Can I lend to a customer who wants to remodel their primary residence using their primary residence AND adjacent property as collateral? They have a first mortgage (FHA) with very little equity and own the second piece of raw land without lein. They have sufficient income but their credit is questionable? What will be my legal hurdles?
Yes but you will be in a second position on the primary residence. No legal hurdles I am aware of for a small private lender (no underwriting standards for YOUR risk tolerance) but I am not a lawyer and speaking only to my experience. What you will need to do is...
* Determine your own risk tolerance,
* Negotiate note terms,
* Draft a promissory note detailing the terms, and
* Record a trust deed for the collateral properties.
I'd start working with a title company to help you through the process for recording and seek a lawyer to draft the promissory note.
Consider this. If the lendee doesn't perform according to your contract, your recourse would typically be foreclosure. But your payoff would typically come from foreclosure sale proceeds after the first mortgagee is paid off, along with all fees, penalties, etc. If the additional foreclosure value of the raw land would cover your interest, perhaps this provides sufficient surety for your comfort. If there is not enough value to cover your interest after the primary loan, fees, etc. are paid, there may be little benefit in foreclosure. You don't seem the type to threaten broken kneecaps as a fallback. (And there definitely is a legal obstacle for that plan.)
@Kitty Jones would this be your first private lending deal? Taking a 2nd position with potentially little equity is a dicey way to get started. Typically, you'd prefer to take a 2nd position using the equity they have in the property. If they don't have equity or little equity then they could be borrowing against equity that isn't there thus putting them underwater. Is this someone you know like a friend or family member? That could make things even more dicey. I think you'll find your biggest hurdles are less legal and more practical/emotional.
@Kitty Jones Please do yourself a favor and check on the foreclosure laws for the Washington state. They last thing you want to do is tie up your funds for a couple of years and having to get through the foreclosure process. Also by lending to an owner occupant the Dodd Frank laws come into play, thus the reason that most private lenders stay away from loaning on owner occupant properties. This coupled with the fact that there is little equity would have me triple thinking this move.
How would Dodd Frank laws effect a private investor?