Is a promissory note needed for each state I use a private money lender?

Question

Hello Community!

I'm wondering if I need a different contract in each state that I plan to invest in and use a private money lender to fund a deal. Could I just use a general standard contract for each state? If not, how much is it to get such a contract drafted on average?

Chris Seveney · Answer

@Ruth S.

If you are the borrower typically your private money lender drafts the agreements

The docs we use are standard except for the security instrument as that changes by state as some states are deed of trust and others are mortgages

Beth Johnson · Answer

No matter which side of the lending transaction you are on, you will want to consult with a local RE attorney and get docs drafted up by a professional to make sure you stay legally compliant and have adequate protections both as borrower and lender.

Ruth S. · Answer

No, I'm looking to use private money lenders on deals in multiple states.

Jacob Sherman · Answer

Are you looking to give someone a hard money loan ?

Beth Johnson · Answer

Yes, you'll absolutely need one drafted up for each different state you might be purchasing in. As Chris mentioned, getting an attorney locally in each state will ensure that you and your family/friends are well protected. While private money isn't highly regulated at the federal level, there are subtle nuances to be aware of in each state that may trigger your loan becoming a security and then the SEC would have regulations to consider. Some states have licensure requirements for private lenders including California, Oregon, Idaho, Nevada, Arizona, Virginia, Florida, the Dakotas, Vermont... that may not be an inclusive list. But if you are pondering investing in any of these states, then you will want to get counsel locally to make sure you are doing it legally.

There also is a lot more than just a promissory note and deed/mortgage to be drafted up so you might want to pick up a copy of my book Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending available on BiggerPockets. It's packed with the information both you and your lenders will need to complete the deal in a safe manner. In fact, if you provide a copy to your family/friends who are interested, you would be showing them that you want full transparency and protections on your transactions and treat their money as if it were you own.

Chris Seveney · Answer

Yes then you would need an attorney in that state. Also make sure you have one private money lender per deal, or make sure they understand the lien position they are in.

Ruth S. · Answer

Hi Chris, thanks for your response. Are you referring to institutional lenders? The PMLs I have spoken to that have interest are personal family and friends so they don't currently have any contracts themselves. I'm interested in buying out of state in multiple markets so I'm just wondering if I may need an attorney in each state to draft a new one.

Is a promissory note needed for each state I use a private money lender?

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