Making A Loan For A Private Flip. First Time Lending. Advice/Recommendations?

Question

Hello,

Preface: I have no lending experience, looking for recommendations on how to protect myself with a loan for a flip

I connected with a guy who seems to be a "straight shooter" with experience doing flips, kids in local school, lives in same community as the flip, active realtor.

He sent a thorough description of the flip.  It's a sub-100k arv on a nice double-wide in a good area.

Before I send a check, what do I need to do to reduce risk?

Should I insist on being on the deed?  Is that overboard?  I have no idea what documentation I may need...

Thank you

Robin Simon · Answer

I would definitely slow down here - got to ask why this guy is going to you (a first time, little experience) for a hard money loan if he is so legitimate/experienced - begs the question, why does he not have the funds to do this in cash (sub$100k?) or why isn't he going to a normal hard money lender (can't qualify?)

Jeff S. · Answer

We lend our own money against local flips, @William Coet, and there are so many red flags here that we wouldn’t even think of making this loan.

Connecting with “a guy who seems to be a ‘straight shooter’,” is not the same as meeting this individual in person to see his flips and gage over lunch whether this is someone with whom you want to do business.  That he has kids in a local school is irrelevant.

You do realize that a double-wide is not real estate.  It’s personal property – not unlike lending against a car.  Is the land included?  We never lend on anything until we’ve actually walked through it with the borrower.  How have you verified that this is a good deal for your borrower and safe for you to lend on?

If this were a real estate loan, you would not send a check to the borrower.  You would wire the loan proceeds to a title company for disbursement after clear title has been established, insurance is purchased, and all the documents provided by your lending attorney have been signed.

Being named on a deed makes you an owner.  Are you looking to become a partner here with all those risks (and a JV agreement), or simply a secured lender?

Sorry if I’m a bit harsh but this is not how to lend money secured by real estate, William.  Find your borrowers face-to-face at local real estate clubs and get to know them a bit.  Set some lending criteria and learn to evaluate their flips.  Most importantly, meet with a good lending attorney who can explain the lending process in your state, including usury and licensing requirements, and can provide an airtight set of loan documents. Please note that a lending attorney is not the same as a real estate attorney.

Good luck to you, William.

Eliott Elias · Answer

You have a lot more research to do before you lend money. Get a attorney to draft the 1st position lien and promissory note paperwork.

Jeff S. · Answer

If you start questioning why anyone would borrow from you when they have other resources, you’ll get into the mode of not wanting to belong to a club that would have you as a member.  I never question why anyone would want to borrow from us when they have other choices.  The response is even more obvious.  Active flippers are always looking for additional sources of reliable money.  This business is famously fickle and with little loyalty.

Lenders, even large lenders, come and go.  Wall Street pulled out twice recently, as the pandemic hit and then when interest rates rose.  This left many lenders and their borrowers in a lurch.  Similarly, lenders change their terms and lending criteria all the time.  Plus, frankly, doing business with a small mom & pop lender can be much faster and easier than dealing with one that can’t tell itself apart from a conventional lender.

@Tom ODonnell, wrote:

“If we live in NY and invest in TN and are looking to begin funding some of our contractors flips in TN, then we should contact a lending atty in TN, correct?

How do you properly secure the loan? (I realize the atty will spell this out but curious how you are doing it)-Once we lend do we become lien holders on the property?”

It’s obviously best to find a local lending attorney, with whom you can develop a relationship and be certain they keep up in your state, but this is not required.  Many of the larger lending attorneys now work nationwide so it really won’t matter where your lender is located.  Just make sure that lending their specialty.

Your loan will be secured by a note and deed of trust or mortgage (state dependent).  The note defines the financial terms of the loan and is basically an IOU.  The DOT/mortgage is a lien filed in the county the property is located.  The property can’t be sold unless this lien is reconveyed (eliminated). You are the beneficiary of that lien and are therefore considered the lien holder.  You reconvey the lien after the note is paid off (or enforce it to foreclose if things go south).  There are typically dozens of other documents associated with a private loan so be careful when you read here that those are all you need.  Not true.

Scott Matthew C. · Answer

Good evening @William Coet. It's evening here on the east coast. Nevertheless, thanks for your post.

TRUST, but Always Verify!

It's great that you've connected with someone who has experience in flipping properties and seems to be a trustworthy source of information.

Regarding your concern about reducing risk, there are several steps you can take to protect yourself when lending money for a flip. Firstly, it's important to thoroughly review the description of the flip that was provided to you and ensure that you are comfortable with the details before moving forward.

In terms of documentation, you will want to have a formal agreement in place that outlines the terms of the loan, including the amount of money being lent, the interest rate, the repayment schedule, and any other relevant details. An attorney can draft this agreement. I advise you not to use a pre-template as it will not address your concerns or the other parties' concerns.

Being on the deed is not a requirement for lending money for a flip, but it can offer an extra layer of protection for your investment. It's worth discussing this option with him and their attorney to determine if it makes sense for your particular situation.

Lastly, it's always a good idea to conduct your due diligence and research the borrower's track record, creditworthiness, and past performance on other flips. This can help you make an informed decision and reduce the risk of potential losses.

I hope this information is helpful, and please don't hesitate to reach out if you have any further questions or concerns. BP's is a huge community and I'm sure someone else here can provide additional help.

Best of luck to you.

Tom ODonnell · Answer

@Jeff S.  Thanks.  Any framework for typical terms? Up front fees, rates, loan period, etc?

Tom ODonnell · Answer

@Jeff S. Great info here.  If we live in NY and invest in TN and are looking to begin funding some of our contractors flips in TN, then we should contact a lending atty in TN, correct?

How do you properly secure the loan? (I realize the atty will spell this out but curious how you are doing it)-Once we lend do we become lien holders on the property?

Can you suggest some sample terms that you use re: schedule of disbursement of loan funds to contractor (ie setting timelines for scope of work completion), interest rates, up front fees, payback terms/conditions.

Any reading materials or channels you would suggest to educate myself further? (Just ordered "Lend to Live" and "Private Lender Playbook"

Thanks for your time

Making A Loan For A Private Flip. First Time Lending. Advice/Recommendations?

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