Private Lenders- how to set up legally?

Question

I am considering using private lenders to invest in already owned property to pay off what is owed on a credit line used as the down payment. The credit line has about ten months before interest is charged and thus allows time for investors to pay into an already existing investment.

Should I meet with a lawyer and draw up terms of agreement for them to sign? Do I have to stay in regular contact with them? What if they want to withdraw their money?

Just want to see if my potential plan has problems or if they can be worked through.

Thanks for your help :)

Matt Motil · Answer

I think I understand what you are trying to do. Best to negotiate terms with your investors with a letter of intent and then have a real estate attorney draft up the details to make it official. You said your investors are friends and family so it's even more important to make it legal and official. Friends and money doesn't mix well, and it's always best to have everything in writing so that Thanksgiving dinner doesn't get awkward.

Alexander Pezzutto · Answer

Intense replies! Thanks guys. I appreciate the honesty and will continue to seek out professionals to set things up legally.

Jon Holdman · Answer

IDK what the differences might be in Canada vs. the US, so take this with a grain of salt.

You say its not a mortgage.  It most certainly is.  If I was your lender, I would want a security interest in the property I'm loaning you money against.  Now, personally, I'd never make the loan you're describing.  You want a second position loan behind an existing mortgage.   Very risky for the lender.

In the US you generally have two documents for real estate secured loan.  A promissory note and a deed of trust or mortgage.  The promissory note outlines the loan terms.  You would have one of these for pretty much any loan, real estate or otherwise.  When a loan is secured by a piece of real estate, a mortgage or deed of trust is recorded with the county.  That gives the lender a security interest in the property.

As far as getting their money back, that covered by the loan terms.  Such a loan would typically not have any calling provisions.  So, the lender cannot demand repayment.  They only get repaid according to the loan terms.

Yes you would keep in touch.  The monthly payments, if nothing else.   At the end of the year, they would need to send you a statement of interest you've paid to use for your tax preparation.

Yes, you want an attorney to assist with preparing the proper documents and ensuring your loans are legal.

Hopefully you're prepared to make good on these loans, even if your RE investments go south.  Or, risk losing your friends and alienating your family.

Roy N. · Answer

@Alexander Pezzutto

We make private loans to rehabbers and others and always secure them as a first or second mortgage against the property (or perhaps another property owned by the individual).  Yes, they still carry a higher interest rate (5 - 8% 1st position, 8 - 14% in 2nd), but the interest rate would be even higher if we were to lend unsecured (which we don't).

We use our own lending documents and the borrower is responsible for all origin and administration fees.  Even Especially if you are borrowing from friends and family, you should use formal lending agreements and register the lien against the property (mortgage) to provide security to your lenders.

Alexander Pezzutto · Answer

@charlie Fitzgerald

I guess I need clarification,  sorry. I was going to use people I know personally and these are not mortgages. It is from a private lender but similar to a mortgage with a higher interest. I would just get friends and families to invest in the down payment amount. I'm also from Canada investing in the US,so I'm not sure if that adds difficulties.

Charlie Fitzgerald · Answer

Most Private Investors will have you signing their contracts.  Presuming that your HELOC is a 2nd mortgage, most private lenders are not going to be too interested in paying it off and being in 2nd position behind a Sr. Lien holder.  I think you have a tough road here.  Have you considered refinancing both loans into one new 1st mortgage?

Mark Archer · Answer

Alexander.

It appears you may have answered your own question and looking for confirmation? (I'm actually asking)

Here's my take:

-Lawyers are good advisors as they will raise some 'angles' that you or I might not have thought of

-A Gold Rule: "Everything is negotiable", and it would be prudent to ask your investors what their expectations are.

-Pre-Arrange any early withdrawls with your attorney and see Gold Rule above.

Private Lenders- how to set up legally?

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