I have a question regarding how Private Lending is typically structured. I will give you this scenario.
I have a SFR home that I will purchase for $65,000 and rehab for 25,000 the ARV will be 100k. I would like to borrow 100% from my friend "Bill". Bill has a self directed IRA that he would like to loan me the money from.
1.Is there a typical "best practice" structure for this loan? I.E. do I give bill a first position on the property or just sign a promissory note?
2. Anyone experienced on how Bill would access those funds from his self directed IRA. Does he contact the custodian and with what documentation?
3. Any tips on preparing the appropriate documents. I imagine having an attorney do it properly makes sense but any tips surrounding this?
Thanks so much.
Bill should have the first position on the property, otherwise he is not protected. When he pulls out his funds from his self directed IRA (he can just contact the company he has it through and they will guide him through it) he can write up a note for you to sign and will include the property as collateral. Also, where are you getting the funds for the rehab? If he is also giving you that for 100% can I be his friend?
If I were Bill i would insist on a promissory note AND a first position trust deed, the promissory note and deed need to be in the name of Bills SDIRA custodian for benefit of Bill's IRA and the note needs to spell out the terms, rate and period.
Bill's custodian will have a direction of investment form, he can call the custodian directly and ask what they will need and the EXACT name and address their underwriter is going to demand, for instance EAGLE TRUST LC FBO BILL'S IRA, I had one kicked back because it was addressed to EAGLE TRUST LLC FBO BILLS IRA. they will also tell Bill what they want as far as the Note and deed, make sure it gets recorded too. You will also need to give Bill your wiring instructions for your bank and work out any draw schedule.
No offense, but this is not a good investment for Bill, the LTV is way to high and you have no skin in the game, i would not do this loan, but maybe Bill is more trusting, good luck.
Some touch up. Bill should not touch the money, it goes from the IRA to the closing agent. The closing agent needs instructions from the custodian as to the name used on the note and deed of trust and telling the settlement agent it is a first deed of trust. The custodian needs the original note and the deed after it is filed or safekeeping per their instructions. Yes, get a note reviewed by your attorney.
You will need a hazard insurance policy with a loss payee assignment to the IRA. Get a Lender's Title Policy (often free with an Owner's Policy) in the name of the IRA.
It gets more complicated if cash goes to you at closing for rehab, Bill can not touch the money or benefit again from any sale, this is his IRA doing business, not Bill.
The custodian may need to send a commitment letter to your seller as POF for the loan.
See your attorney! Good luck :)
if bill has money to lend he should be going through a licensed broker/lender. Lenders protect the borrower as well as the lender.
This is a very thin deal. If I were Bill I wouldn't do it and I would advise you not to do it. You are estimating a spread of $10K but...you have not accounted for closing costs (commissions, title insurance, etc.). You have also not accounted for holding costs (utilities, taxes, etc.). I hope you are planning on paying Bill some interest. What is left? $3-5K, maybe? You can lose that with an unfavorable appraisal. If your estimate of the rehab is off by even 10% or you get a purchase offer for $95K you (really Bill) will be looking at a significant loss.
I do loans like this. I know the example sounds made up and you haven't assumed the commissions, taxes...
Close at a title company that is attorney owned, and specializes in investor services and they will be able to generate the docs you need.
Plan it so that both of you could die and the heirs will be able to close out the deal. Sounds macabre, but things happen. I call it my "struck by lightning policy".
You can walk away from the closing table with cash for the rehab. Make sure that Bill has accountability measures. He can hire third party inspection. You can be bonded for the work. The bond would likely be cost prohibitive on a deal like you mention, but you get the point. Plan for the train wreck. Then you won't have one.
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