what legal docs should be required when lending private money

Question

I was asked if i would like to be a private lender on a flip and im considering jumping in on the deal. Im just wondering what legal docs i should require.

Chris Titcomb · Answer

@Ramon Moreno, if you're giving money you should document that with a Note, and if you're going to secure the borrowers obligations with the property being used as collateral, you'll need a Mortgage. Check out: https://www.fanniemae.com/singlefamily/security-in...

Good luck with your deal!

Mat Sorensen · Answer

Ramon, you should consider getting a promissory note and a mortgage or deed of trust (depending on the state) securing the note against the flip property. The IRA would be the lender/holder on the note and the beneficiary or mortgagee on deed of trust or mortgage. Make sure you have a title company record the deed of trust or mortgage and that you know what lien position you are in before funds are disbursed to the other person. You usually handle that with an Instruction Letter to the title/escrow company where you give conditions upon when to disburse funds.

Account Closed · Answer

@Ramon Moreno depending on my relationship with the Borrower, I usually take a note and mortgage. or I take a note, mortgage and quit claim deed which I hold in trust in the event of an "extreme default". You should speak to an attorney and either offset the cost to the borrower or consider it a cost that will come out of your profit. PM me if I can be of assistance.

Evan Williams · Answer

I typically give my private lenders, a promissory note, Deed of Trust and Hazard Insurance on the property. Just make sure you use a good real estate attorney to draw up all the paperwork.

George Despotopoulos · Answer

You're right. All the more reason to have docs in order and seek counsel prior to closing.

George Despotopoulos · Answer

It's not as simple as a boilerplate mortgage and note. There is specific language, and also clauses, to account and provide for. Also, depending on the type of loan/property, there are potential riders to include or draft to be attached to the mortgage (and potentially note). If you're in a non-judicial state, which Illinois is, you want to ensure you're fully protected. Your state does not conduct judicial foreclosures, which is preferred for lenders. You do not want to lose your entitlements/rights.

Also, there are certain other agreements I may consider to have the borrower sign @ or prior to closing depending on the deal.

I would definitely look this up, if you want to try and take a crack drafting it and putting together the mortgage / note go for it, but in the end I would have a real estate attorney review and make any edits.

Chris Titcomb · Answer

@George Despotopoulos, Illinois is a Judicial state.

Brynn Misener · Answer

@Ramon Moreno Hey Ramon, when I've worked with lenders on fix and flips, we always provide a promissory note, mortgage deed and add the lender as a loss payee on our insurance policy.  At time we also offer a personal guaranty.  Of course, have your real estate lawyer review any documents your borrower provides!

Daniel Dietz · Answer

I just did one today in Wisconsin as the borrower - the lender is a friend whom we have done this with before. We do what @Chris Titcomb mentioned. We use the saying 'the closer the relationship the more important it is to get it in writing' :-) Our local attorney draws it up for a few hundred dollars.

Dan Dietz

what legal docs should be required when lending private money

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