Legal Consequences of Using Private Money

5 Replies

Hello everyone,

I am considering using a family member as a private lender.  He would fully finance the property, including rehab costs.  Most importantly, I am trying to structure the deal in a way that best protects my family member's assets.  I don't have a property yet -- I am trying to understand the mechanics of private lending first.  Please let me know if I am missing something.

Q1: If my name is on the deed and a tenant were to sue me for some reason in regards to the property, I would be liable as my name is on the deed but not my family member as the private lender, correct? 

Q2: Further, if we execute a promissory note and deed of trust to secure his investment and record that lien with the county and a tenant successfully sued me and forced the sale of the property, would my family member, as the first position lien holder, receive what he is owed FIRST, then the tenant receives the remainder (if any)?  

Q3: Would the combination of a promissory note and deed of trust deter an attorney representing a tenant from suing me because I have no equity in the property?  In other words, similar to a conventional loan where I would only have 20% of equity in the property, in this scenario, I would own 0% of equity in the property while the the private lender controls 100% of the property through the "mortgage."

Thanks for your help in advance. 

Justin Krik, attorney, Cherry Hill.  Lipsky Brandt.  Give him a call. 

Tenants dont just randomly sue landlords. Hopefully you have some sort of screening process when you get a tenant. When you are taking care of the property and treat people with respect tenants dont sue.

IF by some rare occurence you do have someone wanting to sue, you should have an umbrella liability policy with your insurance agent anyway. That is some very cheap insurance because they rarely pay. People just dont randomly sue their landlord. When it happens, there is usually negligence on the part of the landlord.

To answer your questions, your private lender is safe. It would be just the same as if Wells Fargo was your lender. The tenant can not go after Wells Fargo. Your family member is safe.

This isn't legal advice, it's merely my opinion, and you should definitely consult counsel of your own. 

I have never seen a tenant sue a lender. I don't know a scenario where Q2 would actually happen but a lender usually has 1st position, unless delinquent taxes are at issue. Q3: If you're on the deed, you own the property, you're the party to be named. 

Again above is my opinion and not advisement. I think a consultation or at max 1-1.5 hours with an experienced RE atty will resolve any issues you have here.

@Rick Pozos Thanks for your helpful reply. I plan on being a very diligent and fair landlord. However, I want to be prepared in the event that a tenant does try to sue for whatever reason. If I don't go the LLC route, I am thinking of using a combination of renter's insurance and an umbrella policy to help hedge any potential liability.

@George Despotopoulos Appreciate it.  I am meeting with a local real estate attorney today.

Great answers above. Just to add a tidbit if for some reason you had to liquidate the property to satisfy a settlement and doing so did not pay off the lien you owed your private lender you would still owe them the remainder of the balance. 

Others will also likely mention that if you're 100% leveraged that your position alone might make you a displeasing target for an attorney. This is what people mean when they say they are using leverage as asset protection. Attorneys would typically prefer to go after targets with unleveraged assets to recoup their costs.

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