I've got a bit of cash I was going to put toward personally flipping homes in the next 12 months. But someone recently approached me asking if I'd be interested in helping to fund their flip project. I do trust this person and know first-hand that they're experienced so this isn't a question about vetting. What I'd like to better understand is how to structure lending in order to protect myself, both when a deal is successful and when something goes wrong. 

I'd love to hear from those who have been personally involved with private lending to hear about the successes and pitfalls I should look out for. 

Do an appraisal, have the closing company/attorney draft a note and security instrument for the amount you will loan then you become the lender just like the bank. I would still take basic application and credit check even if it were one of my family members. You can ask for interest only payments monthly or all the money at the end principal and interest. Reach out if you have more questions.  

Phil,
Loan to value is important as well. We only lend up to 65% of the After Repair Valuation of the property soeessentially every $1.00 lent is protected by $1.50 in value. Also, you have to decide if you will be charging simple interest or compounding interest and if you choose compounding (this is better) does it compound monthly,  weekly,  or daily. We compound daily in our loans.

This could be several books worth of information.  

* Find an attorney in your state to draw up the docs.  Don't use the borrower's if they are not representing you.  Don't use the title company's or the fee attorney because they don't represent you. 
* Minimum docs are a promissory note and lien instrument (mortgage or deed of trust). 
* I include a business purpose affidavit to ensure this is not a consumer loan. 
* Lend only to an entity (not a trust) and get a personal guaranty.  If you do lend to a person, the business purpose affidavit is a "must get".  If they are married, the spouse has to sign, too.
* Close at a title company.
* Get named additional insured on a builder's risk policy.
* Terms are dictated by you and modified by prevailing market in your area, but insist on some sort of payment each month.  This acts as a bellwether for trouble.
* If they miss a payment, send late notice and charge a late fee.  If they don't pay the 1st and miss the 2nd, send notice of default and intent to accelerate (i.e., start foreclosure).  Even if you can work it out and open to working it out, start the process.  You can always stop, but you can't go back in time to start earlier.

That will get you started.  Talk to other private lenders.

Originally posted by @Phil Vongsavang :

I've got a bit of cash I was going to put toward personally flipping homes in the next 12 months. But someone recently approached me asking if I'd be interested in helping to fund their flip project. I do trust this person and know first-hand that they're experienced so this isn't a question about vetting. What I'd like to better understand is how to structure lending in order to protect myself, both when a deal is successful and when something goes wrong. 

I'd love to hear from those who have been personally involved with private lending to hear about the successes and pitfalls I should look out for. 

Echoing what was said above, have an attorney draw up the docs, make sure you're comfortable with the LTV, get title insurance, and make sure you have first lien position.

 

Someone else mentioned getting a lien. What if I got the house in my name instead?

@Phil Vongsavang

If its in your name, consider how to handle taxes..