How do you put a friend in first position as a private lender?

Question

How does this exactly work?  What does the agreement look like?  What does it say?  Do you need an attorney to write it?  Does the SEC need to be involved?

Scenario would be a friend and I agree to go in on a deal together.  I'd make the offer (no LLC or anything like that).  He would fund the money at closing, say 75%LTV of current value, not ARV.  I'd pay the balance with my own funds.  
I'd manage and pay for the renovation with my own funds.  Get the place leased-up.  I'd go for a refi.  With money from the conventional refi lender I would pay back my friend.  He is done and happy.  I have a cash-flowing property with some equity (lets hope)

Neither of us are bankers.  So how do you set this up?

Kyle J. · Answer

Will - Thanks for the information.

Larry - Thank you too and I'll try to find that other post you mentioned.

Ann Bellamy · Answer

Larry K., regarding the personal guarantee:

Virtually all HML's would require one.  Although this is your friend, and not a lending company, I think if you are willing to put his funds at risk, you should be willing to personally guarantee the return of those funds.

And I agree with Will Barnard, you should have the property sold in less than an year, and if there is a penalty needed, having the note specify an increase in rate, and/or an extension fee, is appropriate.

If you have a real estate attorney you are comfortable with, you could start there, or if not, a title company would be where you started to arrange all of this.  An attorney will of course cost more.

Will Barnard · Answer

The other "late fee" is the fact that the mortgage was not paid off in the time allowed and thus, lender has foreclosure rights. That is the worst penalty of all to you.

Will Barnard · Answer

As far as the late penalty, no need, you should not be doing rehab flips if you take over a year to get one done unless you are doing some serious major rehab and even then, over 12 months would be a failure in my book.

If you choose to add in some late clause, make the interest gp to 15% (still below the usury in NJ) and perhaps an extension fee of "X" amount.

Larry K. · Answer

Mark YuschakWill Barnard thanks for the clarification.

@KJ (your name does not pop so I hope you read back to get this.  There is a good post on here that describes this pretty well so much of what I am saying here I got from there.  I think Will B was pretty involved in that post.  Since this is a private lender and not a HML it would be 10%, no points, interest only, monthly payments, penalty if principal not paid back in 12 months, no prepayment penalty.

I am not sure how to handle the late penalty or if it would be customary for me to provide a personal guarantee.  Any guidance out there on these points???

Will Barnard · Answer

Larry K. - yes, in your state it is a "mortgage". Deed of trust for CA and Mortgage for you are one in the same as Mark answered on my behalf, just wanted to confirm that was my reference. I know NJ is a mortgage state and I should have just staed that rather than confuse you, my apologies.
K J - Not sure what Larry has negotiated, but start at 10% and see what your friend says. If he/she is use to getting sub double digit retruns, 10% sounds great. Go up from there as needed (and only if needed)
I usally end up at 12% interest on most deals I pay by private lenders.

Mark Yuschak · Answer

Larry K., what Will is referring to is what we in the eastern portion of the US call a "mortgage".  The western states consider a mortgage a "deed of trust".  One in the same!

Larry K. · Answer

Will Barnard I am not an expert on the specific meanings so bear with me...

I think NJ is a "mortgage" state in that we use "mortgages" and not "deeds of trust".    Are you using the term "deed of trust" to mean "whatever you use in NJ"

or do you mean DEED OF TRUST specifically and not a mortgage in that a deed of trust has applicability for this purpose I am describing such as being a loan from an individual and not a bank

Kyle J. · Answer

Larry, very interesting post since this is almost identical to what I'm considering doing.  Just out of curiosity, what kind of terms did you work out with your friend?  Are you going to pay him a set APR for his money, or just a portion of the ongoing profits and/or proceeds from the final sale/refi?  And is there a deadline or any sort of timeframe when you have to pay him back by?