Private Lending

19 Replies

Hello,

I am interested in becoming a Private Lender, and I've been communication with someone who connects borrowers with potential lenders. She has attended a few of the REI meet up groups, and I've spoken with her on multiple occasions. Recently, a possible opportunity has presented itself, but I am somewhat weary because she does not seem to be communicating well. In our initial conversation about this opportunity, she gave me the amount the borrower needs, and the timeframe in which the borrower will need the money. The conversation lacked the information I was looking for, and she couldn't directly answer my questions about the documentation needed to secure my investment. There seemed to be a big push on "the borrower needs the money". I asked about the Promissory Note, etc., and she has yet to provide a response to my requested documents. The only document she confirmed she would be able to provide is a transfer of collateral, which I would receive at some point during the rehab. Today she emailed me, and stated the funds would need to be wired to escrow by Thursday.

The loan amount is 10K at 6%

Timeframe: 6-9 months, with a possible 1-2 month extension

Red flags have raised in my mind, but I want to make sure I am not over thinking this situation. In my opinion I am requesting documents that should already be a known and necessity in private lending, but she doesn’t seem to be forthcoming with the documentation I am requesting. Is it a good idea to work with a middle person? Am I over thinking this situation? Is 6% too low of an interest rate?

Any thoughts or feedback on this situation would be greatly appreciated.   

You are SOOOO not over-thinking the situation.  Run away...fast!

You're a Private Money lender.  You specify the terms under which you are willing to lend the money.  That includes what collateral you require and what documentation is required.  The borrower needs you more than you need them.  There are plenty of people who will gladly take your money!  

PS...that 6% is really cheap!!!

6% is certainly on the low end for this sort of loan.

You want a promissory note that outlines, in detail, the loan terms.  And you want a deed of trust or mortgage, whichever is used in your state.  You should prepare these documents if they're not being provided by this broker.  You should be able to get blank templates at any point.  You should have these reviewed by YOUR attorney, or prepared by an attorney if they're not being provided to you.

You also want an appraisal paid for by the borrower but done by an appriaser you or this broker chooses.

If the broker cannot provide these things, walk away.

Given the lack of communications, I'd be inclined to walk away.

Hi Lakeisha

From your line of questioning you are just at the beginning stages of learning a new business. It's like you decided to open a restaurant but don't know what is going to be on the menu or what prices to charge. I can't tell you how many people loose their money and then ask questions. You are on the right track in this regard. Also if your gut says something is wrong follow your gut. It is better to miss out on a deal than loose your money   on a bad deal.

The last time individuals told me to run and I did not listen it cost me a Mint.

Follow the above advice and your gut feelings.

Future opportunities for lending maybe consider 8% - 11% and 1 to 2 points.

Important : Only providing a suggestions and have nothing to gain for comment.

Thank you everyone for your feedback.  I greatly appreciate it.  Trust me @Jenkins Ramon   I am following all the advice given, and I'm walking away from this deal.  @Terry Lewis  , you are absolutely right; I am in the beginning stages and I definitely need to step back and review the terms I established and stick to them.  I think a part of my gut feeling came from the fact the borrowers requirements are so different from the terms I established.  I think it's fair to say my gut feelings are a clear indication of my uneasiness with what was presented to me, and I should not move forward.  Again, thank you all.  I am walking away from this deal.  

If the first rule of buying property is location, location, location, @Lakeisha Alston  , the first rule of lending is borrower, borrower, borrower. You have no idea to whom you are loaning and the last thing you need is to be pressured by someone you didn't even say is a licensed broker, to wire money on a deal you know nothing about, in two days. Don't do this deal.  You don't know what you don't know.  This person doesn't care about you.

$10k is not much of a rehab. Do you have any idea what the money will be used for? Is this a first or second position loan? It doesn't matter. The first question you want an answer to is who is the most widely used lending attorney in your area. Lending attorney's are not real estate attorneys and are typically far and few between. Hard money lenders are the best source for these, if you ask a few.

Do a search here on how to become a private or hard money lender and you'll see some very specific advice about how to get into the business; step-by-step in some cases, and it's not difficult.  Rushing into a deal with a stranger will not be on any list. 

Two other pieces of information I would expect to see are a 1003 loan application and a credit report on the borrower.  Not true in the pooled deal where I do this now.  That level is taken care of by the folks running the pool.  But when doing direct loans I did get this information.  Along with a detailed breakdown of the rehab.  Rehab budget was held in escrow.  In practice that meant the title company would cut two checks, each for one third of the rehab budget, made out to the borrower but given to me after closing.  The remaining third was given to the borrower at closing.  I handed over one check with the work was half done and the second check when the rehab was 100% complete.

Jeff S Na the information you have provided is invaluable.  Thank you so much!

Lakeisha,

I'm so glad you walked away from this deal.  It had all the warning signs.  I'm a private lender in NH and personally I won't do any deal unless I can walk through the house, verify that I believe the borrower's rehab budget, do a criminal background check, verify that he has the cash reserves to carry him through, verify his past experience of successful flips, etcetera, etcetera.  So if you don't do a similar level of due diligence you're just asking to lose your money.  And the borrower may have been fine but the loan originator could have been a sleaze ball.  You should do due diligence on both of them, and on the deal itself.  When I did the criminal background check on one guy who wanted me to lend through him, it turned out that he had a bank fraud conviction!!!!  If you want to get into private lending, try to find a loan originator who can document his/her experience, has a great reputation for integrity and who you can personally trust with your money.  I have outside investors, but only ones that I've known for years.  Be very careful with your money.

There is nothing wrong with being a private lender; there are lots of projects that need funding and people are willing to pay you to use your money.  But you have to do your due diligence.  If something seems "too good to be true" or you just have a bad feeling about it, stay away. Any borrower should be willing to go through an attorney for any deal to be funded.

Lakeisha,

I am SOOOOOOOO happy that you asked that question BEFORE you handed your money over.   I, too, am in the process of finding a good project to lend to...and with what I've read and learned (a lot from the excellent comments above) it is all in line with being a smart business person and lender.   WE (the lenders) control the terms and need to be 100% certain we are comfortable with the risk.

I am making the transition to add private lending on real estate projects to my strategy and still looking for the right project locally here...and this thread was timely.  Thanks for starting it Lakeisha!

Glad you posted this. I'm new to RE investing and definitely new to lending! But, in my local REIA I've networked and made some good contacts. I'm in talks about doing some JV deals with a couple who has gone through one of the highly recommended coaches programs in our area and he also has his eyes on all of their deals. They've done a small handful of flips and starting to grow their business now.

The situation:  Has a project underway, about 70% done and needs about 60 more days until selling time.  Presumably all done with Private Money Lenders, but not sure what terms/rates.  What they're asking from me is a loan of about $10-$12k to use for ramping up marketing and money to put offers in on other deals.  I would have a signed and notarized Promissory Note tying my loan to the current project and I would be repaid when that project is sold.

My questions are... I'm not going to have 1st mortgage as I'm not the main lender (or first) on the current project. My money isn't technically going to be used on the current project, but the Note is tied to it. What is a good rate for this type of deal? It's someone I hope to do more JV deals with (not just lending money, but actually partnering on flips). What documents should I expect to have or how to structure it to ensure I get repaid when the property is sold?

Any help???

Originally posted by @Brian Alterman :

Glad you posted this. I'm new to RE investing and definitely new to lending! But, in my local REIA I've networked and made some good contacts. I'm in talks about doing some JV deals with a couple who has gone through one of the highly recommended coaches programs in our area and he also has his eyes on all of their deals. They've done a small handful of flips and starting to grow their business now.

The situation:  Has a project underway, about 70% done and needs about 60 more days until selling time.  Presumably all done with Private Money Lenders, but not sure what terms/rates.  What they're asking from me is a loan of about $10-$12k to use for ramping up marketing and money to put offers in on other deals.  I would have a signed and notarized Promissory Note tying my loan to the current project and I would be repaid when that project is sold.

My questions are... I'm not going to have 1st mortgage as I'm not the main lender (or first) on the current project. My money isn't technically going to be used on the current project, but the Note is tied to it. What is a good rate for this type of deal? It's someone I hope to do more JV deals with (not just lending money, but actually partnering on flips). What documents should I expect to have or how to structure it to ensure I get repaid when the property is sold?

Any help???

 Set the same rate as they pay on their credit cards. If the borrower pays 8-10% on their credit cards then that would be a good starting point.

If the borrower is paying 18-21% on their Credit cards then that would be a good starting point.

If the borrower has no active current Credit cards then DON'T lend money at 10%! 

@Brian Alterman you've already asked this in your other thread. My advice is the same.  I have made private loans and I wouldn't touch this one for 25%.

@Brian Alterman

@Richard Dunlop

  small loans in many states like this are subject to usary rules.  ( think anti loan sharking) you want to check that first.

small second behind a large first is as @Jon Holdman states a terrible idea and loan.  think of all the seconds that got wiped out over the last few years.

Just lend them the money personally on an unsecured Prom Note.. since its really going for business development then get a equity share with the business going forward your being more of a partner than a lender.. plus your not at all experienced at what your doing. Most folks that try private lending in some form are poster childs for those that get separated from their money they have no clue.

If you want to start to lend money hook up with a VERY good local HML and have them place your funds for you in first position.. that's the safest way to start in IMHO

Originally posted by :

If you want to start to lend money hook up with a VERY good local HML and have them place your funds for you in first position.. that's the safest way to start in IMHO

I have the same advice. Until you have a better idea of how to protect yourself, let someone else do that for you. A great HML will service the loans for you, as well. 2nd Liens/Gap Financing is still steady in Texas but it is a VERY risky investment but working with a HML will allow healthy returns on our money without any effort other than signing some docs and sending a wire.

As a Private Lender, you can have Title be held in your or your Company's name... 

And you can have the Borrower pay you interest during the Project, as their "Skin in the Game."

Once the Property is fixed up and sold on the market, You and the Borrower can Split Net Profits 50/50, or whatever the determined net profit split would be.

@Karl Harmon you can send me a message via email and we can go from there.  As a heads up, I'm currently not doing any private lending at the moment, but I have access to individuals who offer private and hard money loans as well as commercial loans.

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