Contract for Private Lending

[Steve Balinski]

Hello, I'm very interested in becoming a private money lender. I've found 1 local attorney who's written lending notes before.  He said just to start and get a basic contract with my preferences would be about $2k, does that sound right? Seems pretty steep.  If I lend 30K for 12 months at 12% I only walk out with $1600 if I subtract the attorney fee alone + any other related fees.  Doesn't seem worth it, at all.  What am I missing?  Even if I lend 50K it doesn't seem worth it.

[Jeff S.]

I’m not sure what a basic contract is, @Steve Balinski. Our loan package contains approximately 20 documents. The issue here is that your loan amount is so small that you won’t be able to cover your expenses, even though some will be paid by your borrower.

Lightning Docs charges $500 for a set of loan documents, plus a $500 annual fee. These documents will be no-nonsense, without explanations, and could be missing broker- or state-specific disclosures. If you want to understand them, you’ll need to pay a lawyer, and it’s not unreasonable to expect costs around $2,000. This is not the right way to get into lending.

$30,000 is a small sum and might lead you into second-position or unsecured lending to undercapitalized borrowers. This includes loans for earnest money, down payments, or closing costs. These types of loans are extremely risky and can easily wipe you out. You do have another option.

Fortunately, you live in Illinois, which is one of the few states that allows fractionalized or multi-beneficiary lending. These loans enable multiple individuals or lenders to be listed on a single loan as beneficiaries, sharing the same debt position and owning it pro rata.

In this case, your name and the names of the other investors would appear on the note and deed of trust (or mortgage), along with your percentage ownership—totaling 100%. Your $30,000 would be combined with contributions from others into a larger loan that could fund an entire property, including rehab if needed. A knowledgeable broker could arrange this professionally, at a safe loan-to-value (LTV), ensuring the quality of the borrower and the property, with vetted paperwork, and recorded in 1st position. This would allow you to participate in a relatively safe loan with no additional expenses on your part. You’ll also see how the process works.

Call some local brokers or your lawyer for references. Additionally, real estate clubs are a good way to connect with people who offer these kinds of opportunities.