1st time lending money as a private lender use of title company?
Madison, WI · Member since 2021 · 75 posts · 19 votes
Very newbie question. I have a borrower who is a member of our local REIA, that needs $50,000. I want to make sure I understand the process of being a private lender. I have my lawyer draw up a mortgage and promissory note. I get my name on the home insurance.
I thought I should be mail wiring the money to the title company, but this borrower will be writing a check at close to the title company and then wants me to wire him a check direct. That sounds risky.
I would greatly appreciate your thoughts on this.
A few considerations to protect yourself and your friend, @Mark Flores, (which are tangentially related to @Wendy Busa's question) …
You don’t want your friend to change his mind mid-stream. This could happen for any reason -- cold feet, concern over your progress, change in your relationship, spent the money elsewhere, never had all of it in the first place, etc. Fully funding this loan into escrow, at the outset, ensures the money is available to you as you need it. This protects you.
Similarly, disbursing the money to you in draws that are based on a construction budget helps ensure you stay on track and are spending the money where you (or your contractor) said you would. It reduces the temptation to juggle money inappropriately as your construction costs inevitably change. This protects your lender/friend, and you to a degree, because you’ll always know where the money is going.
For these reasons, brokered construction loans exceeding $100k in CA are required to be fully funded, held in escrow, and disbursed using professional funds control against a draw schedule. I know this doesn’t apply to you legally, but you should have a frank and informed discussion with your friend to discuss a fair plan that addresses all risks and protects each of you. (For example, how will you handle overages?)
With due respect, having your friend hold all the money and then disburse it himself, seems the worst of all worlds to me. Ditto, writing you a check up-front.
@Wendy Busa I would only ever send the money to the title company. Nowhere else, ever!
“I thought I should be mail wiring the money to the title company, but this borrower will be writing a check at close to the title company and then wants me to wire him a check direct.”
No, you wire to title and only to title. That your borrower wants you to wire money to him, makes me wonder if he knows what he is doing.
“I have my lawyer draw up a mortgage and promissory note.”
Sort of. The note and mortgage are just a few of the documents you need. If you want a better idea, see this thread, Private Lender – forms required for a typical list of other important loan documents. You get these from an experienced lending attorney. Lending attorneys are not real estate or closing attorneys.
“I get my name on the home insurance.”
Probably not. Assuming this is a business-purpose loan of some sort (flip, buy & hold, STR, etc.), your borrower will get the appropriate insurance. If a flip, for example, you would require a vacant dwelling, fire and liability, replacement cost policy with builder's risk. If the insurance company found out this was a construction site or a rental, a standard homeowner's policy would not cover your borrower if he filed a claim. You will be listed as the mortgagee.
Also, make sure your borrower includes a lender’s title insurance policy for you. This would be part of his owner's title policy.
You might consider finding a local HML to originate this loan for you and show you the ropes, @Wendy Busa. A local HML will have loan docs vetted by a knowledgeable attorney. They will also understand usury, licensing, and origination in Wisconsin and should be able to evaluate your borrower, the deal, and you for suitability.
Last, if this is a second position loan, I recommend you reconsider.
Thank you. That is excellent advice.
Hi @Wendy Busa As others have suggested, you should send your funds only to the title company. Their purpose is to protect you in this transaction as you are in effect, taking on the role of the bank. Don't let your "customer" talk you into giving them the money directly. Best of luck as you enter the world of providing private money!
Newbie question related to the thread above. I plan to purchase a SFR all cash. I have a good friend who is willing to loan20-30K for me to use to rehab the property at X% interest. He would be provided a promissory note. Should I also have him wire money to escrow and draw the money from escrow when time comes to pay the contractor? Rather than have him send me the money direct.
@Mark Flores, you could but would have to work that out with the escrow company as well.
In a situation like this, you can really “make up the rules”.
What i have seen done in the past is to have your friend wire money to you to pay for the rehab but do that in phases or increments. Once you have the scope of work and your friend has reviewed it and you agree on loan amount, they could disperse funds in phases. For example (these numbers are made up): 40% of the funds to start the project. 30% of the funds once you provide proof of completion for phase 1, and the remaining 30% of the funds when the job is done.
A few considerations to protect yourself and your friend, @Mark Flores, (which are tangentially related to @Wendy Busa's question) …
You don’t want your friend to change his mind mid-stream. This could happen for any reason -- cold feet, concern over your progress, change in your relationship, spent the money elsewhere, never had all of it in the first place, etc. Fully funding this loan into escrow, at the outset, ensures the money is available to you as you need it. This protects you.
Similarly, disbursing the money to you in draws that are based on a construction budget helps ensure you stay on track and are spending the money where you (or your contractor) said you would. It reduces the temptation to juggle money inappropriately as your construction costs inevitably change. This protects your lender/friend, and you to a degree, because you’ll always know where the money is going.
For these reasons, brokered construction loans exceeding $100k in CA are required to be fully funded, held in escrow, and disbursed using professional funds control against a draw schedule. I know this doesn’t apply to you legally, but you should have a frank and informed discussion with your friend to discuss a fair plan that addresses all risks and protects each of you. (For example, how will you handle overages?)
With due respect, having your friend hold all the money and then disburse it himself, seems the worst of all worlds to me. Ditto, writing you a check up-front.
“I thought I should be mail wiring the money to the title company, but this borrower will be writing a check at close to the title company and then wants me to wire him a check direct.”
No, you wire to title and only to title. That your borrower wants you to wire money to him, makes me wonder if he knows what he is doing.
“I have my lawyer draw up a mortgage and promissory note.”
Sort of. The note and mortgage are just a few of the documents you need. If you want a better idea, see this thread, Private Lender – forms required for a typical list of other important loan documents. You get these from an experienced lending attorney. Lending attorneys are not real estate or closing attorneys.
“I get my name on the home insurance.”
Probably not. Assuming this is a business-purpose loan of some sort (flip, buy & hold, STR, etc.), your borrower will get the appropriate insurance. If a flip, for example, you would require a vacant dwelling, fire and liability, replacement cost policy with builder's risk. If the insurance company found out this was a construction site or a rental, a standard homeowner's policy would not cover your borrower if he filed a claim. You will be listed as the mortgagee.
Also, make sure your borrower includes a lender’s title insurance policy for you. This would be part of his owner's title policy.
You might consider finding a local HML to originate this loan for you and show you the ropes, @Wendy Busa. A local HML will have loan docs vetted by a knowledgeable attorney. They will also understand usury, licensing, and origination in Wisconsin and should be able to evaluate your borrower, the deal, and you for suitability.
Last, if this is a second position loan, I recommend you reconsider.
Good insight
Just to be clear, I received the title commitment today and I am going to have my lawyer look at. It does not have my name on it, I thought it should, am I incorrect?