So I have had a few private lenders who just lend me money with a promissory note. That has seemed to worked quite well. But I am in discussion with a new private lender who would probably want a lien against the property in addition to the promissory note. Is this easy to do? We would clear the lien when we sold the property or refinanced it in 12 to 18 months.
I am in the process of reaching this myself so interested in what experienced private lenders have to say but below are my notes from my research:
- Draft promissory note with loan terms
- Deed of trust or mortgage agreement whichever is required by State is recorded with first lien position which secures the lender’s interest (Title Company or Attorney)
- Appraisal paid for by the borrower but done by an appraiser I choose
- Get 1003 loan application and a credit report on the borrower
- Do a criminal background check
- Verify that borrower has the cash reserves to carry through with job
- Verify borrower past experience of successful flips
- Verify realtor, broker license, etc.
- Detailed breakdown of the rehab. Rehab budget held in escrow (do phased draws)
- Funds always held by a third party (title company)
- Seventy cents on the dollar
- Insurance to cover costs to ensure lender money is returned. Should insure for more than loan amount
- Can pay interest at end of term or up front
- Can offer interest payments or % of profit (not both) – interest will be 8% - 12%
- Lender will provide release of lien when loan is repaid
Thanks for the feedback. Your research seems to line up with what I know and what I am learning. However, much of the bottom part of the list seems like hoops you would jump through for a Hard-money lender or a private lender which you don't have a relationship with. Most of my private lenders are friends who have seen my track record and trust me. So they are not requiring the appraisal, credit check, criminal check, etc.
I've worked with three private money lenders. All three I have just done a promissory note with. One guy I gave 20% over a short-term. The other two guys are at 10% APR for a 6 to 12 month hold. The new guy I am chatting with would come in for 8%, but wants probably a deed of trust or a mortgage agreement.
@Michael Wentzel I know it's been a while but how did you end up structuring this deal? I'm working through almost the exact same thing at the moment.
In Ohio we ended up using a promissory note along with a mortgage. In Colorado, we usually use a promissory note with a deed of trust. In either state we usually do 10% APR paid in monthly payments until we refinance the property into a commercial bank loan.
@Michael Wentzel in Colorado you will have a note (promise to pay) and a deed of trust (lien). You can find blank ones on the state website: https://www.colorado.gov/pacific/dora/division-rea...
A realtor cannot fill these out for you. I am allowed to do them for my own transactions and I have. But you and the lender should be able to figure it out. I didn't find it difficult at all. The title company that handles the transaction will make sure they are properly recorded at your county clerk & recorder office.
@Michael Wentzel For what you're doing, yes, a note and recorded deed of trust are the bare minimum. Although you're dealing with people you know, make sure they are protected. What happens to your investors if something were to happen to you? Then, it gets messy. If they have recorded deeds, not so messy.
You might also consider having the loans boarded with a servicing company. For friends, it's not really necessary unless they want to sell their notes down the line. If you have more professional type relationships with future lenders, they might want them professionally serviced.
Also, check usury laws in your state. In California, you can't charge more than 10% interest unless a third party brokers the deal. You don't want to get your lenders in trouble!
Most private lenders require note, Mortgage (deed of trust) , Title Insurance and be on the hazard insurance policy at a minimum. It has been great so far that you have people (friends/relatives) that only are requiring a note but those are the select few. To answer you question it is relatively easy to get the Deed of Trust filled out and have it recorded. You can do it or get a title company do it to make sure it is done correctly.
Thank you for the input. One of my private lenders is a Colorado attorney. So he drew up the note and deed of trust. We close with a Title company 95% of the time and the deed of trust is always recorded with the county. So I think we are okay on that side.
@Michael Wentzel . Could I/ should I record the deed of trust after the closing so as not to complicate the closing process (being done by remote)?
I am not sure how it works in New York. In Colorado, we normally close with a Title Company and they make sure the deed of trust is recorded.
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