Hard money lender -- need an entity?

Question

This might seem like an odd question, but if you are the one who is going to be loaning the (hard) money to another individual(s), is it safe to loan it from your own personal name, or should you use an entity (LLC) to make the loan? Is there any risk of being sued as the lender? Thanks.

Bill Gulley · Answer

Bienes, if you lend as a LLC and significant income of that LLC is made by lending, you'll probably need a license as you'll be seen as a lending company, how the IRS sees you can influence how finance regulators will look at you.

Jeff's nightmare is rare in my mind, generally other creditors don't sue others as that is taken care of through state law as to foreclosure, I was never sued from that light. Adding to that, if you can be seen as a partner by funding in your name you could be exposed to different considerations, more as a participant that funded a deal than just being a lender. An advantage of being a registered lender opposed to acting privately.

One rule of lending is never get involved operationally with a business loan/borrower, if you advise and they fail due to your advice or by controlling the purse too tightly, you can have issues.

Check with FL as to license laws, I'm betting you'll have exemptions to a certain number of loans as a private lender.

Keep in mind, "private money/lender" an individual doing business with people known to you vs. being "in the business" of lending to the public, as a "hard money" lender that can be regulated. Soliciting loans is being "in the business".

Seems you just got started in landlording and getting that up and running, I recall many of your past posts, now moving into lending is really a different world, depending on what you do. I'd suggest you speak to an attorney familiar with banking and finance, not just a real estate attorney if you're serious about the business. Any RE attorney should be able to do a note and security agreement, they may not be aware of current lending requirements. :)

Jeff Rabinowitz · Answer

You can be sued just for being involved in a transaction. ~4 years back I made a loan to an investor out of my IRA. The investor was an LLC. We had completed a few deals successfully. Every loan I made was used as purchase money for a SFH that the investor would rehab and flip. I was not generally involved in any property for more than 3 months (the shortest was ~3 weeks). The investor LLC was sued by another investor who had loaned money to them. My IRA was also named in the suit. The plaintiff knew I had absolutely nothing to do with the dispute, in fact, the first transaction I did with the LLC occurred after the dispute. They named me because they thought they could take possession of the properties in the LLC's name which I just happened to have first liens on. It took 3 1/2 years (and considerable legal expenses) to free 2 of the properties from the proceedings. One of the properties was abandoned for non payment of property taxes. It was vacant and had been stripped. One property is still encumbered and cannot yet be sold.

Basis for a lawsuit? This is America. You don't need much basis, if any, to sue someone.

Rick H. · Answer

T.G.F.G. (Thank God For Gulley).

Also, Lending is not the same as setting up a hotdog stand.

Having been through plenty of baseless lawsuits made by faceless people, I can assure you that lending privately without benefit of knowledge, license or entity is pretty high risk activity. I've always been licensed, had corps and license and still had to pay some pricey legal bills for silly shakedown suits.

Bienes Raices · Answer

@Jeff Rabinowitz

Gah! What a nightmare! Thanks for the real life example...I know the risks of landlording, not of being a lender...better to know the risks beforehand than to get involved blindly and learn the hard way later.

Hai Loc · Answer

I have seen people do it both ways. The ones who actually use there name have insurance premiums that cover their backs.. Normally they would go this route on flips..

Again.. attorneys will have the best answers

Jeff Rabinowitz · Answer

I am not a lawyer but I have not heard of any regulations that would prevent someone from lending under their own name.  I have done this on occasion.  You will have a bit more privacy if you use an entity or, better yet, a numbered account.Of course you can be sued as a lender.  In this country you can be sued for just about anything.

Bienes Raices · Answer

After reading these I've decided I don't want to get involved in hard money lending after all. It sounds like way more trouble than it's worth.

Bienes Raices · Answer

@Jeff

Thanks--the reason I am asking is I have an LLC that's not doing anything and I would like to dissolve it and stop paying the annual fee because I consider it a waste of money. However I thought maybe I should keep it Active if it was necessary to use if I go the hard money route.

I know you can be sued for anything -- I phrased my OP poorly -- but is it common for the hard money lender to be sued? What would be the basis for such a lawsuit, if the borrower had a well-prepared legal contract with the lender?

Hard money lender -- need an entity?

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