Transferring funds to and from private lender

[James Masotti]

Good Morning BP,

I hope that everyone else on the East Coast is surviving the snow. Saw some crazy videos from down at the shore with all the flooding.

Anyway...I'm setting up my first private lender. Attorney is drafting promissory note that will be used as the template for future deals but I had a few other questions on how folks structure these sort of things.

1) I will be using a construction loan for a good chunk of the acquisition cost, they require to be in first position, Do you put your private lender in a secondary position by actually recording the loan? If not than what recourse would the lender have in the hopefully unlikely situation of needing to foreclose?

2) What is the most ideal way to obtain the funds from the private lender? Should I set up a new bank account for them to transfer money into? Do I pay the expense of just having them wire the money into my account? When I have to pay them (no monthly payments, all interest due upon sale of property) what's the best way to pay them off?

3) Once the loan is paid off what do I need to do to "prove" this, meaning if the loan is officially recorded as a secondary lien is this something the title company takes care of? 

Anyway...these are just some of the questions I have floating around in my head right now. Any guidance anyone can provide would be greatly appreciated!

[Jonathan Makovsky]

@James Masotti

Great questions:

1) Yes, I would ABSOLUTELY record the loan. You must always protect your investors interest to the fullest. They are trusting you with a significant amount of money and yes, it will cost you some money to record [and release] the loan. But setting up your business correctly ensures your investor that you have their best interest in mind AND shows other investors that you run your business the right way.

2a) We have the money transferred to our attorney's escrow account before funding the property and before the loan is recorded.

2b) Yes, I pay the investors for the wire fee. Most of our investors have said not to worry about the $15 - $30, but I like them to feel that they are getting the most out of the deal and I think it creates goodwill.

2c) Ask your lender what they prefer. Some of our private lenders want a wire, some want a check mailed to them.

3) You will release the mortgage from the town records. Our attorney drafts our release and files it with the town.

Hope this helps.