Good evening all,
I am currently looking at using a private lender as a debt partner. I just closed on a quad using my own money, and have an opportunity to purchase a tri from another investor. He has offered to lend the money for closing, so I was wondering:
- How is an agreement usually worded between someone in my position, and the lender?
- Assuming a six-month lending period
- How is the interest usually handled? I'll be honest - I originally said to him "10 percent for six months", but I was using generic terms and don't know exactly what that meant. Is it handled with a standard mortgage-payment equation, with annual interest of .10/12 and six payment periods?
Any advice on how to word an agreement would be appreciated.
Did you ever get this question answered? I am curious in this as well.
Lender will typically prepare the loan documents. Depending on the laws in PA and the security the lender is requiring, it could be as simple as an unsecured promissory note, or more likely, a secured loan. In Texas, that means a note and deed of trust. PA could be the same, or could use a mortgage instead of the deed of trust. The note will set forth the terms of the loan, (interest rate, how payments are calculated, when/how payments are made, maturity date, etc.). Assuming a 10% interest rate (from your example), with interest only payments due monthly, you would multiply the outstanding balance of the loan x 10%, then divide the result by 365 (or in some cases 360) and then multiply by the number of days in the month.
If you are responsible for drafting, hire an attorney. If the lender drafts, and you are not comfortable reading/understanding the documents, hire an attorney. Loan documents are not a place to cut corners. If issues arise, the documents are going to dictate what happens next.
@Ben Wilkins and @Bret Bascue you have a very simple problem to solve. Hire a very good reputable attorney to draft the paperwork. I draft mortgages and notes all the time now for myself but started with using my attorney. The cost will be paid for by the borrower. You will need a two page Note. A 5-10 page Mortgage document and possible a personal guarantee document prepared.
@Bret Bascue - I did get the paperwork done. The guy that provided the financing had done this before and had something pre-drafted already.
The interest was handled as a "six months, interest only" - at the end of the six months, we will owe the original loan amount.
X% up front "points", six months loan at Y% interest. Payments were interest only. Full amount due at the end of the six months. If full amount was not paid at the end of the six months, interest would go up by Z%