Do I need a lawyer if I’m using private money?

8 Replies

Hi BP,

I own 2 rentals (one outright, the second is mortgaged) and am looking to buy two more this year. I found 2 great deals but I’m going to use private money from a friend.

Do I need a lawyer to write up the terms? Or can we just do I own thing? And is 8% a good return for her? And if we can just do the deal by ourselves, can she just wire me the cash and then I can just transfer it back to her after I refi?

Thank you friends

Hi @Emily Wilson Litzinger if you ask an attorney for advice on if you need their advice, they will always tell you need their advice...but, since I'm not one, I'll say you don't.  You can draft your private loan agreement however you like. We had private loans from a friend and a family member and I just drafted a simple loan agreement doc using a draft I found online.  With our deal we agreed on 10% return but the rate is also up to you; for private money, you have the freedom to set the terms and rate so if you both feel 8% is fair, that works.

If you'd like, I can DM you the template we used.

No one should be lending money without adequate legal representation @Emily Wilson Litzinger . You really can’t ask someone to loan what could be a life changing amount of money without proper legal protection. You’ll need a good understanding of your legal obligations as well.

There are many documents associated with a private real estate loan. Some will be state specific.  You can see a partial list in my post in this thread: Private-Lender---Forms-Required . This is not a DIY job.  Nor should any lender accept loan documents from a borrower.

Your lender should obtain these documents from a lawyer used to originating private loans. This is not necessarily a real estate attorney, since most are only used to conventional loans. We use a lending and securities attorney who works with private lenders. There are many things to consider.

Your friend will have to watch out for usury and licensing restrictions. She will also need an understanding of the fire/hazard insurance and lenders title insurance she must require. Loan position as well. I hope you’re not asking her to loan in second position. Nothing could be more dangerous and she should understand the risks of this.

If I were your friend, I would also want to know how you will pay me back. That is, are you already qualified for a refinance? If not, what assurance can you provide you will be able to repay me?

Nothing will change a relationship faster than when money is involved. Take heed doing business with friends or family, Emily. I know you’ll ignore that, but at least make sure your friend sees a good, specialized, attorney. You should sit in on this conversation.

Best of luck to the two of you.

@Emily Wilson Litzinger   When you say you'll just "write up the terms" and your friend will "wire you the cash" and then you can just "transfer it back to her" after the refi, it sounds to me more like an unsecured loan then a what this really should be, which is a secured loan. 

The loan should be secured via a deed of trust or mortgage, and the cash should be wired to whomever is handling the escrow (in my area that would be the title company but may be different in your area - it should never be wired directly to the borrower though). 

I'd highly suggest you take a look at the other post @Jeff S. linked to above.  It may seem like overkill using all these documents when the loan is between friends, but they really are necessary and they can actually save you a lot of problems down the road.  After all, no one thinks their loan with their friend will end up having problems or go bad (if they did, they likely wouldn't do the loan in the first place), but the reality is that does happen.  And when it does, if you haven't done everything properly on the front end, it's already too late by that point.

@Emily Wilson Litzinger

I do private money deals on land flips. Use an attorney. It is well worth the money to relieve you of any possible liability, and they'll likely suggest provisions you haven't even thought of. It will likely lead to others wanting to invest with you as you'll look more trustworthy and professional. You're trying to run a business not a lemonade stand, right?

Clint

In my experience hiring a lawyer is similar to buying insurance, you don't need to unless there's a problem.  The trouble with that is that by the time there's a problem it's too late for a lawyer or insurance to do you any good.  Also keep in mind a lawyer can only represent one of you otherwise there is a conflict.  The Attorney can look out for your interests or your friend/lenders but not both.