What is the proper documentation for private funding for a flip?

7 Replies

I will be purchasing my 4th flip and for this project it's my first time borrowing funding. Purchase price is $150k of which I'll be borrowing $100k from a friends family member. What is the best legal agreement in this case that covers both parties interests?

Secondarily, looking for advise how to properly handle the form a tax perspective? I want to make sure that I have what I need to write off the interest expense.

Thanks in advance!

I was just looking through the fileplace on BP and can't find what I need, either. I'm looking for a contract/agreement/promissory note that doesn't involve the private lender being on the deed of trust. They'd lend my company the money, unsecured, and we would go purchase the property. Obviously, I can only do this with close friends and family that trust me. The term would be 6-9 months, interest only payments paid monthly, principal repaid upon project completion (not at the closing table). Even though it would be unsecured, I'd still like to list the property in the contract, and possibly have an addendum that summarizes the project. 

I thought I'd check to see if anyone had something similar to this, before I have my attorney draft one up. Also, if anyone has any advice on certain clauses to include, that'd be great. 

@Sam Grooms it's not as simple as certain clauses to include, I would hire an attorney. It might run you $2K to draft a comprehensive agreement but then it takes out a lot of the concerns/issues. It also depends on the state you're in. 

@Kevin Stalbaum the best for all parties would be a security instrument (mortgage, deed of trust, etc -- depends on your state) and a note. Mortgage can be 1-2 pages and the same with the note. 

Originally posted by @Sam Grooms :

@George Despotopoulos, thanks. I was only asking about clauses to include if I have my attorney draft it. 

That's good! He/she should really have the best grasp on that. The most important part I would think is to clearly lay out the payment provisos, where the money (or monthly interest payment) is going to be sent to and how (overnight mail w/ signature to receive is always best or wire w/ confirmation). 

As an attorney, I have seen even the closest friends (and family!) get into legal battles over poorly drafted contracts. Your agreement should be drafted in as simple/plain english as possible and really be well-thought out. What I mean by that is all questions should be asked and answered within the agreement. 

I would also put mandatory negotiation, mediation, arbitration in case of a dispute to keep any issues confidential and hopefully keep costs down in avoiding litigation (sometimes med/arbitarion gets a bit costly but that usually occurs when you're dealing w/ complex deals). 

The above is my opinion and not advice.

It is generally vastly cheaper to draft the agreement yourself, then have your attorney review and edit (personal example: my lease would have cost about $500 to draft, but I found one, edited it, and had my attorney review for ~$75). If there's nothing on point in the fileplace, just find something close enough and edit. Anything you do incorrectly can be corrected by the attorney, and cut down the time you're charged for. 

@George Despotopoulos and @Shawn Q. , thanks for all of the advice. 

Also, I just want to backtrack on my original post, and emphasize the importance of using an attorney, and not drafting contracts like these yourself. After a little bit of research, I discovered that an unsecured loan to my business would likely be considered a security by the SEC, and I could have broken securities laws. 

Hi - do you have one investor or multiple investors? If you have multiple investors, then this is a security and you need to consider that. I can tell you horror stories, but I will refrain. 

So what to do? It can get costly to have an attorney draft a document for you - I get it. However, a securities document is highly specialized, so although @Shawn Q. 's advice is good in some circumstances, I don't recommend it in this circumstance. Specifically, long ago, I learned to NEVER "review" a client drafted document - it always took longer than drafting it myself and wasn't worth the liability. Just keep that in mind. It is just so specific. 

I am right now working on a software that will solve this problem for smaller deals.  I am not sure when it will be ready and it has been a lot of work so far. It is just so specific - you need to say the risks, the disclosure, the deal terms, etc. 

The best advice I can give you right now: spend the money upfront on an attorney to write a semi-template for your specific needs that you can use over and over again. 

Good luck! I know it's rough out there.