Need Example Private Lending Agreement

13 Replies

Hey BP Community, hoping you can help me out...

The Set Up: Buying my 2nd buy-and-hold rental property, and this time I've found a relative who's willing to lend me $75k to finance the deal.  Having never done this before, I want to do it right (but without the cost of an attorney)

My Request: Although it's not required, I'd like to put together some sort of loan agreement between me and and this new "private money lender", especially since this relative has never really loaned so much capital before.  Does anyone have a private lending agreement they could share with me?  (preferably non-recourse)  ...I didn't see anything in the BP FilePlace, but maybe I missed soemthing that's already there???

Thanks in advance!!!

JJ

btw - I am a big fan of the podcast (which is what helped me find this site), so I'm putting out a request to Josh and Brandon... don't leave a new guy hangin' here.  :-)  

Any help would be greatly appreciated!

@Brandon Turner and @Joshua Dorkin -- guys, I've been searching the podcast for similar info, and it's time for a show on Private Lending (from the lender side, not the borrower side).  Dave Van Horn's note show was good, but you don't have anything (yet) on being the person originating the  loans.  There are plenty of private lenders on the site who have tons of experience and knowledge to share (Jay Hinrichs, Jeff Rabinowitz, etc).   I'm holding my breath . . . .

It's not you that should be speaking with an attorney, @JJ Mayer , it's your relative who, in the eyes of the law, is now a lender. The reason you rarely see agreements on-line is that they are state specific and often require many documents; least of which is a note and a deed of trust or mortgage. Other disclosures could apply as well. These are to protect both parties and are not for the do-it-yourselfer.

If things go wrong (after all, you could do this on a handshake) both of you will become different people and your relationship might turn in directions you're uncomfortable with. If thing go really wrong, and sadly they can, your relative could be dealing with a completely different borrower/owner. Similarly, if your relative needed money and ever sold the loan, you would be dealing with a different lender. Both of you really need bulletproof paperwork that's been properly vetted and originated in your state by someone who knows what they are doing.

The generic loan documents I've seen from title companies are often terrible. My advice is to have your relative speak with either a mortgage broker, or better, one of the larger hard money lenders in your area. Hard money lenders are used to dealing with private loans. Either way, all will be appropriately licensed and should be able to provided appropriate paperwork. They will also know how to properly originate the loan for your deal and the cost should be nominal.

Also, before someone suggests it, you can go to one of the GFE websites, like Freddie Mac here, and look at loan documents. This process is not for the faint of heart. Have your relative speak to an attorney and understand what they are getting into. You should go with him or her. Then, have a licensed professional help with the loan.

Updated almost 6 years ago

Oops. GFE = Government Furnished Equipment I meant: GSE = Government-Sponsored Enterprise

I have done one deal using this method in the past but I would also be very interested in seeing what other people have done, how it was structured, etc..

That being said.  I would highly recommend going to an attorney.  This did not cost much for us (a couple hundred dollars) but then it makes it legit.  This will not only help show your relative that you are taking this seriously but you will also be able to point to it in the future when you are speaking with other potential investors.

I'm with Jeff S on this one and absolutely would encourage you to not scrimp on this.  You are saving small dollars that could cost huge headaches and dollars later.  Preparing for all the things that could go wrong, without being doom and gloom, is simply smart business.  Using generic docs off the internet without benefit of an attorney is almost a guarantee that you will be violating some law somewhere, either federal or state.

The proper documentation does a few things:  

  • It defines the terms by which you both abide in the event of a problem or disagreement.
  • It assures your relative that you are a professional and are acting accordingly instead of flying by the seat of your pants.  The more professional you are up front, the more professional you will be throughout the transaction.  I can assure you this will occur to them.
  • It ensures that the loan is recorded and secured by the property.  (You did want to secure their loan with the property, didnt you?)
  • It ensures that there are no title issues which can prevent you from reselling (and from paying them back)
  • And on and on......
  • Find your local hard money lenders, as Jeff says, and they can either originate it for you, or connect you with an attorney who is accustomed to generating loan docs for private lenders.  Most regular real estate attorneys use the loan docs provided by the institutional lender, so it's important that you find an attorney who is accustomed to this.

@Anna Watkins , my podcast #9 touches on it a little, but probably does not go into enough detail on what you are asking.  Obviously, I originate loans.  The challenge with this, is that each state has it's own laws that change the flavor just enough that if I were talking about MA for example, I could be totally misleading someone in another state.  Lending is an area with tons of regulation, and just because you are a "private" lender, doesn't mean you aren't subject to all the same requirements.  I think if @Brandon Turner or @Joshua Dorkin wanted to do a podcast on this, they might need an attorney to do it.  

What do you think, @Jeff S?

Originally posted by @Ann Bellamy :

Lending is an area with tons of regulation, and just because you are a "private" lender, doesn't mean you aren't subject to all the same requirements.

Among the more incorrectly held beliefs about lending on this board, is that there is a difference between private and hard money lenders.

When someone here suggests they are looking for a private money loan, another will often jump in and provide their definition that a private money loan is from someone you know, like your dentist or Uncle Louie, and a hard money loan is from someone who does it professionally. In fact, both are non-institutional loans and the terms are completely synonymous. There are not two sets of lending law. As you wrote correctly, Ann, everyone is subject to the same requirements.

This dogma is particularly unfair to anyone who borrows from his or her friends or relatives (which in my view is always a mistake, but that's another topic). It gives them a sense that since they are "non-professional" they can get away with terms and legalities to which others (i.e. "professionals") must comply and that it's ok to be informal. I can't think of anything more dangerous.

Since the argument is so common here, I quit trying to push that rock uphill on this board, but it seemed appropriate to mention now and maybe keep a few individuals out of trouble.

@Ann Bellamy and @Jeff S -- your comments are really helpful. I do think a podcast would be a valuable contribution to the conversation, if only to give information and dispel the myths you say abound (let's face it -- tons more people will hear a podcast than will read this thread!). I'd like to know, for instance, how much money is typical for a beginning lender to loan -- $10,000? $50,000? What's a typical loan period? How does one structure the documents (knowing that the specifics vary by state, but maybe with examples of how much different states vary in their regulations)? What's the difference between loans inside of and outside of a self-directed IRA? Does you manage payments yourself or do experienced private lenders have loan servicers (like landlords have property mangers)? I would think there's lots to cover that's general enough for a podcast!

Originally posted by @Anna Watkins :

@Ann Bellamy and @Jeff S -- your comments are really helpful. I do think a podcast would be a valuable contribution to the conversation, if only to give information and dispel the myths you say abound (let's face it -- tons more people will hear a podcast than will read this thread!). I'd like to know, for instance, how much money is typical for a beginning lender to loan -- $10,000? $50,000? What's a typical loan period? How does one structure the documents (knowing that the specifics vary by state, but maybe with examples of how much different states vary in their regulations)? What's the difference between loans inside of and outside of a self-directed IRA? Does you manage payments yourself or do experienced private lenders have loan servicers (like landlords have property mangers)? I would think there's lots to cover that's general enough for a podcast!

 Hear hear! Or here here, whichever. Anyway, until then looks like we go to an attorney or mortgage broker or money lender of some sort, someone who would have a MLO, lmo, rlmo, whatever on hand

Take it to a title company. The will often draft the mortgage and note, handle recording, etc. This protects BOTH borrower and lender. Costs are minimal. Play it safe. Would you spend $1k to protect 75? I would.

When you are buying your investment property, you get a contract with the seller and (in Texas at least) take it to a title company for title insurance as well as closing. The terms on the contract let the title company know that there is some financing. The closer will ask you who you are getting the loan from. You let them know it is from Uncle Buck and give him/her Uncle Buck's name, address, phone number, etc. You tell the closer that you are closing on the property 10% down, 90k loan, 8% interest for 20 years, payments $752.80 fully amortized. Thats it. 

They will confirm with Uncle Buck. Title company takes care of the paperwork. Your part is coming up with the TERMS of the agreement(int rate, term, down pmt, etc). Title companies have attornies that work for them who draft docs. 

@Richard Pozos, that takes care of you, the buyer, just fine.  It does nothing to protect the lender to have documents drafted by a title company.  

@Jeff S and I have said the same thing different ways, and multiple times in this and other threads:  Non-institutional lenders need to engage an attorney familiar with non-institutional lending.  Not because the laws are different, but because conventional title companies (read also as real estate attorneys) don't necessarily stay up on the nuances because institutional lenders have their own attorneys on staff to do that and prepare the lender's loan docs.  Institutional lenders have boatloads of people who do nothing but work on compliance.  Non-institutional lenders have only the attorney drafting the docs. 

If you need open heart surgery, do you assume that all doctors are the same?