Lending money to a General contractor

[Venu Vedre]

Any thougths are appreciated. Here is the background:

Background:

I met a General contractor a few years ago through a local RE meetup in Charlotte NC area. I have seen his work onsite and He is very good at what he does and has completed lot of townhome projects recently.

He currently has a investment opportunity that i am interested in . He is building a townhome product and is looking for investors to close the property and for pre-construction development and for securing construction loan. This loan is structured as debt(and not equity) with a decent annual rate of return.

Question:

I have never loaned money directly to a GC before. What is the best way to make sure my Loan is secure.

Looked up a few posts online and sounds like a couple options are 1) joint-tenancy on title, or 2) a deed of trust. I dont quite understand the pros and cons of each , or is there a better way to structure this.

Planning to reach out to a few local RE attorneys but wanted to get thoughts here as well.

Thanks,

Venu

[David M.]

@Venu Vedre

well option #1 basically means you take Title with the contractor.  Having ownership in the property is a 'little bit more' than just lending I'd say.

option #2 Deed of Trust is possible if its it legal in North Carolina.  Some States use a Deed of Trust and other just file a lien.  In the former, if borrower is late on their payments or basically breaches the contract/agreement, the Title is already in a Trust so you can take Title to the property without going to court as I recall.  Otherwise, the other system is the typical foreclosure process where you have to go to court to foreclose and take Title (with getting possession another issue).

If its a straight loan, just treat it like a loan.  Create a Note (the I.O.U) and record it with the County which creates the lien.  make sure you find out if you will be the 1st or 2nd position lien.

Of course, consult a qualifed professional or two to get the particulars of the document correct.  Good luck.

[Ed O.]

I have some thoughts on this, but before going into the weeds, what is your motivating factor in making this loan? 

[Moshik Zemach]

@Venu Vedre

The house you are lending on is the collateral you will use to pay off the loan in case the borrower (in your case, the GC ) does not pay.

Regardless of which option you chose you must have a legal document (a note) that gives you the legal means to take 100% possession of the house in case of non payment. Make sure to record it, as already indicated here.

Get a lawyer to put the proper language and to draft it. Do not do it yourself and do not use standard internet forms.

At the very minimum the lawyer will need to know the loan amount, length of time of the loan (the “term”) and the interest payments (amount and frequency).

[Adam Schneider]

@Venu Vedre. If there are multiple people investing, it gets trickier. If you are the only person providing the loan, just do a first position lien deed of trust (I'm in NC, it's a deed of trust state....referencing a previous comment), have a promissory note, be on the insurance as mortgagee, and have lender's title insurance. The borrower normally pays for the lender title insurance. If there are multiple investors, the main concern is your lien position. Lending to a GC isn't a concern in and of itself--you'll need to decide if you want a personal guarantee as well as his/her entity guaranteeing.

[Peter Walther]

Originally posted by @Moshik Zemach:

@Venu Vedre

The house you are lending on is the collateral you will use to pay off the loan in case the borrower (in your case, the GC ) does not pay.

Regardless of which option you chose you must have a legal document (a note) that gives you the legal means to take 100% possession of the house in case of non payment. Make sure to record it, as already indicated here.

Get a lawyer to put the proper language and to draft it. Do not do it yourself and do not use standard internet forms.

At the very minimum the lawyer will need to know the loan amount, length of time of the loan (the “term”) and the interest payments (amount and frequency).

Neither a mortgage or a deed of trust (I believe NC is a DOT state) gives you a 100% right to possession of the property. They both give the lender or the Trustee of the DOT to bring a foreclosure action in the event of a breach of the terms of the security instrument. If no one bids higher than the amount owed to the lender then the lender may take title to the property.