Private Lending rules
Aurora, IL · Member since 2014 · 65 posts · 20 votes
I live in Illinois and am looking to purchase, fix and flip properties. My brother, who lives on the West Coast, has become friendly with one of his neighbors and in passing mentioned my business. The neighbor proceeded to tell him that he has a chunk of cash sitting around not performing for him and would be interested in lending it out for deals.
I am very uncertain as to any rules/ regulations regarding private lending. I've done some searches here on BP, however am not finding anything mentioning this.
Does anyone have experience with this type of a situation? I'm fine with negotiating something that would be palatable for all parties involved. I just want to make sure that I follow any necessary rules.
Thanks!!
The majority of applicable rules and regulations will be state specific to Illinois, @Danielle Cage, which is why you won't find much here on that. You can start from scratch by finding a lending attorney to discuss the rules with you and your lender and help with paperwork, title, origination, closing, etc., but there is a simpler way.
If I were you, I'd search around at some local real estate clubs and approach a few of the larger residential hard money lenders in your area. Many will be willing to help you (really your lender) originate the loan for a nominal fee. We've used a local broker to keep things legal for years, though we also use an attorney, to keep up.
Though not a lawyer, a local HML will have the background and experience to know the rules and regulations and should be able to explain them to you and your potential lender. They will also have vetted paperwork from an attorney as well as all the expert resources necessary to legally originate the loan. There are other advantages to going this route.
A good hard money lender will help you evaluate your deals and give you buying criteria you can use when looking for flips. (In fact, if an experienced lender tells you to back away from a property, you might take heed.) They will also bring some credibility for your out-of-state lender and help set their mind at ease. This will still be difficult though.
Honestly, just because someone says they have money sitting around doesn't mean they will loan it to someone they don't know, out-of-state, on a property likely they'll never see, when neither of you have ever done this before. We see cold feet all the time and under much more appealing circumstances. Any HML will know this of course and, assuming they work with newbies (some do and some don't), will hope to fund your deals themselves. If you're able to find deals that meet their criteria, this is something you might also consider. Good luck.
The majority of applicable rules and regulations will be state specific to Illinois, @Danielle Cage, which is why you won't find much here on that. You can start from scratch by finding a lending attorney to discuss the rules with you and your lender and help with paperwork, title, origination, closing, etc., but there is a simpler way.
If I were you, I'd search around at some local real estate clubs and approach a few of the larger residential hard money lenders in your area. Many will be willing to help you (really your lender) originate the loan for a nominal fee. We've used a local broker to keep things legal for years, though we also use an attorney, to keep up.
Though not a lawyer, a local HML will have the background and experience to know the rules and regulations and should be able to explain them to you and your potential lender. They will also have vetted paperwork from an attorney as well as all the expert resources necessary to legally originate the loan. There are other advantages to going this route.
A good hard money lender will help you evaluate your deals and give you buying criteria you can use when looking for flips. (In fact, if an experienced lender tells you to back away from a property, you might take heed.) They will also bring some credibility for your out-of-state lender and help set their mind at ease. This will still be difficult though.
Honestly, just because someone says they have money sitting around doesn't mean they will loan it to someone they don't know, out-of-state, on a property likely they'll never see, when neither of you have ever done this before. We see cold feet all the time and under much more appealing circumstances. Any HML will know this of course and, assuming they work with newbies (some do and some don't), will hope to fund your deals themselves. If you're able to find deals that meet their criteria, this is something you might also consider. Good luck.
Talk to people as suggested by @ Jeff S. The lender has the onus of having to follow rules. You have the onus of finding the property and meeting the lenders terms. Be sure you can meet those terms and it can be a win win.
Hey Danielle, to add to what's already been stated. You will need to discuss terms with potential lender. You will need to identify a property that will work and move toward getting property under contract. Let a real estate attorney handle all legal paperwork. ( Be sure you pick attorney that does nothing but real estate). Through your attorney you will provide lender with a Mortgage, 1st position note, title insurance, fire & hazard insurance, and disclosure stating terms of loan. He or title company will close transaction and funds need to be escrowed and dispersed at closing. Be sure you do not use language that states tou are guaranteeing lender a certain return. You also are securing loan with property and not personally guaranteeing debt to lender. Good luck with deal !
@Tony Cook Thanks Tony, I'll definitely give it a listen!
@Jeff S. I appreciate your response Jeff. I think I will try some HMLs and see if I can utilize their knowledge and experience. I planned on using one before the Private Lender potential popped up, and most definitely will need one for future deals, so it would be a great opportunity to begin establishing a rapport.
You are more than right in saying that the Private Lender may end up not bringing his money to the table, so I do have some HML's in mind as back ups.
Thanks again for the suggestions!
@Account Closed Hi Kathie, I will most certainly keep that in mind. The private lender is just an individual, so I doubt they are privy to any necessary rules. I'm thinking it will be best to work with an attorney and try to gain any info from an Illinois based HML. If nothing else, at least I'll learn what's necessary for a situation like this and be ready for it in the future.
As you suggest a private lender is not constrained unless he begins to make his lending a business. As a private lender myself I try to follow the Dodd Frank rules as I understand them. I only deal with investors. This, I believe, eliminates a lot of the constraints around lending. Do talk to an attorney who knows real estate. If you think it OK as him what rules a private lender needs to follow if lending to investors only.