How to safely lend money to an investor?

Question

I'm considering lending money to an investor in Indiana. He needs 85k to buy($70k)  and rehab($15k) the property and his ARV is $115k. He's offering 10% apr and 2pts at closing.

What sort of paperwork should I look for? What should be stated in the contract to protect myself from losing money? what sort of questions should I ask him?

Thanks in advance!

Kyle J. · Answer

@Jen Pothilat  This sounds like a high risk loan for a number of reasons.  For example:

- It appears you are loaning 100% of the purchase cost AND 100% of the rehab cost.

- If that's correct, the investor has zero skin in the game.

- You're a new lender and don't know what you're doing yet (no offense meant, just pointing it out because this more experienced borrower could potentially take advantage of that)

- The information a couple posts above, which you agreed with, about the borrower taking care of having the loan documents prepared is not correct.  YOU need to have this done by YOUR attorney.  Not the borrower's.  Not the title company.  (Either CAN do it but neither have your best interest in mind.)

- It appears you're also across the country from this borrower and the proposed property so you can't personally meet the borrower or monitor his progress if you decide to fund the deal.

All of the above just adds to the risk of loaning on this deal.  However, if you decide to go through with it anyway, I'd suggest you read the third response in the  following post to get an idea of some of the documents you should be thinking about and asking for: https://www.biggerpockets.com/forums/49/topics/413352-private-lender---forms-required

Good luck.

Trent Stone · Answer

First thing I recommend is to make sure his numbers are airtight, get a few opinions (I can refer you to an amazing Realtor we work with in Indy). Did he plan for contingencies? How well do you know him? How many CMA's have you gotten? What are average days on market for the neighborhood? Where is he getting his SOW from? Does he have a contingency fund built in the numbers? How is he selling and marketing the property? Are you paying agent commissions?

Second, you want to make sure you are covered. If you are strictly a debt partner then you will need to make sure you have first position on the property and there are no other liens. Does he have any skin in the game if things go sideways? I have a joint venture agreement I can send you that we use with our money partners, it can easily be adjusted for the terms you are seeking but it will get you on the right track as far as what you should be looking for.

IF his numbers are correct, you are all it at 74%ARV and on such a small deal, that is really not a lot of room. I am currently investing in Indianapolis as well and we shoot for 65%ARV all in but we won't go higher than 70%ARV. Hard-money lenders won't lend higher than 70%ARV for a reason and they usually require at least 10% of the purchase price down. So, the deal might be okay, but you really want to make sure it's a good to great deal if you are going to be at that much risk. Say he flips it in 4 months, you stand to make 7k on 115k. That's only a 5.9% return on your money, not spectacular for the amount of risk you are taking IMO. After commissions and closing costs, holding costs, etc. you are looking at less than 20k profit before he pays you, IF nothing goes wrong AND the numbers are completely solid....It's a little risky for my taste. We pay are partners a bit more and our margins are way bigger. As the person putting together deals, I would not even think about pitching this to anyone.

Long 2-cents, sorry, but I hope it was helpful. Reach out to me if you would like me to look over the deal for you or if you want a copy of our JV agreement. Best of luck!!

Mike D'Arrigo · Answer

Make sure you have a note secured by a deed of trust.

Roman M. · Answer

Jen,

if you are asking all these questions than you should really avoid doing any deals until you get proper training or at the very least consult an attorney.

If you loose money it will be an expensive lesson. There are too many details when you lend especially that it looks like you doing 100% financing.

David Hedges · Answer

@Jen Pothilat

hammond is in lake county. A title company would be best bet to go through or you can call the country to find liens.

the county does have a few sites that are useful in researching properties.

country recorder (you can search for liens here, but if they are very recent they may not show)

http://www.lcrecorder.com/reco...

you can also call or email the recorder, contact info is here:

https://www.lakecountyin.org/p...

there is also the assessor site:

http://counties.xsoftin.com/la...

Kenneth Garrett · Answer

@Jen Pothilat

Sounds like your team has analyzed the deal and you are comfortable with it.  Have an attorney review the documents.  I think it’s ok to use his title company.  Make sure he has the ability to refinance your money back.  Check with your team.

Jen Hoang · Answer

@Trent Stone Thanks for your input. This is a BRRRR Deal. I've checked it out with other people who live in the area. The ARV looks reasonable, it's in a good area and should rent fairly quickly. He manages his own properties. This is in NW Indiana (Hammond).

I've contacted other investors who have worked with him. So far they all say good things about him.

1. How can I make sure that there are no other liens?

I would love a copy of your JV agreement.

Kenneth Garrett · Answer

@Jen Pothilat

When lending money out to an investor, the investor must analyze the deal as well.  You need to ask yourself a few questions.

Is this a viable investment?

Will this make money?

If a flip is there enough profit in the deal?

Is there a backup plan (another exit plan)?

If I can’t sell my flip, can I rent it?

If a BRRRR project, is there enough room to refinance?

Can the investor refinance?

Experience for all projects?

You must analyze the deal as if it were your deal. Is this a good investment.

Do your homework on the project and the investor.

How are funds protected?

Rene D. · Answer

Glad you didn't go through with it.

@Trent Stone can you DM me your realtor? I'm currently in the market for a new one. Thank you!

Hai Loc · Answer

You need to be 100% collateralized with 1st lien note..

How to safely lend money to an investor?

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