What paperwork do I use to combine private lender and hard money?

4 Replies

Hi - buying a flip shortly. Hard money lender is giving us purchase price of $95K and private lender is giving $60K rehab money. Hard money people want first position plus a deed that's won't be recorded unless they have to take ownership of the property.  What paperwork do I give the private lender to secure his investment? Is a promissory note enough?  Also private lender is from CA and I'm in PA. Any SEC issues to consider?

Your second position lender will want his own attorney to draw up his promissory note and mortgage, and that attorney will want to communicate with the closing company handling the closing for your first position hard money lender.

"You" should not be giving him paperwork.  He should be consulting an attorney who regularly works with private lenders in PA.  

Since you apparently have agreed to the following: "plus a deed that's won't be recorded unless they have to take ownership of the property. " the first position lender may not allow a second position. Have you asked them?

@Gail Greenberg I'm a very strong believer in keeping people nice enough to help me with financing very safe (this is true whether in seller-financed deal or on the rare occassion I might use a private lender). I think you do a great disservice to your private lender if they don't have a mortgage AND sufficient equity (say 30% of FMV) above the combined loan-to-value of the first and second to protect their position.

I'm not an attorney but I strongly suspect that the hard money lender holding a deed has the potential to compromise to a degree the private lender and, if I were the private lender, I'd sure be getting competent legal advice relative to law and precedent in the state wherein the property is located.

Also, more than likely @Gail Greenberg , that deed (which would be a pre-signed deed in lieu) could be contested by you as invalid or unenforceable. Your first position lender is effectively circumventing your rights in a foreclosure.

I don't know the licensing laws for lending in PA, but I'm certain we could not just set up a business there from CA without strict compliance. Your private lender falls into the same category. Calling them "private" does not mean that they can avoid the regulations. There is nothing informal about this.

I agree with Ann and Ed. Both lenders in this transaction should be properly represented by someone who is licensed, and protected using a note, a mortgage, and all other appropriate disclosures that defend their respective position.

"I'm not an attorney but I strongly suspect that the hard money lender holding a deed has the potential to compromise to a degree the private lender…"

Perhaps, but likely the opposite, Ed. Enforcing a deed-in-lieu means the first position lender is stepping into the shoes of the homeowner and is subject to all other liens, including that of the private lender. Since they didn't foreclose, they must now pay off the second lender according to the terms of the loan. That's why Ann suggested they might not want anyone in second position.

@Jeff S I think I must have had more than a few misfiring neurons when I wrote my reply.  Mea culpa, I agree with your deed-in-lieu assessment.