How do I provide assurances to family lenders?

Question

Hi BP peeps! So I am about to start making my rounds to friends and family, to generate gap funding for my first deal. I had mentioned this in a meetup, and someone told me to provide them assurances, one of those being to put them on the title of the house. But, my question is, if I have multiple family members loaning the company money, how could I get it so they all hold second position on the house? Is there a fund entity I can create? Or would it be best to just list them 2-Nth with the larger investors getting preferential positions? Or do I just scrap this idea, and is putting them on the insurance and signing a loan agreement enough?

Thank you in advance!!

Ned Carey · Answer

@Taylor Campbell welcome to BP.

Putting them on the deed is possible but probably not the best way to proceed. TO do that just everyone is on the deed as tenants in common. The deed can specify what % ownership each person has.

Much more common is to have a mortgage (or in some states a deed of trust)  There is a promissory Note, which is the loan document and The mortgage is the document that gives the lender a security interest in the property.

A third relatively common way is to create and LLC to own the property and multiple people can be members of the LLC. The LLC operating agreement spells out how profits get distributed.

Keep in mind the best assurance is the fact you are doing a good deal. all the agreements in the world won't protect them from losing money on a bad deal.

Ned Carey · Answer

@Taylor Campbell Normally when someone borrows money to buy real estate, there is a mortgage (in some states this is called a deed of trust but essentially the same  thing)

A mortgage is the document that makes the house security for the loan. If you do not pay the loan, the mortgage allows the lenders to sell the house to get their money back. The mortgage is recorded in the land records with your deed. That puts the world on notice that you can't sell without dealing with the money owed against the property.

Now when people talk about a mortgage they really mean two different documents. One is the mortgage document as I said above. There is also a "promissory note". (this is usually just referred to as the Note). The Note is the legal document that contains the actual terms of the loan, it has all the details of the amount borrowed, the interest rate, how often you make payments, late fees, etc.

There are three levels of assurances with loans.

• Just a verbal agreement
• a formal written promissory note
• A recorded mortgage with a promissory note

My guess is when someone said put the lenders on the deed, they may have meant a deed of trust. This is as I say basically another name  for a mortgage. Despite the name, a deed of trust does not give any ownership in the property.

Taylor Campbell · Answer

@Ned Carey

Thanks for the information!! That helps a lot.

Taylor Campbell · Answer

@Michael Plante

That's good to know. Thank you.

Taylor Campbell · Answer

@Ned Carey

I do not know what a recorded mortgage is. I am saying that for friends and family, the suggestion was that a loan agreement and putting them on the insurance was good enough. If they felt they wanted that added security, I could add them to the deed.

Does that make sense? Thoughts?

Michael Plante · Answer

I just bought a house it had 5 peoples names on the deed

Wash had to sign the offer and this closing docs

Ned Carey · Answer

@Taylor Campbell are you saying just have a promissory note and now recorded mortgage? If you can pull that off that is better for you. However as a lender I would NEVER accept  that.

Even if you get away with it, later if one of your lenders finds out that it is the norm to have a recorded mortgage, it might reflect poorly on you that you didn't suggest it.

Taylor Campbell · Answer

@Ned Carey Thanks for your response!!

I spoke with an escrow officer this weekend, and I think that the best way to go about this would be to lay out the specifics in the loan doc, and not worry about doing a deed of trust between them and myself. I can put in the loan agreement that they will get paid before me. That combined with a commitment to my business model, which includes only moving forward on deals that align with my purchase formula, should be enough. Oh, and also putting them on the insurance.

What do you think?

How do I provide assurances to family lenders?

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