What are some resources or things I need to be aware of to give a Hard Money Loan

Question

Sorry if this is wrong category.  And I'm sure this topic has been discussed before.

I have a friend who owes her lender (probably a bank) around $9k.   I told her in the past I'd like to help her not lose her house.

She agreed and is asking for a loan from me to pay off her late mortgage and fees.   With promise that will pay me back over a course of a year plus an additional $3k.   Then we would also work together and repair her house (a separate contract perhaps) so she can airbnb/furnishedfinder it.   Since it's not that far from downtown and not bad drive to Lake Erie.   I would take about 25% of the net from STR for a year.

Are there any resources and things like contract templates for a hard money loan like this. Steps I need to take to make sure it's legal and binding. And I may need some custom clause in the case where she doesn't pay me back in full. Do I request half ownership of the house or some other penalties? As a landlord, I feel late fees are kind of dumb in a way, since if the person can't pay rent in time, a fee just puts them further behind the 8 Ball and even further behind in some case.

Anyways any thoughts and guidance are welcomed.   As I can see this being a new offering I can start doing in future.

Thanks!

Ken M. · Answer

When I bail out a foreclosure or potential foreclosure, I want to know how they got there.
A car accident, a medical emergency are excusable and understandable "I spend more than I earn" isn't. If you want to be paid back, you need to know how that will happen. Otherwise, it's a gift and you give the gift freely with no expectation of getting it back.

So, if they won't open their expenses and income, it's a no go.

If you want to do partial ownership of a property, first you need a local attorney's advice, second you need a psychiatric evaluation :-), third you need to be prepared for trouble.

People only remember your help and kindness when they need you. A judge will say you took advantage of them and a desperate person, who is trying to keep their house, will lie in court. A Federal Judge told me that in one of my cases.

Don't mix real estate and "kindness" that you could benefit from, the court looks at it as "suspicious". I speak from experience.

Chris Zias · Answer

Columbus is in Ohio.  Unless you're talking about Columbus, Georgia?  Also I'm from Columbus, OH.  Trust me I know all about that Intel thang.  It was stalling btw but seems to be picking up again.  Probably due to the Fed getting involved.  Anyways, I should put from Columbus in my Profile.  Thanks.

Arman Ahmed · Answer

@Chris Zias

Chris, sounds like you’re stepping into private lending territory, and it’s smart you’re asking these questions first. The key is making sure you’re protected legally — a promissory note and recorded lien or mortgage against the property is what secures your position. A simple written agreement won’t cut it if things go sideways. If you’d like, I can connect you with a solid real estate attorney here in Ohio who can draft the right docs and make sure you’re covered.

Corby Goade · Answer

If she isn't paying her mortgage and could lose her house, why would she pay you?

All kinds of red flags here; don't work with close friends or family. Don't loan money to people who don't pay their bills.

In addition, at best, you'd be in second position and if she loses the house or defaults, you'd never see a dime.

Please don't do this- go find your own deal and start building a portfolio for yourself.

Chris Seveney · Answer

First, if this is owner occupied you are not wanting to give a hard money loan as they mostly do not comply with federal guidelines.

You will want an attorney to draft the documents on this as well. If this is in Erie PA, your note and mortgage have clauses if they do not pay, and if its PA the only recourse is judicial foreclosure which can take 18 months and cost you around $10k. You cannot request half ownership in the docs. I would be very careful also as if they stopped paying you and you go to foreclose, you do not get a credit bid at auction whatever you are owed you have to have that much cash in hand to bid at auction (in erie).

If you want to be a good friend, start with why can they not afford the home and why are they $9k behind and do they have a plan to pay anyone off?

Hard money lending is not for the faint of heart and giving money to people in distress typically never ends well.

Jimmy Lieu · Answer

Hey Chris! What you’re describing is more of a private lending deal, so the big thing is making sure you’re protected with the right paperwork and collateral in place rather than just relying on a handshake agreement. Typically, that means having a promissory note and recording a lien or mortgage against the property so if things go sideways, you’re legally secured. There aren’t really one-size-fits-all templates because every situation has unique details, especially when you’re mixing in a profit share from future STR income, so this is one of those times where it’s worth talking to a real estate attorney to get it structured correctly. If you want to build this into a future business model, starting with good legal foundations now will save a lot of headaches later. On a side note, if you ever look into markets outside of Ohio, Columbus has been a really strong play for investors lately with affordable properties, steady cash flow, and long-term appreciation thanks to huge growth from companies like Intel, Amazon, and Google. Happy to connect and answer any questions you have!

Chris Zias · Answer

I should add that she does pay her mortgage just not enough monthly.  The economy is tough on those who don't have the right skills for white collar work.  She's a part of the gig economy (proletariat).  Drives ubers or instacart.  She makes her own hours, but only so many hours in a day sadly.

Chris Zias · Answer

Bill Gates also had a rich father and had access to cutting edge mainframe computers and got free time on them.  Which costs a lot of money to rent that time.  He did not code Windows.  He bought DOS from someone for $10k.  What he saw was opportunity and didn't pass up on it.  Now that's his real talent and intelligence imo.  But I hear ya.  I'm not financially free but working on it.   But once I'm free of the Matrix, maybe some of us have the responsibility of freeing others.  And yes I have been burned in the past.  But I don't know that I can allow that make me so jaded and to not try again.  I don't want my path to be the same cookie cutter as many others.  I appreciate all the perspectives.  The unexamined life is not worth living and all that.  Instead of giving her money, I'll give her one of my copies of Rich Dad Poor Dad.   No one I've given it to has ever read a single page.   Cheers!

Chris Zias · Answer

This is all good advice and things I never thought to consider.  I will get a real estate lawyer.  And go from there.  I thank everyone.

Jill F. · Answer

If you want to stay friends, don't loan her money.

What are some resources or things I need to be aware of to give a Hard Money Loan

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