1st time private lender for commercial real estate. Need advice QUICK!!

Commercial Real Estate Investing
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1st time private lender for commercial real estate. Need advice QUICK!!

Ginger A.
Real Estate Investor · Philadelphia, PA · Member since 2014 · 19 posts · 5 votes

I am completely new to REI "NEWBIE" ALL THE WAY, so I have my concerns with a lending opportunity. I asked the developer how is he going to secure the loan so that I am guaranteed the return of my principle? I was told that I will be covered with money from his hard money lender... Not sure how it's all going to work I'm researching now, I just want to know what documents I need to have signed to guarantee my loot back? Is a promissory note enough? It's an opportunity to invest in a commercial property that is being converted to residential space. Any tips will be helpful! I like the developer and think it's a good deal, just want to be smart about it...

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y

under capitalized developer and a non sophisticated lender  leads to all sorts of problems

that are usually negative to the lender.

I would pass on this deal and if you want to be a lender and you have no experience hook up with a local REPUTABLE HML and have them make a few loans for you so you get the drill

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    12y

    I see a few RED FLAGS. That means stop. Your title says "...Need advice QUICK!!" and that leads me to wonder if you are being pressured. If so, that is a bad sign. Two quick questions: Is there an attorney representing you as lender in this transaction? and Have you done any legitimate due diligence in this transaction? As a private lender myself (via SDIRA), I always want to be in front of any issues... and a YELLOW flag causes me to stop to figure out what part(s) of the process have gone awry.

    Being a motivated lender is as bad as being a motivated buyer. Worse, actually. Because if you move forward, you are not as in control as the person you lent your money to.

    Legal help for people in your position is very inexpensive if not 'free' to you. The borrower should cover your legal expenses for making sure you are covered and protected. If not, another RED FLAG.

    2Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    12y
    Originally posted by @Ginger A.:

    I asked the developer how is he going to secure the loan so that I am guaranteed the return of my principle? 

    You are never guaranteed that your principal will be returned, Ginger, but you can maximize the probability of being paid back.

    If this is in Pennsylvania, your borrower will sign a note that is secured by a mortgage against the commercial property. I would also expect a personal guarantee. You would get this paperwork from a lending attorney, whom I suggest you speak to in any case.

    I don't know what he means by you "will be covered with money from his hard money lender." If this means he is also borrowing money from an HML, then be very careful. In all likelihood, the HML will be in first position and your loan will be subordinate to the first. Should this developer default, the HML will get paid back first and if (big if) any money is left over, it will go to you. In all likelihood, you will be wiped out.

    Second position loans are no place for a first timer, Ginger, if that's what you are doing. Watch yourself.

    1Reply
  • Mark Milan
    Wholesaler · Gladstone, NJ · Member since 2013 · 47 posts · 1 vote
    12y

    Ginger I agree with Chris and Jeff. I don't generally LEND my money as I use it for my own deals, but I DO partner with Private Lenders. I always secure their investment with a 1st Position Mortgage, unless there is some special situation that requires something subordinate to 1st (rare for me) and then ONLY with full disclosure to the lender what the circumstances and risks are. I'll add that if the developer is using Hard Money, his tolerance for risk is probably pretty high as HM lenders usually take a substantial part of the profits in fees and high % rates. Cant be positive with only the info provided but I see a lot of red flags here too... you could be getting taken.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    under capitalized developer and a non sophisticated lender  leads to all sorts of problems

    that are usually negative to the lender.

    I would pass on this deal and if you want to be a lender and you have no experience hook up with a local REPUTABLE HML and have them make a few loans for you so you get the drill

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    3Reply
  • Ginger A.
    OP
    Real Estate Investor · Philadelphia, PA · Member since 2014 · 19 posts · 5 votes
    12y

    I thank you all! You all have valid points on why I should run. I wanted this SO much. Yes I see red flags, I can honestly say I am a motivated lender. (Never even thought of it that way) but YES I am motivated to grow my money. Desperation is never a good thing. I would definitely be second against a HML's millions. And although I am hardworking, intelligent, creative, thorough and intuitively perceptive , I am (temporarily ) unsophisticated with this business, and I'm putting in too much trust in someone I really don't know. I have refused to listen to my own spidey senses... Because I'm a MOTIVATED lender. It just takes someone pointing out the obvious . I have to say the developer has gone out of his way to make me feel comfortable with this deal, but when I honestly look at some inconsistencies, no matter how BADLY I want to succeed in this venture, it's just not the right time. :/ I was pushing it because I know in RE, you have to have an element of being a risk taker. That's what I thought I was doing, but things just don't add up. This is breaking my heart but I also feel encouraged to keep on trying my best with this :)

    0Reply
  • Ginger A.
    OP
    Real Estate Investor · Philadelphia, PA · Member since 2014 · 19 posts · 5 votes
    12y

    oh and I definitely feel rushed. This is a NO GO.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    Don't forget that many HML do not allow for a second (borrower getting a second is a breach if the agreement so the HML can follow the provisions when in default); the reasoning behind that is to always have a deed in lieu as an option for the borrower who can't pay.

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  • Paul Timmins
    Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes
    12y

    @Ginger A. 

    Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will meet wholesalers who provide deals and rehabbers. Find one rehabber very experienced consider doing a deal together.

    Paul

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  • Ginger A.
    OP
    Real Estate Investor · Philadelphia, PA · Member since 2014 · 19 posts · 5 votes
    12y

    thanks Paul I like that idea . I also like our idea Jay, search for a HML here in Philadelphia. There are other options to grow. And so I leave no one out here, I'm available if needed by anyone here (Laughing) ;)

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    12y

    As you progress, write down what you want as far as requirements for your borrower, the property, and the terms. Also define what they need to do before you can lend anything to them. For example, if you lend to a flipper you may require that the borrower has completed at least 1 local project in the last two years. It's really up to you to define the lending criteria. When the parameters are written down, you will see that it is easier to stay fucused on the right deals and not get wrapped up in the emotion.

    For straight forward, straight debt deals my parameters include: lending to an experienced REI (flipper or new construction), low LTA/LTV (typically <~60% acquisition price), typically 1%/month interest only, callable in 12 months with (for 1 point) extension clause, 2-4 points total depending on the person and the deal, Borrower pays all closing costs, provides lender's title insurance, 12 month hazard (or builder's risk) policy with lender as named insured, first position recorded D-T, attorney closed with HUD-1 naming lender, and borrower must be non-person entity. I don't lend to people any more. Maybe I am overdoing it, but this is a business loan and not residential lending.

    I am fortunate that the last few deals were with a guy that makes my decision making easy.

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  • Ginger A.
    OP
    Real Estate Investor · Philadelphia, PA · Member since 2014 · 19 posts · 5 votes
    12y

    This site is awesome. Chris thank you, I will use What you advised as a guide. I really have a lot of gratitude for all of the Pros who have given advise. This site is extremely valuable to me.  Can't wait to be where you all are!

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