Private Money lending process

[Julia Yagodina]

Hello,

I have a property under contract and decided to raise private money to fund this deal. I found an interested investor and we agreed on terms. Loan will be secured by deed, no points, monthly payments deffered until home is flipped and sold.

How do I execute from here? What should be the next steps? Do I need loan servicing company or could we sign a promissory not and handle deed through Escrow? Not exactly sure. Any help would be appreciated. Thank you!

[Dion DePaoli]

It is not exactly clear if your investor and you are on the same.  When you say loan will be secured by deed - do you mean by Deed of Trust or by Warranty, Special or Quit Claim Deed in escrow?  

If the latter, your investor is asking for an installment contract.  That is protective of the investor and may cause some tax consequences that are not intended.  In an installment contract, you do not own the property but you would making improvements.

If the former that is a standard note and security instrument agreement.  (Deed of Trust and Note)  I don't like the idea of using a title company to come up with loan documents.  Find an attorney to draw them up.  Especially with the payment deferment structure.   You will be budding up against each other's interests in how it will work if the plan goes wrong or slow.  You will need some custom clauses within the note to deal with such.  An attorney run title company would work, just don't let an agent try and make you those documents.  (which is technically illegal anyway)

You could also look at a tenants in common where the investors gets X% of the property and you get Y%.  Those would be fixed equity interests.  (you are an agent, so I assume you can look into TICs) You could reverse the math on all the loan math and see what is worth and come up with those equity percents.  Then you are both owner and get paid at closing.  You will each have a basis in the property to deal with tax wise.  

If you do the Deed of Trust and Note route, the investor would be the one who seeks or doesn't a loan servicer.  Since you are planning on deferring, there is not much servicing going on so he could just hold it and deal with any default on your part as needed.  If for some reason payments need to be made periodically he can always board the loan at that time with a Servicer.