First Time Private Lending
Hi, I'm new to biggerpockets and looking for some advice on first time lending. I am thinking about privately lending to a friend who has many years of successful REI experience. One of my concerns is usury laws. I live in California and here the law limits non-exempt private lending to 10% annual interest. My borrower lives and will be buying property in Massachusetts, where the law allows private lending at up to 20% interest. Does anyone know how the usury laws apply to private lending across states? Lets say he is offerering 10% interest and 1 point. Would this violate California usury law? Also, any recommendations on a good REI friendly lawyer in the Los Angeles area?
Here is the actual text of the California constitution regarding usury:
http://www.leginfo.ca.gov/.const/.article_15
I would point you to subdivision (1) as it may help you find an answer. I can't provide legal advice, as every situation is different and fact dependent. This is for informational purposes only and we have no attorney-client relationship.
Feel free to PM me if you are still looking for a referral.
Hi Tory,
If you will be lending and securing the loan out of state, the law of the state where you are securing the loan would most likely apply, but I'm sure there are exceptions to this.
I would think that you need to check for the laws in Massachusetts also.
In California and in other states, but not all, you must be a licensed to secure loans with real estate, there are probably exceptions to this rule.
If you secure loans with real estate in California with a licensed broker, the loan is exempt from usury laws, again, there are exceptions to this rule like lending less than 30k in senior position (or less than 20k in junior position) and there is something that attorneys talk about regarding charging an unconscionable rate but that would be getting way too detailed...
Another important consideration is that if the proceeds of the loan are used for personal use or if the collateral will be owner occupied, then that triggers a bunch of other regulations, this is why most hard money lenders only lender for non owner occupy business purpose.
I think if your borrower and the real estate are in MA then MA would apply unless the note says something different. The mortgage would be recorded here as well.
MA does have a usury laws but there are some exceptions/ways to deal with it.
[Solicitation Removed]
Members, this is a private money lending discussion and solicitations are not allowed. Please refrain from suggesting the poster should contact you and refrain from violating the terms of use here on BP. Thank you.
#3 Guru, Book, & Course Reviews Contributor
- Investor, Entrepreneur, Educator
- Springfield, MO
- 12,856
- Votes |
- 21,918
- Posts
#3 Guru, Book, & Course Reviews Contributor
- Investor, Entrepreneur, Educator
- Springfield, MO
Good to see you on duty Will :)
Loans, initially, are governed by the jurisdiction where they are made, not from the source of funds used to fund them. I said initially as loans must also be compliant with federal laws. However, a state may see you as an out of state lender, that brings in other requirements, like registration usually has several caveats, but usury will be governed in the state where the loan is originated.
Though you said this guy was a friend and you want to charge more than 10%? LOL
I've made a lot of money at 10%!
If you want a bigger cut from your friend I'd suggest you consider an LLC instead of being a lender. Doing more than one loan can give you the flavor of a hard money lender rather than a loan to a friend. Good luck :)
Thank you to everyone for the useful information. I will be meeting with my friend and his lawyer to go over all details of the transaction later this week. You have all given me great feedback and some issues for me to address.
One concern I have in this situation is that my friend's lawyer is obviously paid to have his best interest in mind for this transaction. Honestly, this is a friend I would trust with my money and my life (have known him since early childhood), but I still feel I should have my own lawyer look over the details of the note before signing anything. I plan for this deal to be the first of many successful transactions between us. Would it be foolish of me to not have my own lawyer in California look over the note?
Ask a MA loan broker for 1 pt to originate the loan for you then you don't have to worry about any of this stuff.
When the word gets out that you’re lending private money, you’re going to have real estate investors coming out of the woodwork looking for funding. That’s great news, because as an investor yourself, you benefits from having a diverse selection of deals from which to choose.
#3 Guru, Book, & Course Reviews Contributor
- Investor, Entrepreneur, Educator
- Springfield, MO
- 12,856
- Votes |
- 21,918
- Posts
#3 Guru, Book, & Course Reviews Contributor
- Investor, Entrepreneur, Educator
- Springfield, MO
I never advise someone not to see their attorney or other professional, what I can tell you is that a note is a pretty standard document, easy to understand and straight forward, so is a standard deed of trust as a security document. Common sense tells me his attorney has no great incentive to try and screw you out of anything being friends, that would or could hurt the friendship and fall back on him. If there are any terms you don't understand, like waiver of notice and presentment, just google them, such are standard terms.
Private money loans usually have a lower usury rate than institutions have if there are any. Also, no points as pre-paid interest is common on private money and applicable to any equity funded note (seller financing).
Lots of folks can read a note and tell you if it is standard practice, Realtors, title agents, your accountant probably could, other investors in your area. You could email to someone for a quick read as well. But, I'm not saying not to have your attorney read it. :)
When the word gets out that you’re lending private money, you’re going to have real estate investors coming out of the woodwork looking for funding. That’s great news, because as an investor yourself, you benefits from having a diverse selection of deals from which to choose.
What I didn't see mentioned in here, was if you are using the property as collateral. This could heavily affect which laws/rules are involved.
Hard money lenders would lend solely based upon the deal or property at hand. They would only lend up to a certain percentage of the fair market value of the property, that way in the event of default, the hard money lender would profit handsomely if they had to foreclose or sell to an end buyer. Now, you will find that many hard money lenders, if they want to stay in business, require more than just equity to qualify. This is because the laws now are favorable for consumers. Consumer protection laws, time consuming and expensive court procedures, and so on have forced some hard money lenders to become even harsher when applying for a loan.
