Hello - I was looking through Craigslist and came across a Borrower who needed to borrow about 2/3rd the purchase price for a property, which is in Las Vegas, Nevada. I like the property and the loan to value... the question I have is fairly simple:
Can I fund this loan as a non-licensed, private individual? There's no brokers involved or anything like that. Just two people trying to make a deal work. I've bought a few trust deeds this year in California, but that's it.
Thanks for your responses!
I am sure some members who are more experienced with will reply here.
An important question is "Is this an investment loan or to a homeowner?" If it is to a home owner there will be many more hoops to jump through. The SAFE Act is relatively new law that will add complexity to lending to a home owner.
Good luck - Ned
How could I forget that piece of info! Thanks for reminding me, Ned.
This is for an investment property. He is a flipper and this will not be used for personal, family, or residential use.
@Lupe Santiago there are several loan brokers on here that can probably give you answers, I'd seek them out, it will be worth the effort.
Private lending can be done easily with out using a broker, However that said there are Sec Rules. Must have relationship with them/ know them etc. check out this web site past articles on this subject. They are very helpful
Make sure when you do these loans you use a title company/lawyer to make sure all t's are crossed etc. and get it recorded to protect yourself.
I've been involved in many of these loans make sure everything is written down and notes and deeds are recorded.
This is just my opinion and past expereince. Good Luck
I'll second what Scott has said (with major emphasis on lawyer to review docs)
Also, when I saw "craigslist", I cringed a little... I'd say it's well worth the money to run background/criminal/credit checks. I'd hate to hear some "Nigerian prince" ran off with your money. I've heard some pretty bad stories like that before. But that's just the tip of the due diligence iceberg here...
I don't believe that SEC regulations actually apply to one person or entity lending to a person or entity. They usually relate to selling securities (which can include pooled funds for the purpose of lending) or advertising for "investors". The borrower would be more at risk than you in this case, since he was advertising. No legal advice intended, I'm not an attorney, just my understanding.
What is very important, however, is that you protect yourself against those requirements that involve lender licensing, usury, and the SAFE act. The SAFE act regulates consumer loans, not business borrowing, but if the loan goes to foreclosure, and the borrower claims it was a consumer loan, not a business loan, you will be int he position of proving to the contrary.
Therefore, I strongly recommend the following:
Lend to an entity only, not a person
Get the borrower to sign a declaration stating the loan is for business purposes, and the proceeds will be used only for business purposes.
Get a Nevada attorney who has worked on private lending closings to generate your documents and advise you on any Nevada llaws and requirements. The borrower should pay all the closing costs.
I also agree with @Justin Hughes about cringing when I hear Craigslist. It's full of scammers, so I would not do the loan without boots on the ground in Nevada to make sure the property in question is actually there with a house on it. Make sure the property you see matches the property you are lending on, and have your attorney look for liens. Also have him look for federal IRS tax liens in the county in question. IRS liens attach to all properties owned by the borrower in the county in which they are filed, if I understand them properly.
I would also question as to why a borrower couldn't find a local private lender. So the answer would typically be
1. He is brand new and doesn't know how to find them
2. He has burned all his private lender bridges in Nevada, so that even hard money lenders won't lend to him.
The second one is worse than the first.
Sorry if this is more information than you asked for, just wanted to be sure I pointed out some things to consider.
@Ann Bellamy Thank you very much for the info - that's exactly what I was looking for!
I don't know if this helps anyone but an article I came across recently that is kind of related in making or asking for capital for loans.
Much of this will depend on state law and how they define a residential property under the Safe Act. Ann is correct in that such a loan is not an SEC matter nor will it apply to a commercial loan. Problem is that in some areas, and regulators, may examine the extent of the commercial activity compared to the type of loan being made. Buying 10 homes in one transaction in a buisness name which trades in RE is obviously commercial, doing one property to a guy who does one deal at a time and takes title could be a problem....especially for a first time flipper who has business income.
Best way, imo, is to make a phone call to the state department of finance and ask!
We have also not seen yet where the CPFA comes down on these transactions. If someone is not family it could get difficult without a license. My advice is go to the man and ask instead of getting internet advice from us out of stater types. I don't know what has changed in Nv over the years.
I suspect another way is to buy the property with the buyer and later sell your interest.....hint, hint.... :)
@Bill Gulley Hey great advice! I'll give the NRED a call and that's a nifty idea about selling the interest back at closing. Sounds like it's just a matter of form over substance, but hey, if it works, it works. Thanks.
@Lupe Santiago You're in Texas and this property is in Vegas? Are you in Vegas a lot? Familiar with the area? If not, this deal is a non-starter.
You would want the closing to be done at a title company. With all the formal paperwork. You want a promissory note, drawn up by YOUR lawyer, outlining all the terms. Those need to be in compliance with NV law. You also want a recorded deed of trust on the property. You want a title search to be sure there are no other liens. You having to do a foreclosure and take the property is a real possibility. Hopefully not, but I have. (Actually, a deed in lieu, the defaulted borrow didn't fight me.) So, you must know where you stand. As a result of doing that title search, the borrower will pay for a "lender's title policy" for you.
You also want an appraisal on the property done by an appraiser you choose. You want a list of work to be done with estimates. You want the appraiser's estimate of the value with the work.
You want to define your lending limit. If the appraiser says its worth $200K fixed up, a safe number would be to lend no more than $140K. At the absolute max, $150K. Any more than that and you're taking a big risk.
Now, if its worth $200K and you're lending $140K, and the borrower is paying $120K and it needs $30K in work and there are $3K in closing costs, the buyers needs a total of $153K to close. $120K goes to the seller. $3K goes to the title company, and gets distributed for the various fees. A big chunk of it is your title policy. The $30K rehab budget goes back to you. You give that to the borrower as the work is done and you personally inspect it. When I was doing direct loans, I would have the title company cut three checks for $10K each. Made out to the borrower, but given to me.
Now, if you're sending in $140K and getting the $30K rehab escrow back, that leaves $110. The buyer has to come up with $13K to cover the rest of the purchase price and the closing costs. If you had a long track record with this borrower, you might agree to let them take $10K or $13K out of the rehab budget at closing. That avoids them bring cash to closing. But for the first deal, you want their cash on the table right up front.
@Jon Holdman - Thanks for your input! This is all very solid advice. Yes, I am in Vegas a lot and I will actually be living there and commuting between LA and LV for my work. I've done a number of private lending transactions before, but always through a broker. This time, there was no broker involved so I wanted to make sure I didn't have to be licensed to do this sort of a transaction.
I think I'm in the clear after reading Bill Gulley's response and I checked out Nevada Revised Statutes (specifically, NRS 645B.015-.016 provide the list of exemptions and I would fall under the exemption).
Any opinions on how many of these you can do before you need to be licensed? Can I hypothetically do 100 of these transactions if I never use a broker? Are my advertising capabilities limited as a private lender?
@Lupe Santiago , without knowing Nevada specifics, we can't answer that question. But usually, it's the type of loan, and no longer the number of loans, that determine licensing.
The SAFE act mandates licensing for residential lending. States interpret residential lending slightly differently. This is one of the reasons why you need a Nevada attorney who is experienced in private lending.
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