So I have several interested investors who have seen the 2 houses that I have remodeled and are interested in lending me private money. Now my only hang up is... What are the logistics of this? I'm just trying to figure out my next steps so I can start making offers asap!
For a quick summary on what I'm doing... I'm looking to BRRRR SFH's in my area. Distressed properties that are under $60-70k and need extensive renovation. Looking for ARVs that are $120k and up. I will probably be using entirely investor money and offering something like 8% interest delivered within 12 months. I will have some cash reserves of my own.
1) Would you recommend going to an attorney first to draw up papers for these agreements? I've been told that the title company can do some of this, but if the protection/thoroughness of an attorney would be way safer, then I'd happily pay those relatively small fees upfront to save headaches later
2) What does it look like when you fund a deal with investor money? Will they need to wire funds directly to the seller at the time of purchase? If I'm using personal friends who trust me implicitly, would it ever make sense to hold their investment while I'm looking for a deal so that I can move quickly, or would that have some bad tax/legal consequences?
3) My lender mentioned something about needing the note to be signed by the investor so that they can pay back the investor directly... Otherwise they may not be able to do the refi. Does anyone have more info on this? Is the note he's talking about just the agreement that I have with the investor, or does this have something to do with having their name on title? I'm a little lost on that one.
4) The investors I'm using are personal relationships and don't necessarily have real estate investing experience. Would it be in the best interest of both parties to keep it simple and just do a full payout when I refi, or is it better for me to still be making interest payments to them during the rehab phase?
Even if you can only answer one of these questions or have other related advice, I'd really appreciate any feedback!
I draft many PML loan doc sets. How you get it under contract is up to you, but from there, you open title, get commitments from you private lenders, and let your escrow agent know you have a private lender that will be funding the transaction.
A title company might be able to hire a lawyer draft closing docs, but DON'T DO THIS. That attorney will be working for the title company, not you or the lender. If you want to keep using the same private lender because they trust you, the attorney should work for the lender, not you. There are many place where the lender can be harmed because the attorney worked for you or the title company (and not familiar with what needs to go into REI loan docs).
There are a number of terms that need to be settled on. I have a doc prep worksheet that asks the right questions. Terms like payment terms, application, pre-payment, extensions, construction loan, personal guaranty (you should), etc. Business purpose affidavit (you should).
You might want to push off even an "interest only" payment to the end of the loan, but the lender needs to have something during the life of the loan in case a satellite wipes you off the planet. No need for the loan to term out before foreclosing.
I draft lender's instructions to the title company, telling escrow agent to update title commitment, make sure things match, add/strike endorsements to the lender's policy as needed, what to collect from borrower, and under what conditions to fund. Lender should get a settlement statement with amount to actually wire to title. Lender should short-fund or net-fund (loan amount, less offsets).
Once the docs are drafted according to the worksheet, drafts go to lender/borrower for approval. Once confirmed, live docs go to title with invoice for payment at close. If it doesn't close, lender/borrower still liable for payment (work is done).
My set of docs includes the deed (with vendor's lien), promissory note, deed of trust, personal guaranty, business purpose affidavit, attorney letter (no representation), and lender's instruction to the title company.
Thanks so much for the thorough response!
You can obtain a POF letter from a lender or pre approval and yes there are some lenders who can give you a terms sheet with a pre approval. I advise people to get their ducks in a row before pushing send on your keyboard to send your LOI or offer. It can then be structured so its both acceptable to the seller but will fall under a lenders underwriting guidelines.
Thanks @Nate Marshall ! I guess that would sort of be like having a pre-approval letter from the bank. I can just draw up a proof of funds document and discuss what funds are available from my private lenders and have them sign to that effect. I'll be using lenders who I have personal relationships, so I don't necessarily need the formality on that side, but for the sellers, I guess that's a good thing to have.
@Taylor White The lender will send you a POF letter. It's their money until it's wired for the closing. Many will give you a POF for asking and sometimes a small fee like $5-10. Even if you don't use that lender and use your personal relationships they have more liquidity and reputational capital so they can withstand any verification or scrutiny.