Best way to Protect my Private lender?

Question

I am borrowing money from a private lender to flip a house.

What is the best way  to protect my private lender ? Put them first on title?  Have escrow file a promissory note? what other options do I have?

I want to make it clean and simple thanks In advance.

Adam

Jeff S. · Answer

“What is the best way  to protect my private lender ? Put them first on title?  Have escrow file a promissory note? what other options do I have?“

No, your lender does not go on title.  You or your entity is the borrower and the property owner.  That’s who goes on title (typically with a grant deed if in CA).  Nor do you record a note.  Deeds of trust and mortgages get recorded and by a title company, not escrow.  Sorry for all the clarifications.

Yours are good and common questions but not something you should take lightly, @Adam Jones.  I can speak for the lending side.  This means working with a lending lawyer.  These are not real estate attorneys who might do closings, leases, and evictions.  Lending lawyers specialize in lending and securities.  Both you and your lender should sit with one to understand lending in general as well as usury, licensing, other possible state restrictions, title and hazard insurance, as well as origination in general.  There are also lots of books about private lending but they won’t take the place of a real live lending attorney.

The attorney should explain risks to your lender, who I assume is unsophisticated about lending (?), and their options.  This might be uncomfortable for you.  For example, think twice about asking someone inexperienced to lend to you in second position.  They could easily lose all their second-position money if a first-position lender forecloses or if you go bankrupt.  You might think this is unlikely, but it really does happen.  What if they have to foreclose on you?  Or sell their loan?

You’ll read here from those who claim all you need is a note and a mortgage or deed of trust (state dependent).  And, that you can obtain these from a title company or off the web.  To properly protect themself, your lender should use a set of professionally prepared loan documents.  These will include a note, mortgage/DOT, personal guarantee, title insurance, fire and hazard insurance, lender instructions, and a host of required disclosures and additional agreements.

You didn’t say who this lender is or where the property is located but be warned that things can get ugly when business mixes with friends or family.  That is, it’s super important everyone is protected. There are several respected lending attorneys who work nationally now, and a few are located right in your backyard.

Some lending attorneys now offer online documentation.  You provide the loan details, and it spits out a set of state-specific docs.  Get your feet wet first and both of you meet with an attorney before you get into that.  You don’t want an unsophisticated lender standing in front of a judge claiming they had no idea what you got them into.

Charles Carillo · Answer

@Adam Jones

Have them put a first-position mortgage on the property. It will be just like any other mortgage. Any real estate attorney should be able to draw it up and handle it.

Beth Johnson · Answer

@Adam Jones

Check out our book published by BP called Lend to Live: Earn Hassle-free Passive Income in Real Estate with Private Money Lending. It talks about how to find and fund a private loan safely and legally through the point of view of the private lender but it's also great for borrowers seeking to better understand what lenders need to do to secure their loans and protect the principal investment. The more borrowers understand the lenders side, the more credibility they can build with their capital partners by being able to demonstrate concern over their partner's funds and also how to protect it as well.

Adam Jones · Answer

@Jeff S.@Chris Seveney

Thanks so much for both of your input. Id like to get better and raising capital and honestly being more professional at doing so. I've borrowed money from many different people over the past 8 years and its always been easy and handshakes put them on title all. I have the capital to back whatever I borrow I just wanted to invest other peoples money to make them money and not tie up my capital for other deals that are coming. I borrowed 500K to purchase a property in oceanside ca and I put up the balance and the renovations. so we are invested together. Also with this wild market I put together worst case scenarios if I need to keep the property and rent it and pay my investors back its a short term loan. project is 30-45 days rehab and  2 months on market if it doesn't sell in 30 days I figured id finance out of it and leave in 40 k of my capital and come back to it in a few years it will cash flow 600.00 with a 7% interest rate. its all borrowed money from private people.

so I just want a professinal way to make my investors protected. I like you idea @Jeff S.with speaking to a lending lawyer. I closed this deal on my standard handshake. @Chris Seveney I always pay because I have the capital to pay it back

Lindsey Johnson · Answer

@Adam Jones Hey man! Yeah I would advise putting them in first position. Should be that simple. I sent you a DM/Request. Super curious what deals you are working in San Juan! Would love to connect.

Adam Jones · Answer

by the way thanks so much for all the responses this forum is epic!

Chris Seveney · Answer

@Adam Jones

Pay them back no matter what.

Gurbeer Sangha · Answer

Since you're in California, it will be best to go through a reputability title company who will do all the paperwork for you properly.

Adam Jones · Answer

@Charles Carillo,

Thanks

That was my thought. I just wanted confirmation love this forum thank you again.

Best way to Protect my Private lender?

Most Popular Reply