reaching out to the more experienced hard money lenders in this forum.
Recently I completed my first hard money lending deal(I am the lender) to a company which is flipping houses. We concluded the deal with a Promissory Note and I sent the money to the escrow account. The loan is backed by the house that will be refurbished (as stated in the promissory note).
However, how can I:
1) Make sure the lender has indeed used the funds to buy that particular property?(does the escrow agent send me some form of confirmation?)
2) How do I know I am indeed registered as a lien holder ( I understand I need to get hold of the trust deed from the County Recorders' office. If so I live outside of USA, so can I do this online)?
3) Where and how do I check if the property is insured?
4) Anything else that I have missed in order to make sure that my first lending deal has been executed properly.
Good questions. Your title agent with the title company (or closing attorney) should be following a letter of direction from you for the disbursement of funds. That letter is part of their contract with you. They have a fiduciary duty to complete these items. Disbursement of funds held in escrow must meet the conditions of the escrow agreement. In this case:
1) Recording of a mortgage or deed of trust.
2) Execution of the promissory note
3) Are you requiring the borrower to give you any personal guarantees? If so, this must be signed.
4) Receipt of insurance certificate naming the lender as an insured party.
5) Purchase of a title insurance policy naming the lender as a co-insured ensuring the title is warranteed if you need to foreclose. This step ensures that the title work has been done and both the borrower and you have clean title.
6) Recording of the deed.
If the funds are being loaned for construction, I would lend the money in draws, upon completion of phases. This way, you are minimizing risk and ensuring the funds are actually going into the building. You are securing the loan with a building. Materials sitting in the back of a pickup truck aren't part of the building and therefore can't be part of the security. Those funds are unsecured. They're only secured once part of the building. Create a draw schedule, combined with inspections to ensure the construction plan is being followed. The borrower should be willing to sign a sworn statement of construction as an exhibit to the loan. This usually is accompanied by an AIA form.
You should also be having the borrower sign an assignment of rents. If the property is rented, and the borrower is in default, you need a mechanism for the rent to flow through to you until you get repaid.
If you do all these, you should be well protected.
Thank you Victor and many apologies for the belated reply. Your advise most definitely helps and looks like I had not done my first hard money deal correctly. Luckily it looks like the flip is going well and we will clear a profit by the end of the month.
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