Hard money loan to an old friend. Never done this. Help!

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Hard money loan to an old friend. Never done this. Help!

Richard Miller
Aubrey, TX · Member since 2014 · 37 posts · 12 votes

So friend for 20 years has flipped a couple homes recently and knows I'm interested in the same calls me up. Wants to know if I would be interested in being his hard money lender for about 100k for his 3rd project. I don't know where to start, are attorneys needed? Sounds expensive for a 2 month loan. Or is there a web page that would takes care of all that for you? Obviously would like to do it but want to be protected at the same time for the least amount of profit loss. Fire away and give me guidance BP'rs.

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Andrew Michael
Lender · Frederick/ Falls Church DC, Maryland & Virginia · Member since 2014 · 794 posts · 612 votes
10y

This would be a private money loan.  You are acting as the "bank".  If he is a good friend I would get in touch with an attorney and make sure the proper paper work is drafted.  If he is a really really good friend I would not do the deal :)  You need to both be on the same page when it comes to terms, structure, scope of work, timelines, responsibilities, etc.  

Are you doing this as a favor or a business venture?  

Generally private money is going to be lower points (if any) and lower interest rates then hard money.  The people that I know giving or receiving private money are anywhere from 4-8% right now.  

Another option would be to lend the money for free but then take an equity position in the property.  Perhaps a little of both?  It really all depends on why you are doing this and what each party expects of each other.  

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  • Andrew Michael
    Lender · Frederick/ Falls Church DC, Maryland & Virginia · Member since 2014 · 794 posts · 612 votes
    10y

    This would be a private money loan.  You are acting as the "bank".  If he is a good friend I would get in touch with an attorney and make sure the proper paper work is drafted.  If he is a really really good friend I would not do the deal :)  You need to both be on the same page when it comes to terms, structure, scope of work, timelines, responsibilities, etc.  

    Are you doing this as a favor or a business venture?  

    Generally private money is going to be lower points (if any) and lower interest rates then hard money.  The people that I know giving or receiving private money are anywhere from 4-8% right now.  

    Another option would be to lend the money for free but then take an equity position in the property.  Perhaps a little of both?  It really all depends on why you are doing this and what each party expects of each other.  

    2Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    There are a few considerations:
    1. potential loss of capitol
    2. potential loss of a friend
    3. no experience on your part

    You have to know a lot more than what you posted. Not enough info to say do it or don't do it but as I noted above, there are more considerations than just friendship.

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  • Jay J.
    ., OH · Member since 2015 · 361 posts · 127 votes
    10y
    Originally posted by @Andrew Michael:

    ..If he is a really really good friend I would not do the deal..

    ..unless you have done the 'proper paper work' and its a 50/50 (or something) partnership type thing..

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  • Jake E.
    Real Estate Agent · Arlington, TX · Member since 2015 · 57 posts · 23 votes
    10y

    The concern is that you've never done it before so by all means move with caution. As @Andrew Michael was saying, you would be acting as a private money lender. So, for this part seek a real estate attorney, have them draw up a note according to what you both agree upon. Then ask the attorney to make sure that you are being placed in first lien position. But, before you even agree to the transaction , make sure that it is a good deal to be a part of and look at the worst case-scenario. Too many of these transactions take place which often destroy friendships not to mention the deal. Best of luck my friend!

    1Reply
  • Richard Miller
    OP
    Aubrey, TX · Member since 2014 · 37 posts · 12 votes
    10y

    I would put him in the good friend category, I would be doing this for profit more than helping a friend, so this would be of the business venture variety. Thank you for the 4-8% number  Andrew as that gives me a starting point. Equity position has less guarantees as I'm not involved in the picking of the property, amount of rehab, cost, length of time, If it's a bad flip etc. if I'm understanding that correctly. John I see your a private lender, I really interested in what you think. Is there any info not given above that I could provide?

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  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    10y

    There is another post on here where a guy loaned money to his friend, then the deal fell through and it turns out his friend took his $24k and paid some back taxes with it, so the trust is gone, the money is probably gone, and he is left high and dry. 

    Yes he is a friend, but make sure you get everything in writing now, while he is still a friend.

    What happens if the flip, flops? If he makes no money, will he still pay you back in full?

    [email protected]Podcast Guest on Show #261
    BiggerPockets
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  • Richard Miller
    OP
    Aubrey, TX · Member since 2014 · 37 posts · 12 votes
    10y

    I agree Mindy, I have already stopped by an real estate attorneys office since posting this morning. They are getting back with me on the cost of their services needed. Does anyone have experience with the cost to do something like this? I also am concerned about "what if it flops". Thanks so much for all your post, and if you got anything else please mention it.

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  • Rob Rose
    Investor · Waterford, CT · Member since 2016 · 1 post · 1 vote
    10y

    My two cents; loaning money to friend = Losing a friend.

    1Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    My attorney typically charges about $600 for paperwork and then sends it to the title company. My borrowers pay all the costs including legal and closing. Proceed with caution. 
    Consider as well:
    1. what is the property truly worth? Is he putting in anything or asking you to fund 100%?
    2. does he have the abilily to repay?
    Good luck whatever your decision.

    0Reply
  • Onna-lisa Kyom
    Portland, OR · Member since 2016 · 14 posts · 25 votes
    10y

    @Mindy Jensen Do you have a link to this horror story? What happened? Poor guy...

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  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    10y

    @Onna-lisa Kyom, I meant to put a link in my post, thanks for asking.

    https://www.biggerpockets.com/forums/51/topics/355068-is-filing-a-lien-necessary

    [email protected]Podcast Guest on Show #261
    BiggerPockets
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