What is the Happy Path for a Private Money lending Transaction?

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What is the Happy Path for a Private Money lending Transaction?

Matthew Holtry
Rockville, MD · Member since 2013 · 15 posts · 11 votes

BP Community,

I recently did my first private money deal (as a lender). The borrower is someone I know personally, and we intend to do additional deals together in the future. We stumbled through this first one together (relying heavily on a real estate attorney), but I wanted to reach out to the community to see if we could find a way to streamline the process and hopefully reduce transaction costs.

For this transaction, the borrower was purchasing a duplex in Pennsylvania that needed significant rehab, and he intends to do future deals in this neighborhood. For the sake of the discussion, let's say I was lending $25k and the borrower was paying $1k in origination fees (points).

Here is how the transaction went step-by-step:

  1. We agreed to initial terms via email.
  2. The borrower paid for a real estate attorney to draft up a note with our terms and prepare an open-ended mortgage to establish me in first lien position on the property.
  3. Unfortunately, Step 2 took a long time, and the buyer had to go to settlement on the property (via an all cash transaction) before we could get the mortgage in place.
  4. About 1 week after closing, the real estate attorney coordinated with the title company to get the mortgage in place. This led to a lot of additional questions from the title company (including confusion about how the funds would be distributed from me to the borrower) which created at least another 1 week delay.
  5. After we got those issues resolved, the borrower had to go through settlement again (and pay a bunch of title fees, including Title Insurance) for the second time.
  6. Within a few days after settlement, the mortgage was recorded, I received a check from the title company in the mail (for the points I charged), and I sent funding to the borrower.

It took about 5 weeks from the day the borrower contacted the real estate attorney to the day I sent funds to the borrower.

For those who have done this kind of transaction in the past, what does the "happy path" look like?

Here are a few specific questions:

  1. Assuming we were able to process the note and mortgage at the first settlement, how and when are funds typically distributed? I had assumed the borrower would pay the $1k in origination fees (points) to the title company and I would provide the title company with a cashier's check for $25k, and then at settlement, the title company distributes the funds all at once. The real estate attorney told us the title company would collect the $1k for points but would not be involved in the $25k distribution. So how does this typically work to ensure the buyer has the funds he needs for the transaction with ensuring the lender's lien is properly recorded all at the same time?
  2. For private money lenders, what title endorsements do you typically require in Pennsylvania? The attorney suggested a Closing Protection Letter and endorsements 100, 300, and 900.
  3. Now that we have a note and mortgage format we like, do we still need to have the real estate attorney prepare these documents each time or can we use the existing format as a template for future transactions?

Thank you all for your insights and advice!

Matt

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John M. Erdek
West Chester, PA · Member since 2018 · 3 posts · 18 votes
8y

I am writing as a) an attorney who represents both private lenders and borrowers (both traditional and self-directed IRA borrowers/lenders) and "regular" lenders (e.g., banks), b) a partner in a RE investment private lending company and, c) a RE investor for many years.

I have given numerous presentations on private lending to local (Phila-area) RE investment groups over the past 10 years and I am always amazed at how loose private lenders will be with tens of thousands--or more often, over $100,000-- of their hard-earned money.   The posts here are evidence of that.

Without trying to sound harsh, a private lending transaction is not rocket science, but it is complicated and should be handled by someone who knows that they are doing.   The first post here sounds like a farce--that process should have NEVER happened the way it did.  The title company sounds clueless--in several instances. 

A title company should NEVER prepare loan documents--EVER.  The borrower should NEVER prepare loan documents (did Wells Fargo let anyone provide the loan documents for their home mortgage.....?).  The lender is in control and lender makes the rules.   A private lender---just like "real" lenders--should have its counsel prepare the loan documents, and at the borrower's expense.  Just like a bank does. 

There are SO many nuances to private lending that are never touched on by those "winging it".  They may include: Loan structure- single advance, or multiple advances?  When?  How? Lender's title insurance.  Borrower as entity or individual?  Spousal waivers to protect collateral.  Property insurance in favor of lender.  Assignment of leases and rents.  Loan extensions.   Interest or principal/interest payments.   Property/construction inspections.  Invoices for construction materials at property/incorporated into project.  Assignment of construction contracts.  Personal guarantee(s). Confession of judgment for money.  Confession of judgment for possession.  Confession of judgment waivers.  Type of mortgage--open ended or not? Mortgage priority.  Loan agreement (a "note and mortgage" is NOT sufficient--who says the borrower HAS to use the money you advance for the purposes you *think* you are lending it?  Hint:  that's not covered by the note nor mortgage).  Closing protection letters. Endorsements.......   The list goes on.   And on. 


Not every private loan incorporates all of the above, but 70% of it applies to every transaction.   Why would anyone try to wing it?  As I say when I teach RE investment courses:  If everything goes to plan, and everyone does what they are supposed to, you don't need ANY paper. But, when things go sideways, what's the first thing EVERYONE does?  They go to the paper to try and figure out their rights to get the other side to do what they are supposed to do.  Just like RE investment partnerships:  everyone loves each other on day 1, but what happens on day 195 when the project is overbudget/not sold, the payments stop, the contractor has run off, the borrower is in the middle of a divorce--or dies, etc, etc, etc.

Personally, as a private lender using my own and my partner's funds, MY loan documents look an awful lot like those a bank makes you sign when you want money from it.  WHY wouldn't every lender want the same protections a bank requires?  For the relatively small cost of having an attorney review things like the title report, title insurance exceptions, property insurance and borrower documents, as well as preparing the RIGHT documents so everyone knows what is expected of them, it seems like a no-brainer.   That said, the RE investor universe is well-populated by folks who will hesitate to spend $1500 on doing it the right way, but will fork over $100,000 with crossed fingers and a prayer.  

As an attorney, I HATE--HATE-HATE getting a call from a private lender asking "xxxxx happened! What can I do now?" and seeing loan documents that leave them hanging waaaaaay out in the wind.    Old saying in law:  "Pay me now, or pay me later--later is always more expensive".  Totally applies here.      PS--for those trying to save a buck:   reusing loan documents is a tremendously bad idea--details matter. 

Just food for thought---climbing off my high horse now....

John M. Erdek, Esq.


This message is not intended as legal advice and may not be relied on by anyone for any purpose whatsoever. The information in this message is intended solely for general informational purposes.

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  • Shawn Ginder
    Investor · Lititz, PA · Member since 2015 · 36 posts · 13 votes
    8y

    We have done this from the borrower side of things, perhaps smaller amounts dealing with, but the path we used in PA was lender deposits funds to our bank account in advance to ensure funds cleared on the account, typically 7-10 business days on the bank side for deposit to clear in excess of 5k. Title company writes up the mortgage and or note for the lender, we give title company the funds at closing through bank wire or cashier check, documentation gets files by the title company at the court house. We place the lender on the mortgage as 1st or 2nd lien and is also included on the insurance documentation.

    I'd check with your title company if they can prepare the note documentation for you and or use the template you now have and take a step out of the process with the attorney. 

    With the title company preparing the documentation they can move much faster to shorter your time period on closing the deal.

    Disclaimer here, I do not provide legal advice, only encouraging to check with those that do, but this option is something to ask about to your title company. If they can't ask other title companies.

    1Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    8y

    1.  Funds are distributed by title after mortgage is recorded, usually the same day.  I would wire money, not cashier's check, cashier's check will delay closing by a few days to clear.  You can send your money to title in one of two ways, (1) wire $25k and title will send you a check (or wire) after closing for your points/fees, (2) net funding: wire $24k ($25k-$1k) and you don't have to wait for your $1k check.

    2. I get a ALTA Lenders Policy with whatever endorsements come standard.

    3. Attorney once, template forever more.  You fill in the blanks, email to borrower, borrowers signs, in front of notary for mortgage, notary not necessary for note, borrower overnight mails originals to title, title records mortgage after your funds arrive at title, title distributes net proceeds to borrower and whatever if any proceeds to lender.  Borrower will usually have to bring money to closing to pay down payment, fees, liens, taxes, etc above and beyond what lender funds don't cover.  If borrower doesn't bring money to closing you as lender lent too much ... borrower doesn't have skin in the game.

    5Reply
  • Matthew Holtry
    OP
    Rockville, MD · Member since 2013 · 15 posts · 11 votes
    8y

    @Shawn Ginder and @Account Closed - The step-by-step you provided is perfect! The way you described the process is exactly how I expected things would work (with me wiring the money to the title company and them acting as an escrow so funds can be provided to borrower at same time as mortgage is recorded). In our case, both the real estate attorney and the title company told us to handle the disbursement of funds directly (from me to borrower) with the title company rep even telling us to "not involve our office to keep things easier". It seems like they were saying this since the borrower already owned the property but it still created a lot of confusion on our end. This provides a lot of clarity and helps us see a shorter path to doing these deals in the future. 

    1Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    8y

    @Matthew Holtry

    Good point.  I've done it both ways...money to borrower directly and through title.  Nothing wrong with either.  Going through title costs a little more and there are two wires involved.  I like going through title, that way there is a very good record about if/when/where the money went.  If borrower ever says (s)he didn't get the money I would turn to title and say, hey, it's your problem.  Although, if you keep a good banking trail showing money went to borrower that's probably okay too.

    1Reply
  • John M. Erdek
    West Chester, PA · Member since 2018 · 3 posts · 18 votes
    8y

    I am writing as a) an attorney who represents both private lenders and borrowers (both traditional and self-directed IRA borrowers/lenders) and "regular" lenders (e.g., banks), b) a partner in a RE investment private lending company and, c) a RE investor for many years.

    I have given numerous presentations on private lending to local (Phila-area) RE investment groups over the past 10 years and I am always amazed at how loose private lenders will be with tens of thousands--or more often, over $100,000-- of their hard-earned money.   The posts here are evidence of that.

    Without trying to sound harsh, a private lending transaction is not rocket science, but it is complicated and should be handled by someone who knows that they are doing.   The first post here sounds like a farce--that process should have NEVER happened the way it did.  The title company sounds clueless--in several instances. 

    A title company should NEVER prepare loan documents--EVER.  The borrower should NEVER prepare loan documents (did Wells Fargo let anyone provide the loan documents for their home mortgage.....?).  The lender is in control and lender makes the rules.   A private lender---just like "real" lenders--should have its counsel prepare the loan documents, and at the borrower's expense.  Just like a bank does. 

    There are SO many nuances to private lending that are never touched on by those "winging it".  They may include: Loan structure- single advance, or multiple advances?  When?  How? Lender's title insurance.  Borrower as entity or individual?  Spousal waivers to protect collateral.  Property insurance in favor of lender.  Assignment of leases and rents.  Loan extensions.   Interest or principal/interest payments.   Property/construction inspections.  Invoices for construction materials at property/incorporated into project.  Assignment of construction contracts.  Personal guarantee(s). Confession of judgment for money.  Confession of judgment for possession.  Confession of judgment waivers.  Type of mortgage--open ended or not? Mortgage priority.  Loan agreement (a "note and mortgage" is NOT sufficient--who says the borrower HAS to use the money you advance for the purposes you *think* you are lending it?  Hint:  that's not covered by the note nor mortgage).  Closing protection letters. Endorsements.......   The list goes on.   And on. 


    Not every private loan incorporates all of the above, but 70% of it applies to every transaction.   Why would anyone try to wing it?  As I say when I teach RE investment courses:  If everything goes to plan, and everyone does what they are supposed to, you don't need ANY paper. But, when things go sideways, what's the first thing EVERYONE does?  They go to the paper to try and figure out their rights to get the other side to do what they are supposed to do.  Just like RE investment partnerships:  everyone loves each other on day 1, but what happens on day 195 when the project is overbudget/not sold, the payments stop, the contractor has run off, the borrower is in the middle of a divorce--or dies, etc, etc, etc.

    Personally, as a private lender using my own and my partner's funds, MY loan documents look an awful lot like those a bank makes you sign when you want money from it.  WHY wouldn't every lender want the same protections a bank requires?  For the relatively small cost of having an attorney review things like the title report, title insurance exceptions, property insurance and borrower documents, as well as preparing the RIGHT documents so everyone knows what is expected of them, it seems like a no-brainer.   That said, the RE investor universe is well-populated by folks who will hesitate to spend $1500 on doing it the right way, but will fork over $100,000 with crossed fingers and a prayer.  

    As an attorney, I HATE--HATE-HATE getting a call from a private lender asking "xxxxx happened! What can I do now?" and seeing loan documents that leave them hanging waaaaaay out in the wind.    Old saying in law:  "Pay me now, or pay me later--later is always more expensive".  Totally applies here.      PS--for those trying to save a buck:   reusing loan documents is a tremendously bad idea--details matter. 

    Just food for thought---climbing off my high horse now....

    John M. Erdek, Esq.


    This message is not intended as legal advice and may not be relied on by anyone for any purpose whatsoever. The information in this message is intended solely for general informational purposes.

    11Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    8y

    For those wondering, I requested that @John M. Erdek take a look at this thread, because I know he is the expert at this topic.

    What he left out is that the borrower is the one paying the attorney fees for document preparation - so as the lender you do not incur that expense.  At least that is the way it works when done John's way ...

    2Reply
  • Matthew Holtry
    OP
    Rockville, MD · Member since 2013 · 15 posts · 11 votes
    8y

    @John M. Erdek - Thank you for the detail and advice your provided in your post. Just to clarify one important thing about our transaction: We did absolutely have a real estate attorney prepare the loan documents. They drafted both the note and the open-ended mortgage (at the expense of the borrower) which included specific details about the nuances you mentioned (e.g. explicitly defined as an open-ended mortgage, there is a section about "Assignment of Leases", etc.). 

    In our case, the real estate attorney put together detailed documents, but it seems like things fell off the rails when it got to the title company. 

    The attorney did provide some advice about closing protection letters and endorsements, but it seemed like the advice was largely answering individual questions that were asked instead of providing more of an end-to-end picture with advice for the best way to be protected. For example, instead of saying "You will want a closing protection letter and endorsements x, y, and z to protect against these legal situations...." the chain of events was:

    1. Title company asked what endorsements should be included.
    2. I reached out to the real estate attorney for advice.
    3. I received a curt reply from the attorney with just the endorsement numbers that should be included without any additional detail. (I actually had to reach out to some friends who are more experienced than me and work in mortgage lending to ask for advice to supplement the information I was getting from the attorney.)
    4. I provided the information to the title company.

    Definitely some lessons learned here. At a minimum, for the next one, I think I will plan to meet with the real estate attorney in-person in his/her office instead of relying on email communications so I can get more detailed advice/dialogue, and it also sounds like we may need to find a new title company since the one we used was (at their admission) not experienced with private money lending details.

    @Steve Babiak or anyone else - Any advice about good title companies in the Harrisburg, PA area?

    1Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    8y

    @David Krulac is working n  the Harrisburg area, so maybe he has suggestions.

    1Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    8y

    It would depend on the area, if I were settling in Lancaster or Lebanon county I would want an attorney there.  I would also probably have the attorney giving the advise do the settlement.  seems to be cumbesome to have an attorney advise and do the documents then settle somewhere else.  Having one party rather than two involved in settlement will help to stream line.

    2Reply
  • Frank Y.
    Lender · Philadelphia, PA · Member since 2017 · 225 posts · 72 votes
    8y
    I am an private money lender in East PA (Allentown, Reading, Harrisburg, Lancaster, West Chester, Schuylkill Valley, Lebanon .....) and the way we do is much simpler. Our attorney draft mortgage, notes, guarantee agreement based on the terms lender and borrower agreed upon, and sent to closing company a day prior to the settlement. Once we get the title insurance, HUD sheet, and properties insurance confirmed, we will wire the money. We don’t need go to the settlement. The settlement company will distribute the money, and FedEx us the signed loan documents, check for the points to us within 48 house after the closing. The closing company will keep the original mortgage to record to the court house. Couple days later, we will receive the recorded mortgage in the mail from the court house.
    2Reply
  • Frank Y.
    Lender · Philadelphia, PA · Member since 2017 · 225 posts · 72 votes
    8y
    Just add one more point: the borrower pays all loan documents preparation fee and wire transfer fee. All these will show on the HUD sheet. Lender has to approve HUD sheet before closing.
    2Reply
  • James MasottiPro Member
    Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
    8y

    @John M. Erdek - Thank you very much for your wonderful response. I guess I should also thank @Steve Babiak for reaching out and asking you to write that response. 

    This is going to be a long rambling question...so please bear with me. 

    As someone who utilizes private money lenders, and is in the process of engaging more of them. Many are very unfamiliar with the process of how exactly to lend money. As such one of my key goals is to have as much detailed information prepared as I can so that I can explain to them all of the things they need to do in order to protect themselves and their money in the transaction so that they can feel safe. Many of the folks that I deal with do not have an attorney, don't know how to find a good attorney who specializes in these sort of things. So what we do is provide our own copies of standard agreements we have used for the lender to review with their attorney if they wish and if we need to modify the documents in order to fit their risk tolerance or profile we're happy to consider the recommendations made by the lenders attorney and decide if it makes sense for us both to proceed under those circumstances. However, I've also found that if we make the process overly cumbersome or put too much required work on the lender, they'll just back away and become less interested because it seems to scary or unsafe or more work than they wanted from a passive investment...when in reality we could have the debate that it's safer than throwing money into the black box that is your mutual fund...but since that's socially acceptable people just do it. 

    So about now you're asking yourself...where is the question in all of that?

    How do you recommend that someone like myself, and others seeking private money lenders, prepare ourselves in order to be an educator, advocate, and partner (not in the legal definition of joint ownership but in the non adversarial perspective of wanting to be helpful) for our current and future lenders so that the situation is a win-win for everyone involved? 

    I'm sure I'll have more to add to this discussion so I'm going to follow as well to see what others chime in. 

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    3Reply
  • Paul Gilo
    Orlando, FL · Member since 2016 · 74 posts · 22 votes
    8y

    @James Masotti noble desires. typically ppl only care about protecting them selves. not the other party. 

    1Reply
  • James MasottiPro Member
    Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
    8y
    Originally posted by @Paul Gilo:

    @James Masotti noble desires. typically ppl only care about protecting them selves. not the other party. 

     I believe in what I'm doing. If I didn't think the investments would make money I wouldn't do them. My private investors help me accomplish my goals. As such I need to protect them and help them achieve theirs. It's the only way to truly develop a long term worthwhile relationship. I don't really see why anyone would want to do it any other way with a private lender. As @John M. Erdek mentioned the only time you need to go back to the documents is when things go sideways...really...sideways that is...if things ever get so sideways that I can't bail out my private investor, than I want them to be protected. I couldn't imagine doing business another way. 

    Podcast Guest on Show #312
    4Reply
  • Paul Gilo
    Orlando, FL · Member since 2016 · 74 posts · 22 votes
    8y

    @James Masotti I respect that.

    2Reply
  • John M. Erdek
    West Chester, PA · Member since 2018 · 3 posts · 18 votes
    8y

    Thank you for the kind words @James Masotti.  

    I'm awfully busy right now, so a quick reply--and it may sound a little harsh but, in my experience, the following is true to one degree or another regarding private lenders who think it is "too scary or unsafe" to do the work required to protect their investment.  Even if that just means engaging a lawyer that YOU (as the borrower) will pay for--which is, uh,.....NOT hard!

    James, your intentions are great, and I highly recommend your approach---total transparency, explain, explain, explain, and be up front about risks and rewards.  However, overall (and this is the harsh part), if you are trying to be the "good guy" and make sure your lenders are protected MORE than they think they should be protected, you are:

    Trying. To. Fix. Stupid.   Can't be done. 

    Here's the thing--you can TRY and educate lenders, you can TRY to let them know you want them to be protected as well as you, but if you take that horse to water and it don't drink....well, good for you.  Take their money and if things don't work out for the lender, that's NOT your problem.  Who should be most concerned about the money being lent?  The lender!

    I have a saying:  My BEST clients are those that come to me the SECOND time.  Why?  Because the second time, they LISTEN to me.  

    In summary, I think you are doing all you can--and kudos to you for trying to do the right thing.  I can tell you a story  about a borrower (a CPA in fact) who hit up a whole bunch of private lenders (her clients) for loans.  Long story short, that CPA and her "projects" all went waaaaay sideways----to the extent the FBI and NJ state police were involved and jail time resulted.  

    There was ONE---and only ONE--lender in that bunch who got his investment back (about $350K) via foreclosure of a property. Guess who? My client--who insisted after talking to me that the CPA sign the loan documents I prepared with proper collateral, correct LTV, first mortgage, title insurance, confessions of judgment, etc, etc, etc.---all that "difficult" stuff. You think any of the other lenders who didn't worry about that stuff and/or thought it was too "cumbersome" wish they did a little more......?

    In short, you can try and point your lenders in the right direction (maybe find a trustworthy lawyer you can point them towards?), but if they insist on lending based on a wing and a prayer.........I say let them.

    Best-

    John M. "Can't write a short-reply" Erdek, Esq.

    This message is not intended as legal advice and may not be relied on by anyone for any purpose whatsoever. The information in this message is intended solely for general informational purposes and does not create an attorney-client relationship between the author and any other person or entity.

    5Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    8y

    @James Masotti - just point your private lenders to this thread, so that they can read for themselves what @John M. Erdek has written ;)

    1Reply
  • Matthew Holtry
    OP
    Rockville, MD · Member since 2013 · 15 posts · 11 votes
    8y

    @James Masotti - Just to offer some thoughts as a guy who is a new private money lender who just went through the process for the first time... 

    Looking back, the #1 thing I wish I had (and, in my case, the borrower wish he had as well) is a step-by-step understanding of the whole process from start to finish. For example, a slightly more detailed version of the steps that @Account Closed provided in his post would have been incredibly helpful. Both the borrower and I kept finding ourselves going back to the real estate attorney asking "So what's the next step?" and in our situation, we still ran into a really confusing hand-off between the real estate attorney and the title company. Now that we have the step-by-step from this post (and some additional suggestions), I know our next transaction will be substantially easier. I am almost imagining a flow chart (yuck!) or a single piece of paper divided into 3 columns (one for "Lender's Responsibility", one for "Borrower's Responsibility", and one for "Attorney / Title Company Responsibility") with all the tasks that need to happen... possibly even divided into rows of Pre-Closing, At Closing, and Post-Closing. 

    Providing standard agreements seems like a nice service as well, but I could see some new lenders being a bit suspicious of their borrower wanting to use "their" specific forms. Obviously, this is where the lender consulting a real estate attorney is critical. If there are people out there who say they want to be private money lenders but aren't willing to even try to find a real estate attorney (for whom the borrower will be paying the tab!) to support the deal, I would argue they don't actually want to do this type of lending and are likely wasting your time. You shouldn't have to drag a private money lender through the process... They should be a partner in it. 

    1Reply
  • Alexander Love
    Saint Louis, MO · Member since 2018 · 10 posts · 0 votes
    7y

    Thanks @Matthew Holtry for making this post and @John M. Erdek , @Steve Babiak for your replies. I'm actively looking for a private or hard lender assuming that all private and hard lenders know the ropes. This post brings a lot of clarity to the process and issues when trying to structure a deal with a private or hard money lender.  So as a private lender what do you look for in a transaction that makes you feel comfortable to invest? I plan to use a hard or private lender for my first deal and I'm trying to learn all I can about the process to be confident in my next steps

    0Reply
  • Tim Johnson
    Lender · Grand Rapids, MI · Member since 2018 · 703 posts · 446 votes
    7y

    Private money lenders look at experience and the deal. Know your numbers and make sure you ltv is good, so many of the deals I see the LTV is like 90%, nobody is going to lend on that

    2Reply
  • Matthew Holtry
    OP
    Rockville, MD · Member since 2013 · 15 posts · 11 votes
    7y

    @Alexander Love - In my case, the situation boils down to 1) Am I working with a person I know and trust based on our previous experience working together and 2) Does the deal make sense and would I be protected if things went south?

    I am not a professional lender so having an established relationship is important. In my case, I knew all the parties involved and had done previous business with the person who was helping to pull the deal together. I am also incredibly conservative when I run the numbers to evaluate a deal. As Tim mentioned, LTV of 90% would be insane as an investor. For the deal mentioned above, I believe we ended up lending only about 60% of the ARV, and we divided it into payments based on construction progress. So, for example... If the property was being purchased for $50k with a $100k ARV, we would start with a loan of $30k available immediately and then, as construction was completed, additional calls for $10k would be released. The real estate attorney helped us draft all these terms.

    1Reply
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    7y

    @Matthew Holtry

    I have borrowed private money numerous times and have been a lender a few times as well.  

    As a borrower I have my attorney draw up the documents; note and mortgage.  The private lender is investing me.  He or she is trusting I will fulfill my part and complete the project as agreed upon.  It takes a great deal of trust.  Don’t let your lender down.  The real estate is always the lenders first lien position.  I have done 100% financing with private lenders.  The real estate protects there funds and I have a successful track record.  

    Once our attorney drafts the note and mortgage he sends to me for review.  I forward to my lender for review.  The lender can contact me or my attorney for questions.  Some adjusting may take place but it’s not really that complicated.  About a week before closing lender receives wiring instructions from the title company.  Lender forwards the note and mortgage to the title company with a letter of direction describing the lenders requirements i.e., title insurance and any other requirements.  As the borrower you must stay on top of things so no loose ends are going to fall through the cracks.  Communication Is critical.

    The entire process begins with a detailed description of the investment so my lender can review the project in detail.  The description should be detailed so that it is clear and should answer all of the lenders questions in advance if possible.

    Good Luck.

    2Reply
  • Alexander Love
    Saint Louis, MO · Member since 2018 · 10 posts · 0 votes
    7y

    Thanks @Matthew Holtry...So most lenders will lend only %75 to %60 of ARV?

    @Kenneth Garrett what questions would a lender have? I know you said a detailed description of the deal but what does that involve or mean? 

    0Reply
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    7y

    @Alexander Love

    How is my money protected? If it's a flip what happens if you can't sell it? What if the rehab goes over budget? What if it's a BRRRR and you can't refinacrcit or the appraisal comes back low? The questions are endless , but you should be able to answer most of them. You can always defer to your attorney for the legal ones. Clarity is one of the most important aspects.

    Good Luck.

    2Reply
  • Matthew Holtry
    OP
    Rockville, MD · Member since 2013 · 15 posts · 11 votes
    7y

    @Alexander Love

    Theoretically, the lender can lend you however much money s/he wants. Suppose you buy a property for $100k, you plan to put $50k of work into it, and you expect the ARV to be $200k. A lender could loan you the $150k for the project or even the full $200k ARV or even more than that (although it's hard to thing of a justification for loaning more than $200k...)

    I personally do not loan 100% of ARV, but there are others that do and there is nothing wrong with one approach or the other. It's all about two parties coming together to make a deal happen. I prefer to stay closer to 70%-80% of ARV based on my personal assessment of the ARV (which may differ from the person I am lending to). If I plan to make a loan, I am going to pick at the numbers. If you think the ARV will be $200k, but I find a recent flip down the street that sold for $180k, I am most likely going to use $180k for my estimates. So in this example, I may only be willing to lend 70% of my estimated $180k ARV. That means I would have $126k at risk for a property that might be worth $200k. This means there is plenty of buffer in case mistakes happen and it also means the person borrowing the money has significant skin in the game as well.

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