Private Lending — What Documents Should I Always Require?

[Robert Hoffman]

Hi all,

I recently started doing some private lending and would appreciate input from those with more experience.

So far, I’ve been lending in 2nd position behind a hard money lender on fix-and-flip projects, typically around $50K per deal.

The borrower operates his real estate business through an LLC, and I invest the money through our real estate investment LLC. The first two loans were with someone I trust, but I want to tighten up my process going forward and ensure I'm properly protected.

For those who actively lend, what documents or protections do you consider non-negotiable on every deal?

I didn’t record mortgages on the first two deals because the amounts were smaller, but I’m rethinking that approach as I continue lending.

Appreciate any guidance from those doing this consistently.

[Matthew Crivelli]

Quote from @Robert Hoffman:

Hi all,

I recently started doing some private lending and would appreciate input from those with more experience.

So far, I’ve been lending in 2nd position behind a hard money lender on fix-and-flip projects, typically around $50K per deal.

The borrower operates his real estate business through an LLC, and I invest the money through our real estate investment LLC. The first two loans were with someone I trust, but I want to tighten up my process going forward and ensure I'm properly protected.

For those who actively lend, what documents or protections do you consider non-negotiable on every deal?

I didn’t record mortgages on the first two deals because the amounts were smaller, but I’m rethinking that approach as I continue lending.

Appreciate any guidance from those doing this consistently.

Why lend in second position? You are essentially lending to people who don't have the cash to operate their bussiness correctly. If they get foreclosed on you are going to have a hard time recouping the money, second position get nothing until the 1st is 100% satisfied. Many times there is nothing left for the 2nd at the end. Without the loan on title you are putting your self at even more risk. The way you currently lend, you will get burned with little recourse, it's only a matter of time.

Non negotiables
1. 1st position only (recorded)
2. Credit check 
3. ARV Appraisal 
4. Verify experience (base leverage off experience)  

Maybe after a well established relationship i would be more comfortable relaxing these guidelines. You are better off lending 100% in first position then giving even $10 in second.