Private Lending Risks and Mitigation

12 Replies

Are both a Promissory Note as well as a Deed of Trust needed for a small private loan (~10% of single-family house cost)?  I've gotten two "yes" and two "no" responses regarding the need for a Deed of Trust.  All four people were weathered investors.  Could someone clarify.

Yes you need both. The note spells out terms of loan (int rate, late fee, payment schedule , amount etc) The trust deed or mortgage (depending on state) is the document that is recorded with county that encumbers/liens the property and that gives the beneficiary power to foreclose.

Ok, so the deed of trust can be verified with the county.

One thing to check is that the SAME entity, an LLC in my case, is issuing the trust deed and promissory note. Another check is that the LLC indeed holds title to the property in question. Any other sanity checks?

@Nazar Trilisky

You may also want to get the HUD for the property to ensure ownership and ensure you really have a lien.

Are you getting a personal guarantee as well? 

Who are you lending too? I have lent but I knew and greatly trusted the party I lent to. I would make sure the person you lend to references out because that is more important than any document. Someone who wants to find a way can always find a way to do something you wish they did not with your money. 

I am not getting a personal guarantee.

Thank you for the answers so far.

To ensure everything is done properly, run it through a title company. They will do a title search, lien search, etc. Are you going to hold 1st position? You need to know. A title company will do all the work, make sure everything is done correctly, and generally inexpensive. Pass these costs on to your borrower.

This would be a 2nd position loan.

Is it true that having multiple liens on a property will hurt the chances of getting refinanced on a mortgage?

A specific example is a 4-family house that is on a short-term, bridge loan.  If there are five private, hard money lenders who would each get a deed of trust, then will there be problems getting a longer-term, lower-rate loan due to the multiple deeds of trust?

I also agree that you need both the promissory note and the deed of trust. As @Tim Watcke

 pointed out, the deed of trust is the legal instrument that gives you the right to foreclose on the property if necessary. The Deed of Trust should be recorded with the county to ensure your interests in the property show up in the chain of title. If you fail to do this, the Deed of Trust may still be valid, but you'll possibly have a harder time foreclosing. The promissory note (depending on your state/county) does not usually need to be recorded. 

In any event, having both a written promissory note and a recorded deed of trust help clearly define expectations and responsibilities between all parties. It's often worth the fee to have a tile company (or real estate attorney depending on your state) handle the paperwork and make sure everything is done properly.

@Nazar Trilisky

  small seconds behind HM loans are to be avoided or at least anyone who is a professional lender would normally pass on that opportunity

To answer my own "Aug 02, 01:29 AM" question:

yes, multiple liens on a property prevent a bank from giving a long-term loan.

A BECU representative said that BECU would have to pay off all private lender trust deed liens before the bank can give a long-term (15 to 30-year) loan against the property.

I think we need to start at the beginning and spill the beans as to what is really going on, an LLC, no personal guarantee, second position or further back, is this to a commercial transaction or a consumer loan, buying from an LLC, there is no issue with the number of liens to be paid off, the issue is the dollar amount and the property value. That is loan to value. How much is 10%, there are minimum loan amounts that may be secured by a deed of trust. Absolutely get a title examination, is this a purchase money loan, the LLC is buying it, or is it rehab money or refinancing? It all makes a difference. And, if you're a first time private lender, get a personal guarantee, even if it's your grandmother! You may need to take out a first mortgage to protect your second, if you lose the collateral to a first lien holder, you're out of collateral. Without a personal guarantee you're out your money as it is then an unsecured debt. Even pawn brokers don't make unsecured loans!

So, what gives?  :)

This is a consumer loan, not commercial.
This is rehab money, not purchase money.

The personal guarantee is a good idea: gives collateral.  Those grandmothers can be tricky  :)))

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