So I have been recently talking with my real estate broker and had mentioned that I would be willing to lend to other investors at a 10% interest rate while I was out of the game for a little while and studying for an engineering licensing exam; I wanted to keep my money working while I didn't have the time to do any flips or rentals myself. A few weeks went by and he approached me about lending money to himself for a rehab flip project (which he has flipped many houses in the past). The money would basically all be going towards the construction costs so I would not be financing the actual purchase. When I spoke with an attorney, he told me that he should get mortgage and title insurance, it should be recorded and a contract should be drawn up, and it was all very expensive compared to what he intended to pay me back in the long run (6 month term). He mentioned that he could get a lot of this done without my attorney and everything would still be handled and drawn up correctly and legally by his title agent. I trust him a lot as I have done a lot of work with him over the years and have even borrowed a little bit of money from him for a rehab project I worked on a few years back. Does this sound okay or would you still go the attorney route? Looking for any advice or insight.
You'll want your own representation IF you go through with this. A realtor has many contacts with title and even attorneys that can structure the deal to protect themselves and not you. Sometimes you can find a title office that has a RE attorney on staff that can look over the docs. for you and help you adjust the deal.
All that said, this is a one off deal for you and I would much rather you purchase a performing mortgage note from a HML that does this all the time. I'd hate to see you learn the hard way!
Title companies are disinterested 3rd parties, any attempt at structuring a deal to benefit one party would be highly unethical and probably illegal. That said, it's never a bad idea to have your attorney at least look over the documents. You should see if he would sign a note and record a deed of trust to protect you and ensure that you get paid back when he flips this property. Also I would ask to see his numbers so you know it's a sound investment.
@Matthew Rembish Keep in mind that he is not representing you in this deal, he is representing himself. The title company attorney represents the title company and you will sign a document specifically acknowledging that they did NOT represent you and your interests in the deal. Your loan will be in 2nd position to the mortgage, increasing your risk. Finally, just because someone is a Realtor does not mean they understand investing and rehabbing. Make sure you vet him as an investor. I am not saying to not do the deal, just pointing out your risks. You need formal loan documents and a title attorney will typically not be the one to draw those up and standard fill in forms are not sufficient protection for you in this deal.
Hope this helps,
its customary to have the borrower pay these expenses not you... and in that state its an attorney closing state I believe so i think your stuck you need the mortgage and Note and you have to have an attorney draft it unless you do it yourself. Me personally I can do my own.. but I am a professional lender.. you maybe not... Just like I have to hire engineers to do my engineering work when I build a subdivision... you have to pay for those disciplines you cant do yourself.. its pretty vanilla stuff really and should not be more than 1 to 1,200 buck arros for everything.
and since your giving him a sweet heart deal not sure were the heartburn is.. I mean your not charging points.. this guy should be all over it.
@Darren Eady The more I read up on this, the more I agree with you. I want to continue moving forward but I will seek my own representation. Thank you very much for the advice!
@Elena Jobson I have actually already gone over all of his numbers and everything seems to look good on paper. But I never thought of that before and will definitely bring it up to my attorney. Thanks for the feedback!
@Lynn Dee Murrow He actually has a lot of experience rehabbing properties and buying rentals but I completely see where you're coming from. I think after reading all of these replies, I'm definitely going to seek my own representation. Thanks!
@Jay Hinrichs Hi Jay, I think after all is said and done between insurance and attorney fees, it's going to be around $1,500 but he will be covering it. I felt the same way as though I was giving him a pretty great deal for lending the money but I guess there's always going to be a little push to see how far I'd ease up. This being my first loan where I'm on the lending side, I'm definitely going to make sure I have all of my t's crossed and i's dotted though and have my own representation. Depending on how this first one goes will determine how my terms look in the future. Thanks for the feedback!
@Matthew Rembish You have received some great advice, and I'm glad to hear you'll be following it and getting your own representation. Also, make sure you analyze the overall deal and ensure that there is enough spread. If you are taking a second position (assuming there is already a first mortgage on the property), you don't have much protection in case things don't work out. Additionally, you are definitely giving your realtor a good deal by giving him funding at 10% for a second position!
@Anthony Susco Thank you, Anthony. I thought so too, which is why I was so surprised with the pushback. Thanks!
@Matthew Rembish I would have been surprised, too. What is the status of the deal? Are you moving forward?
Have your attorney draft the mortgage, note, guarantee agreement and the buyer/borrower should pay for these legal fees at closing. Good luck.