How to lend huge amount to a friend?

21 Replies

Hi,

This is my first post here and please be easy on me.

One of my friend need money for his business activity and none of the professional bankers won't lend him money due to his tax filing situation, loan to debt ratio etcetera.

I received a request from him for a 24 month loan of 200K at 18% interest rate per year (only interest payable every month and loan will be paid off at the end of 24 month term).

He does have a primary residence on which he is having around 300K equity and he is having a primary mortgage on that property.

Is there a way that I can be secondary lienholder on that property which is in the state of Texas by lending him 200K?

I know this person for the past 20 years and I can trust his ability to pay me back but like to draft some thing legal since the amount involved in the transaction is not something that I can afford to loose.

Please let me know your thoughts around this. Thanks in advance.

If you can't afford to lose it, you can't afford to lend it. A document isn't going to get your money back and if your friend has $300k equity in his house, can't he get an equity loan? 

All that said, I'd want a piece of his business or his house to secure the loan. If he has a mortgage on his house, I'd take a second position on it for the $200k. If the business went under and your loan was part of that, you may be low on the list to get paid and it may only be pennies on the dollar, if at all. 

Best way is to use someone else's money!

To keep a friend, do business in a business like manner.

I suggest you see an attorney, take business assets first and then additional collateral on a commercial loan, taking the business assets first using a UCC filing and then a second on the residence should keep away from lending on a principal residence as a consumer loan. Half or more of the loan should be collateralized by business assets, the loan to value is not critical in this case as a long time personal friend.  He must use all and account for all the money through his business, he can't use ten bucks on anything personal or that taints the loan. Not that you don't trust him, but what if he's hit by a bus and attorneys crawl all over his estate in settlement?????

Other readers, this matter has a long standing personal relationship to base the loan on, it's not an investor's out or get around type thing. :)

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How to take a second position on home mortgage note formally?

-  I have to get this done with a title company?

- How much it cost and what would be the step by step process?

No currently, he can't get Equity loan or HELOC due to high DTI ratio and that is why he is offering huge Interest.

I would see what he needs the money for. Then you might start out small with amounts releasing a little at a time.

This will make your friend be a steward more with the money than blow it all at once mismanaging. If your friend doesn't manage the first round of funds well and pay with no issues then you can simply stop the next round of funding and not take as big of a loss.

Business is business regardless of the friendship and if anyone is trying to get money from you without a written business agreement and security I wouldn't call that person a friend at all but trying to take advantage.

No legal advice.   

It's usually a really bad idea to lend money to family or friends, and the extremely high 18% interest is likely to cause some friction later on. You alluded to him having an unusual tax filing situation and an unfavorable debt ratio... These are red flags that you should be concerned about. If he has 300k in equity but can't get a 200k loan, his credit history may be very bad. If he makes a habit of paying late or not paying back debt, don't expect that to change just because you have a personal relationship with him - people are generally either responsible with money or not.

Just my two cents.

For $200,000 -- it sounds best to consult with an attorney.  You can take the time and explain the situation and the friend can explain their assets and you can come up with ideas of what you can attach a lien to regarding the loan (e.g. 2nd mortgage on his residence).

Many years ago a business owner approached my mother looking to borrow. So mom asked around a bit; the guy needed money because the business was in trouble. That is why lenders wouldn't give him a loan. Troubled businesses don't always get out of trouble just because somebody threw a pile of money into the business; that money only delays the eventual day of reckoning. 

If you do decide to make this loan, be sure you can see the financials of the business before, and during, the period of the loan. 

Originally posted by @Jay Hinrichs:

200k is not a huge amount and if it is for you then certainly do not lend it.

these are average loan amounts for HML... this is a friend and family deal not a business deal

 I would say that MOST people would say that $200k is a huge amount.

@Dawn Anastasi    sorry Dawn on the West coast thats a small loan for a RE deal.. my average loan in PDX was closer to 300k and the average loan in SF is closer to a million so yes in my mind that is not a huge amount. to loan on RE.. but if its an unsecured buddy loan then I agree its a huge amount for sure.  so depends on context

Originally posted by @Chand P.:

Hi,

This is my first post here and please be easy on me.

One of my friend need money for his business activity and none of the professional bankers won't lend him money due to his tax filing situation, loan to debt ratio etcetera.

I received a request from him for a 24 month loan of 200K at 18% interest rate per year (only interest payable every month and loan will be paid off at the end of 24 month term).

He does have a primary residence on which he is having around 300K equity and he is having a primary mortgage on that property.

Is there a way that I can be secondary lienholder on that property which is in the state of Texas by lending him 200K?

I know this person for the past 20 years and I can trust his ability to pay me back but like to draft some thing legal since the amount involved in the transaction is not something that I can afford to loose.

Please let me know your thoughts around this. Thanks in advance.

 Yes, record a deed trust on his property. Best talk to an attorney or private money lender you trust to make sure the documentation and lien is executed correctly. In CA, that rate is usury, and may run into problems. Consult on local laws.. Especially when the lien is on a primary residence. Most private lenders only lend on investment properties after Dodd Frank..

I'm wondering about this.

I don't know anyone who would loan everything they had to a friend, meaning anyone who has 200K to loan should be financially fit with much more. How is it someone who has such money doesn't know a financial broker, an accountant or an attorney?

First thing that pops to my mind is that, often, people reverse the role about asking for money. Several motivations to seek an understanding of how they might borrow from an individual so they can explain the process to the one they will be asking.

I've had this type of thing happen several times. I'm not saying this is what the OP is doing, I'm pointing out that some will reverse roles attempting to get information because they feel if they didn't approach the matter in that way they may not get the information.

An example that I had, without all the issues, it was a guy who wanted to "borrow" from his grandmother with a fabricated story of going into business and he also wanted to know how a default would operate and the consequences. He wanted me to teach him what all would be involved in setting up the business and assigning what appeared to be collateral to granny. Bottom line, his song to me was he had a partner in another business that his grandmother wanted to loan to this partner for a new startup and he was trying to assist her. There was no collateral to be assigned really. When things unraveled his attitude was it's my inheritance anyway.      I've had many borrowers in the small commercial lending are who blew smoke seeing how they could borrow when they could not.

So, with those experiences, I'm asking myself why someone who has 200K to lend wouldn't just pick  up the phone and ask his attorney or other financial advisor how to accomplish what needs to be done? Why would they get on the internet and ask for a step by step process about securing a loan, since everyone I know with money has obtained loans before and they already know what a note is, what a mortgage is, that they go to a loan settlement, that they get title insurance in real estate, that they go to a closing and basically how they conducted that business.

Which is why I didn't go step by step but gave points for their attorney to address. Aspects of making a private loan on a commercial basis by an accredited investor (at 200K). 

Very first post here as well. I know nothing about first time posters. As I get to know people and the specifics of situations I give more detailed advice. Had the loan amount been 20K I could better understand the lender's position.

People with money are not DIYers when it comes to their money unless they have knowledge as they understand, not only how to make it but also how to keep it.

Not saying our brand new member is doing anything wrong, or is pulling anything, just that he needs to see his attorney.

Another observation, there are many Asians that have financial issues, foreign funds, tax complications and difficulty in borrowing, I've had several outstanding larger amount type borrowers in such difficulties, I've had European borrowers as well in similar boats but many more Asians. Many are learning the way things are done here as opposed to other homelands, but even so, at this level of funds, an attorney is in order.     :)

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Originally posted by @Jay Hinrichs:

@Dawn Anastasi   sorry Dawn on the West coast thats a small loan for a RE deal.. my average loan in PDX was closer to 300k and the average loan in SF is closer to a million so yes in my mind that is not a huge amount. to loan on RE.. but if its an unsecured buddy loan then I agree its a huge amount for sure.  so depends on context

Ah, yes, West coast real estate.  In my neck of the woods, $200,000 could get me 5-6 single family homes.  How 2,000 miles makes a difference!

You should never invest more than 10% of your net worth into something like this. Even if it is your close friend. First of all, if the banks won't lend him against his equity due to DTI issues, where will he get the cash-flow to pay you 18%? You could take a second lien against his home but what are you going to do if he doesn't pay? Really foreclose on his home? At the end of the day, this loan is based on trust and personal relationship. In other words, if a stranger came to you with the same deal, you wouldn't even consider it right?

The amount and terms don't scare me, but I agree you need to see what it's for. Like Jay said, $200k isn't big money if he's doing RE or something. I borrow that kinda coin from friends and family pretty regularly at 2pts and 12%. If it's a payroll bailout or something I'd be nervous. That money needs to be making money not bailing him out IMO. Just saying "for the business" doesn't fly if his DTI and credit are jacked. Plenty of people who will pay you back that banks won't lend to (including me), but you need to do your due diligence. Lending is all about intent and ability to repay, you want to verify both.

In any event, the answer to your question is that it's pretty simple to secure against his house, assuming TX is anything like Georgia. You need a note outlining the agreement, then a deed filed securing your loan against the house.
You want to pull a title search and close with an atty. Very routine for investors that borrow private money.

I'd also verify the 1st mortgage is being paid and have in the note that any late payments constitute default.

Ask your friend to sign the deed of his primary residence over in exchange for $200k, and rent it back. Then you've killed two birds with one stone ... lowered his DTI and he got the money. Of course let him know he can buy it back for $240k in 24 months.

@Chand P.

I have seem so many small business in this kind of situation during the last 30 years.

It is very unrealistic to expect YOUR friend to dig himself out in this situation. He/she has obviously extend the credit to the limit that there are no cash flow in the business.

If you can afford to lose the $200K because that person is your friend. Lend him the $200k & get a second lien on his primary residence. In most cases, if he can not turn his business(cash flow) around in 24 months. You might as well kiss your $200K away now.

Unless he can find another friend that is willing to lend him another $400K to stay afloat & pay you the $200K

You would be better off to give your friend $2,000 or even $20,000 if you can afford/want to no strings attached.  Then you would be able to maintain your friendship and even feel like you tried to help.  As one who didn't lend to him, if he does lose his business/house you can be there to console him and give him another $2,000 if needed to get into a new place.

You can't afford to lose the $200,000 so you shouldn't lend it to a friend. Can you imagine foreclosing on him if he gets behind on his payments? Calling him constantly to try and find out where your money is?  As the lender, you would become his enemy if you aggressively collected or foreclosed on him.  He would resent that you loaned him the money wanting to make a tidy 18% profit and then ruined his life and business by aggressively foreclosing when things went bad. There is a very small chance this loan works if you go through with it and a much greater chance that you either lose your $200,000 and your friend or he looses his  business and house and you both lose a friend when you foreclose.

where is your 200K coming from? Checking, savings, SDIRA.

I would only do this through an SDIRA to build tax free interest. Your SDIRA should be through an REI friendly company like iPlan, Quest, etc. Do it legally through SDIRA comapny and exchange money for note and mortgage. Your SDIRA will handle the details.

Don't have SDIRA? Get one.

Thanks for your feedback on this question and I learned a lot of new thing in this thread. I am able to point my friend to a different direction and he is able to get loan else where and I have not loaned him any money.

During the exercise, I learned that Title company can handle any one as second lien holder on a note as long as primary lien holder do agree.

Once again, thanks for your help!!!