Using an individual/independent private money lender

[Oscar Macal]

Hi all,

When it comes to using an individuals private money to fund deals, how is the money typically handled?

I ask, because I recently met an individual on a real estate investing Facebook group who says he offers private money to investors. (I still have to further vet him before giving ANY of my personal information, because I talked to one a couple days ago who was clearly a scammer).

Since he and I don't know each other and have never worked together, I would think there would be some security blank for him and for me when it comes to handling the funds. I can't really expect that he would just wire me $200k and trust that I do what I'm going to with it? 

So does the money typically get sent to a title company or some sort of intermediary?

Please share any and all info you guys have on Private Money Lending.

Thank you!

[Don Konipol]

Quote from @Oscar Macal:

Hi all,

When it comes to using an individuals private money to fund deals, how is the money typically handled?

I ask, because I recently met an individual on a real estate investing Facebook group who says he offers private money to investors. (I still have to further vet him before giving ANY of my personal information, because I talked to one a couple days ago who was clearly a scammer).

Since he and I don't know each other and have never worked together, I would think there would be some security blank for him and for me when it comes to handling the funds. I can't really expect that he would just wire me $200k and trust that I do what I'm going to with it? 

So does the money typically get sent to a title company or some sort of intermediary?

Please share any and all info you guys have on Private Money Lending.

Thank you!

First, you’re right to seek out information about anyone you’re going to deal with as scammers and scams abound.  So congratulations for taking the cautious and correct approach!
In all likelihood the private lender will want a 1st position lien securing his note.  If he has any idea of what he’s doing at all, he will have HIS attorney produce the closing documents on the loan side, and will wire the funds to the title or escrow company with instructions to fund only when certain conditions are met, which include all documents executed and notarized where appropriate, title company in a position to offer title insurance, exemptions to title policy deleted, down payment secured, property free and clear of all liens and encumbrances or all liens and encumbrances paid off at closing, personal guarantees if required, business purpose documentation executed, property insurance in effect with lender named as loss payee and or additional insured, and anything else deemed important by the lender and or his attorney.

Of course, there are many inexperienced, unknowledgeable, and generally incompetent investors wanting to get into private lending after reading a book who often want to seem more competitive by not requiring the borrower pay for an attorney, appraisal, title report, survey, etc.  If you do a deal with one of these you may be dealing in a very “light document” situation, which wouldn’t necessarily be a bad thing for you.  However, s..t happens, and these type wanna be private money lenders often quickly run into problems and often take large loses.  I’ve seen newbie lenders take second liens when they thought they had firsts; lend when they thought the pro[earth was free and clear and actually 10 years worth of property taxes were do; lend on land that was not zoned correctly, escrow construction payments and not have proper draw inspections in place, lend way too high LTV or LTC, lend with no guarantees and have borrowers walk with little cash invested, and about one hundred other mistakes.  On the flip side there are a lot of sharks out there disguised as unsophisticated lenders that tie a borrower into terms that put the borrower in default the minute he signs the closing docs!  Private lenders can be a GREAT source of financing, but due diligence and a good experienced real estate attorney is a necessity.

[Oscar Macal]

Don, thank you very much for your thorough response!! Much appreciated!!

[Andrew Postell]

@Oscar Macal thanks for posting.  Always great to hear from a fellow Texan.

Lots of good stuff in the post above but just to shorten it down some - they won't give YOU the money for the home.  They wire it to the title company.  That's how it's supposed to work.  So really in these cases our concern is "will they fund a deal when I find it"....and how do you vet that?  That's why I ALWAYS recommend speaking with other real estate investors on who they use.  That way, you have some basis for the recommendation.  They've already done the heavy lifting in a way.  There are plenty of real estate groups that meet in Houston....I know it's a little bit away but it might be good to go to a few groups there and meet some other investors in person.  If that's impossible I still might try to get another investor's recommendation from one of the groups you belong to.  There's other groups too.  I did write an entire post on this subject if you want to read it HERE.

Hope all of that helps in some way.  Thanks!

[Oscar Macal]

@Andrew Postell Thank you for your response! Much appreciated! hope all is well!

[Frank Greg]

@Oscar Macal
I can't really expect that he would just wire me $200k and trust that I do what I'm going to with it? So does the money typically get sent to a title company or some sort of intermediary?

You are right... when buying real estate, the funds are usually delivered to the seller and there is always some sort of escrow account involved since the investor has to know that are getting clear marketable title free of any encumbrance.

Remember, you will also have to bring to the table the difference between whatever the property price is and the lender's LTV. If the property requires rehab, the rehab budget component is typically withheld and only released when you (or whoever is doing the rehab) provide evidence of completing specific repairs and lender dispatches whoever to confirm. So its a phased release.

With asset based lending, lender always secures a lien on the property until they get paid off... so if your intent is to flee, its not clear what you'd be fleeing from if seller got paid for property and your rehab budget is withheld in escrow and released as you complete repairs.

Lender's primary risk is that if buyer mysteriously disappears, they don't really want to play rehabber by stepping in to complete the project and if they have to sell the property, they have to be able to get whatever they paid seller at a minimum.