know worst case scenario as well. That being said, I was curious as well if an LLC and a lock tight contract is suffice enough to protect myself, and of course my investor.

@Jonathan McGee I had not heard of a Quit claim, is this something you use? Does it protect me free and clear and hand over ownership of said asset to the investor?

@Robert Trevino A Quit Claim deed is a deed of transfer that does not have a warranty, like a warranty deed, but it is a valid transfer of ownership. Basically, the private lender would fund the purchase price plus the rehab funds into escrow at closing. The warranty deed will go in your name, but in the closing docs, there will be a Quit Claim deed signed between the lender and yourself with additional documents stating that the Quit Claim will only be filed in the event of failure to perform or non-payment. The lender can request the attorney to file the Quit Claim based on non-performance and essentially by filing the Quit Claim, all your rights and interest are transferred to the lender. Once you have refinanced or paid off the lender, there will be additional document stating the Quit Claim is now null and void.

@Robert Trevino This is a method used for non-traditional lenders, like family members or friends who are not licensed with an NMLS as a mortgage company. There are additional steps required to place a “first mortgage” on a deed and have the right to foreclose it. 

Unfortunately Quit Claim Deeds are not used in Texas or at least are not generally recognized by Title companies.

@Robert Trevino lets look at it this way. Your uncle Freddie lends you 100k. The deal goes sideways and he ends up foreclosing on you. He sells the property for 80k. Are you going to let him stay out of pocket 20k plus interest that he should have gotten??? I hope not. Maybe different with Chase or Citibank, but I would hope that you make things right for family or friends with or without a judgement. If I made a family member or friend short on a deal, I would draw up a promissory note or give them a 2nd on my home and try to make them whole as quickly as possible. Otherwise Karma will bite you in the a$$!!!

Deficiency judgement is there for a reason. It is to help people to be made whole again when the borrower defaults or in some cases perpetuates fraud. When looking at worst case scenarios, you WILL get a judgement against you. It is just something that is put in place to help keep everyone honest.

Really, you are worrying too much about deficiency judgements when you need to be marketing for properties. THAT is the hard part of this game. Good deals bring money, bad deals get you in trouble. Good deals right now are NOT being found through the MLS or through wholesalers. Do your own marketing. You will never be without deals.

Good Luck!!

Originally posted by @Jonathan McGee :

@Robert Trevino A Quit Claim deed is a deed of transfer that does not have a warranty, like a warranty deed, but it is a valid transfer of ownership. Basically, the private lender would fund the purchase price plus the rehab funds into escrow at closing. The warranty deed will go in your name, but in the closing docs, there will be a Quit Claim deed signed between the lender and yourself with additional documents stating that the Quit Claim will only be filed in the event of failure to perform or non-payment. The lender can request the attorney to file the Quit Claim based on non-performance and essentially by filing the Quit Claim, all your rights and interest are transferred to the lender. Once you have refinanced or paid off the lender, there will be additional document stating the Quit Claim is now null and void. 

Careful with this advice not all states look at QC the same way.. the proper document would be a deed in lui of foreclosure.. Not a quit claim

 

@Rick Pozos thank you for that clarification! You’ve definitely made it clear to simply not go upside down on a deal and I appreciate that. That’s a given that I definitely understand! These are simply things I want to know moving forward to further arm my knowledge. Not just what the good and great looks like, but what’s the bad and ugly in a certain circumstance. In this case, what’s the worst that could happen on a Brrrrr and how would it effect my investors and myself . I appreciate your time and I see you’re in San Antonio. Hopefully we can connect some more in the future!

@Jay Hinrichs Deed in lieu of foreclosure would require the lender to have an NMLS number if I'm not mistaken. His question was geared towards private lending such as family or friends whom I would assume are not licensed lenders. 

Originally posted by @Jonathan McGee :

@Jay Hinrichs Deed in lieu of foreclosure would require the lender to have an NMLS number if I'm not mistaken. His question was geared towards private lending such as family or friends whom I would assume are not licensed lenders. 

Negative licensure has no bearing.. you may want to talk to your closing company.. in many states Q C can be an issue for further title insurance in other states no problem. I am NMLS registered although inactive so I get the reference.. I am just saying its state specific and one would want to check with their local title insurer before they take a quit claim. LIke in the deals I do in MS its totally common here in Oregon not so much

 

@Jay Hinrichs I understand. From what I gathered when trying to assist in an advising a private lending deal, DIL's can be risky to the lender. There is supposed to be a sequence of events such as a request from the borrower so a pre-signed deed in lieu may not hold up. Pre-signed QC in TN was the method used in that scenario, and although it didn't default, the QC would have been an easy transfer but I also understand other states may be different.

Originally posted by @Jonathan McGee :

@Jay Hinrichs I understand. From what I gathered when trying to assist in an advising a private lending deal, DIL's can be risky to the lender. There is supposed to be a sequence of events such as a request from the borrower so a pre-signed deed in lieu may not hold up. Pre-signed QC in TN was the method used in that scenario, and although it didn't default, the QC would have been an easy transfer but I also understand other states may be different.

Any and I mean ANY pre signed deed is not valid and will not stand up if challenged that I know for a fact.. I have lent money in 20 states 

the reason is it circumvents the borrowers right to due process under the mortgage and note.. I know its done all the time.. and most borrowers just cave and go away.. but it wont hold up if challenged.  

the other reason is a Deed is valid the day its signed.. so you just made a loan and on the same day you deeded it back to ourself.

think of all the deeds that pop up that were never recorded that were locked in a strong box. !!!

 

@Robert Trevino Get into a partnership with the family member via the formation of an LLC. Essentially, they become a silent partner in the deal.

Make sure to get an attorney to help you file to state shares and any profit split arrangements.  

@Jay Hinrichs

Would a recorded promissory note along with mortgage papers hold up usually? I can see the quitclaim deed issue not being recorded as between purchase and default the title can change hands again , have the investor put his own debt on it etc .

Originally posted by @Javier D. :

@Jay Hinrichs

Would a recorded promissory note along with mortgage papers hold up usually? I can see the quitclaim deed issue not being recorded as between purchase and default the title can change hands again , have the investor put his own debt on it etc . 

Promissory notes are not recorded most of the time and don't need to be to be valid only the mortgage or deed of trust or in GA the deed to secure debt