Hey guys, first off I want to thank everyone for all of their help. I am looking to move forward on my first buy and hold property because of all the things I have learned from this website. I have convinced a seller to finance the deal with a small amount down! I have a business partner (best friend) who is willing to lend me the downpayment ($6,000). Neither of us have ever dealt with private lending and don't know how to properly do this. He understands he's making less than 2% in the bank so he does not mind lending me the cash for a better return.
How do we structure this deal so that I am not screwing him?
How long of a term should the loan be for? (he doesn't mind it being a few years as long as he's collecting a higher percent than what he is getting from his bank annually)
What legal paperwork should I draw up for ease of mind?
What percentage rate should we use?
Thank you all for your input, it has time and time again proved priceless!
You should put his name on the deed for his protection.
You could use a loan servicing company to keep everything clear and avoid future issues. There are several out there- here's one that might be good for your situation http://www.zimplemoney.com/Family-Friend-Loan.aspx
Not a recommendation per se; I haven't used them, this was just something I found w/ quick google search
Not knowing all the ins and out of the deal here's what I would look for on a first pass, though obviously it will depend on what you can all agree to.
Your SF purchase amount would be secured in 1st position at whatever terms you and the seller have agreed to.
Your $6,000 down payment loan from your friend would be secured in 2nd position. You and your friend need to decide on what kind of terms he would be looking for. Him being in a 2nd position is slightly riskier so the terms should be such that it takes that into account.
Choose a title company that understands the SF aspect of this and can help you be sure that the documents are all in order. There should be a note spelling out the terms and payment. There will also be a mortgage for both lenders.
Here's a deal I agreed to with my sister lending to me on my next purchase which can give you an idea of some possible terms:
She will lend me 25K or so at a 6% rate, interest only no balloon no prepayment with $750 in points. After 6 mo title seasoning I'm pursuing a cash out refi with the new appraised value (70K ish) which will pay her loan amount off and get my approximately 30K cash invested back. So I now will have a fixed rate loan and only 4-6K of my cash still in the property.
She gets about 2K in interest and points on her 25K for about a 10-12% APR. Way better than most other investments she could make, and relatively secure since she's lending at about a 50% LTV.
All the documents will be prepared by a title company that works with other investors and understands what they're doing so that her and my interests will be appropriately secured when we close.
Hope this helps.
All you questions have been answered in detail here, might do some searching before you leap. Matt's deal is with his sister, so that lending arrangement is exempt. Points can only be charged by institutional or regulated lenders, you buddy can't legally charge points. Points are prepaid interest. Equity loans may not have points. Your title company will be able to do the deeds, you might need an attorney for the note. Read the seller financing scams here on BP, any offer of seller financing is usually done for a reason, need to know why. Also, check the minimum loan amount that may be secured in your state, here, it's $5K others are 10K. Again, see your attorney. Absolutely use a loan servicer! Good luck :)
As Bill said service the loan. Even with my deal being with family the servicing is a must, and gives you an experienced 3rd party that helps to make sure everybody stays compliant.
You guys are great, thank you for all of the knowledgeable responses.
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