Private Money

14 Replies

I have a family friend who is in a position to become my personal private lender.  I would like to make this as easy for him as possible.   Any advise on how I go about assisting him in setting up to do this.  I am a moral and ethical person who wants to treat him right with a good return and protecting his financial interest with putting him as first lien holder and the such.  Any advise?  

Find a great deal that needs financing. Show him the deal and let him know how you will protect him and that he will also make an X% return on his money. Show him how things SHOULD GO(you make monthly payments for XX years), and also let him know what the worst case scenario would be(you dont pay and he has to foreclose on you which means that he will get the house back).

Make sure that you are getting a deal that is WAY below market price and not something retail. When everything is on the table and transparent, let him make the decision as to whether he wants to be your lender, partner, whatever. Talk and discuss the details. Have the title company put the items that you discussed into the deed of trust or mortgage.

@Gerald Marshall

That's great you want to treat them well and make sure they are protected. Giving 1st lien is the right step. The interest rate and loan term are what you both feel is fair and works for both of you. Private lenders are an asset!

@Gerald Marshall

I have a family member who is a retired developer.  He approached me about wanting to lend me money a month ago.  I was excited. I know of private lending but I don't know how it works.  All my deals have been with conventional financing.  I am curious, how did things work out?  Were you able to make a successful deal?  Was it easy to write up paper work?  Did you use a lawyer or just have the title company draw up the agreement?  

Thanks to all for your posts in this thread.

AA

There are several things you need to make sure you do for your private lender:

1. Make sure you don't overleverage 

2. Provide your private lender with a secured promissory note

3. Provide him/her with Deed of Trust / Mortgage recorded on public record

4. Provide him/her with title insurance

5. Name him/her on hazard insurance as a mortgagee

6. Make sure all money go through escrow

In some states I heard title company can prepare Note/Deed of Trust for private lenders. If not, ask an attorney to prepare paperwork for you. 

Since in Washington state title companies don't prepare paperwork, for our private lenders we usually prepare all paperwork ourselves, so, they only need to read through it, verify the terms and sign the acknowledgement. As simpler you make the process for your private lender, the more they would want to invest with you again and again.

You can reach out to me if you need more details or have questions.

Originally posted by @Tatiana Gershanovich :

There are several things you need to make sure you do for your private lender:

1. Make sure you don't overleverage 

2. Provide your private lender with a secured promissory note

3. Provide him/her with Deed of Trust / Mortgage recorded on public record

4. Provide him/her with title insurance

5. Name him/her on hazard insurance as a mortgagee

6. Make sure all money go through escrow

In some states I heard title company can prepare Note/Deed of Trust for private lenders. If not, ask an attorney to prepare paperwork for you. 

Since in Washington state title companies don't prepare paperwork, for our private lenders we usually prepare all paperwork ourselves, so, they only need to read through it, verify the terms and sign the acknowledgement. As simpler you make the process for your private lender, the more they would want to invest with you again and again.

You can reach out to me if you need more details or have questions.


This is a great list.  And perfectly timed.  In your experience is it common for the borrower to pay all the legal fees associated with the transaction or should the lender have their own atty?   

Originally posted by @Tatiana Gershanovich :

There are several things you need to make sure you do for your private lender:

1. Make sure you don't overleverage 

2. Provide your private lender with a secured promissory note

3. Provide him/her with Deed of Trust / Mortgage recorded on public record

4. Provide him/her with title insurance

5. Name him/her on hazard insurance as a mortgagee

6. Make sure all money go through escrow

In some states I heard title company can prepare Note/Deed of Trust for private lenders. If not, ask an attorney to prepare paperwork for you. 

Since in Washington state title companies don't prepare paperwork, for our private lenders we usually prepare all paperwork ourselves, so, they only need to read through it, verify the terms and sign the acknowledgement. As simpler you make the process for your private lender, the more they would want to invest with you again and again.

You can reach out to me if you need more details or have questions.

This is a great list.  And perfectly timed.  

While you appear to pay the fees associated with the loan, is it common for the borrower to pay all the legal fees associated with the transaction or should the lender have their own atty to review everything done by the borrower's team?    

If your private lender chooses to have their attorney to prepare the documents, then they will pay for it and might ask you to reimburse them.

So far, none of our private lenders wanted to go to an attorney to draw the documents. Couple of them elected to run the documents prepared by us by their attorney first time they made a loan. They never asked to be reimbursed, but we would do it no problem if they asked.

Couple of sellers who was providing us with seller financing had their attorneys draw the documents, but they never asked us to pay for it.

All other fees like lender's title insurance, Deed of Trust recording and reconveyance fees are paid by us.

@Aaron Abraham , my deal went great.  I used an attorney whom I had used in the past to do everything.  My lender was placed as first lien holder with all the rights of a regular bank.  We went with a 30 loan with a 10 year ballon.  This was due to his age and not wanting to leave his family an investment they couldn't cash in.  For that he gave me a super rate and I avoided all the cost associated with a regular loan.  I just paid for the attorney fees and lender title insurance.  I would do this again and again.

@Karen O. I would recommend using your own attorney, especially if you have one as part of your team.  I always like to use my own people (gives me peace of mind).  If the entity that is asking for the loan has their lawyer draft it, they might sneak something in that might be a problematic term for you and would need to be scrubbed by your lawyer anyways.  You don't want to get into a bad deal, especially on the first one.  If you price the costs of your lawyer into your rate of return, you'll be golden.  Just my two cents.

Originally posted by @Gerald Marshall :

@Aaron Abraham , my deal went great.  I used an attorney whom I had used in the past to do everything.  My lender was placed as first lien holder with all the rights of a regular bank.  We went with a 30 loan with a 10 year ballon.  This was due to his age and not wanting to leave his family an investment they couldn't cash in.  For that he gave me a super rate and I avoided all the cost associated with a regular loan.  I just paid for the attorney fees and lender title insurance.  I would do this again and again.

 To understand correctly he's holding a long term note for you? Are you going to refinance with conventional terms? Will this lender be able to finance additional deals this way for you? How do you plan to continue scaling (assuming growth is your goal that is)?

@James Masotti , yes, he's holding a 10 year Balloon with a 30 year amortization.  I don't have intentions of going conventional in the near future, all depends on the market, there isn't a penalty for early termination.  I will probably do a few smaller deals with him in the next few years, but nothing large at this time.  He's left the door open for additional deals, but his age will keep the transactions small (under 150k) and nothing more than 10 years.  He doesn't wan to leave his family holding notes when he passes.  I'm funding my growth with leveraging my current properties that are free of debt.  I plan to leverage anywhere from 500k - 750k this next year.  I'll use this as down payments and light remodeling.

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