I have private money to lend. Terms?

Question

Hi. I've been investing for about ten years (rehabs and wholesaling). Now I am getting into private lending/joint venturing. Want some feedback on these terms.

- I fund 100% of project including purchase and rehab costs.
- Total loan amount not to exceed 70% of After Repair Value
- Rehab Draws: 50% at half and 50% upon completion
- Title held in my LLC. (Negotiable based on borrower experience)
- Execute Joint Venture Agreement
- Profit will be split based on deal and level of experience of borrower
- Agreement term is for 6 months, after which, borrower profit split is reduced to 50% and I assume management of the project.

Does this sound reasonable?

Bill Gulley · Answer

First step is to learn the laws pertaining to solicitations to the public, including internet forums, to potential borrowers or investors. You have SEC regulations as well as lending regulations to comply with, such as registration with your state department of finance and perhaps other compliance issues.

Private lenders do not advertise or seek out borrowers, that is a hard money lending matter. Residential or commercial loans, doesn't matter, if you're seeking lending opportunities you're in the business.

Private lenders make loans to those already known to the lender, they have had past business relationships with a  borrower, or they are known personally or they are related. These are the exemptions to lending compliance.

Soliciting JV relationships comes under SEC authority, basically the same type of exemptions apply, when you start advertising for joint ventures you're crossing the line.

If you solicit business and the deal goes south, you can lose your money due to your non-compliance.

Experience in RE is not experience in finance!

Having money doesn't bestow lending knowledge or the ability to underwrite loans.

I'd suggest you get with a mortgage broker first as they can act as a conduit and seek lending or joint venture projects.......they can "teach" you the business and compliance issues.

Potential borrowers piling on in this thread may also be in violation answering solicitations, those are solicitations for money and if you're in business, that can be an unregistered bond solicitation.

I suggest you make contacts simply by talking about what you might do, such as I'm interested in being a private lender, what do I need to do? Or, I have some projects that I need to secure financing for.....but talk more to the project rather than saying you need a lender. Then, contact people privately!!!!!

Lending is highly regulated, much more so than RE, knowing what you might have done as a borrower doesn't mean you can simply turn the table and act from the other side of the table.

To start out,

Jay Hinrichs · Answer

@Ram Gonzales

you want to be careful couching your self as loaning money then switching them to JV in the structure you delineated.. this can be construed as bait and switch and the JV partner can make a claim that this is really a loan.

So if its JV deals you want to do NEVER mention that your lending money because your not.  This will keep you in compliance.

For me personally I do both so I am sure to make the distinction.. and a happy JV partner who your giving an opportunity to can create some very long term and lasting relationships that are rewarding for both parties.

And if your doing these in your home market even better as you have command and control and can visit the project through the process.. Its when you venture out of state were this becomes a little more risky and choosing that JV partner is paramount to your success..

Ram Gonzales · Answer

Ken T. Yes, I would review and approve each deal to make sure the rehab budget is reasonable and includes a contingency, all of which would need to come under the 70%.

Ram Gonzales · Answer

Thanks Bill Gulley

Good information to know. I wasn't trying to solicit anything here. Just trying to get feedback on my terms to know how they stack up against similar arrangements.

Jay Hinrichs · Answer

@Ram Gonzales

my business is relationship based..

Ram Gonzales · Answer

@Jay Hinrichs What kind of "infrastructure" do you set up when you plan to start lending or partnering in a new market? Do you first engage some local experts to be your boots on the ground so to speak or do you simply rely on your relationship with the borrower/partner?

Ken T. · Answer

hey @Ram Gonzales  I'm new and i have a question about the loan amount not exceeding 70% of ARV, if it goes over will the house flipper cover the difference? because that wouldn't be a 100% loan and taht scenario would obviously affect the profit for either you or the flipper.  Also do you evaluate the properties yourself to determine that the correct calculations were used to determine it can be rehabbed at 70% ARV.

Bill Gulley · Answer

I'm sure you didn't intend to. Need to ensure that when we talk about funding that it can't be interpreted as soliciting the public.

Great thing about BP is that contacts can certainly be made, private communications can certainly lead to relationships.

One reason I never had an issue with regulatory matters was due to the care taken in all written materials, any business plan, project, lending relationship, advertising or proposal never had interest rate guarantees or implications of profits. Actual past performance can be used and I give the securities type disclaimer, see your attorney and tax advisor.

If you follow TILA in all business, you can't go wrong, even if APR and loan costs are not required in advertising, you'll always be in compliance.

I may use the word "partnership" I never call someone an "investor" because investors invest and to invest they contribute capital which is secured by a promise by a business entity which is a bond. I don't even go there.

Didn't mean to stifle your question, but to begin, start with compliance.

Terms can vary widely, but as some believe you can do anything that can be agreed to is not correct. Again, as to compliance issues, understand what prudent lending practices are and what is seen or can be seen as predatory, this applies to commercial or consumer financing, just that consumer loans are heavily regulated. Doesn't mean that commercial lending is the Wild West.

A private lender may make a commercial loan, not a problem, so long as it is compliant.

I'm doing one at 10% interest, amortized for 30, balloons in one year one a purchase rehab. Amounts will be disbursed on the purchase and initial material costs advanced, then the rest will be on a draw basis. I'll manage the note/disbursements myself. No points on private loans. An admin contract will be made as to additional participations down the road but not related to the loan. Best of luck in getting started! :)

Jay Hinrichs · Answer

@Ram Gonzales

Texas is a great fix and flip retail market I have many going there right now.. and very happy

Ram Gonzales · Answer

Thanks everyone for your feedback.

I've been investing for ten years now but, honestly, I've always been better at finding money than finding deals. I'm finally embracing my strengths. :)

That being said, the reason I split the rehab money is simply from my experience in dealing with contractors on my own flips. I simply don't trust most of them, so I only work with contractors who will accept payment on these terms. It ensures that I only pay for work performed. I assume other investors can do the same and not have to come out of pocket - especially if the funds are first set up in escrow. Most people would say that if you are working with the same contractor all the time this shouldn't be a problem, but I have found that, unless you are doing one deal right after the other, that good contractor is already on another job by the time you find the next one. As a result, I'm always testing new ones.

Bottom line though, I'd be far more flexible on this if I was working with an experienced investor as Andrew described.

@Andrew Cordle Thanks Andrew. You'll definitely be hearing from me.

@Jay Hinrichs Thanks Jay. I'm still feeling out the right path there in terms of lending vs partnering and which is more appropriate in which circumstances. I am definitely sticking to my home market for now and will possibly look at expanding once I've got a few JVs under my belt here. Fortunately Texas is a big state so there's plenty here to work with. :)

I have private money to lend. Terms?

Most Popular Reply