Notes and lending private money

17 Replies

Hey everyone.  I've been flipping houses and owning rentals for around 15 years now, and also doing a bit of Realtor work during that time as well.  Lately, I've come across several opportunities where I (or another investor maybe) could potentially make private money loans to house buyers/owners.  These are most often owner-occupied single family homes.  I've been in this biz long enough to recognize a deal when I see it, but I've not been able to pull the trigger yet.  Along those lines, this whole world of buying/selling/brokering/funding/making loans - well, so many people try to make it out to be some type of secret society that you have to be in or something.  Sure, I need to get educated, but the basics don't seem that complicated to me.  But then people start bringing in points about the law.  First off, is it somehow illegal for me (or someone else) to make a private money loan to a residential owner-occupant buyer?

it sure is.. you may want to bone up on 

Dodd FRank also Tennessee specifically is one of the states that requires a license to make any kind of loan secured by real estate.. that's why many regional HML don't work there..

you need Dodd Frank  QM rules for owner occ  and you need a TN specific lender license.

this can all be done with proper licensing.. 

The feds may not care about my constitutional thoughts, but as Dodd Frank relates to one person loaning money to another in the same state - I think that the law is unconstitutional.  Just my 2-cents, but I do thank you for the reply and the answer.  

@Bryan L.

As jay mentions owner occupied is highly regulated vs non owner occupied. While it is not a secret society (I agree many people make it out to be but It is like all facets of real estate investing in that how many are actually doing it just like other forms of real estate).

Before you start I recommend getting an attorney and a RMLO on your team

@Chris Seveney - so, if I had the money or line of credit to fund one of these loans, I could just simply run it thru a RMLO?  I'm a Realtor and know several lenders, but honestly, I've never heard of them doing deals of this type?  These deals that I've been finding are typically where the borrower has a short employment history, or bad credit, but they have a large down-payment.  I know of zero RMLOs who are currently making these loans.  But, if I went to one and said that I would be their investor and fund it, would they likely make the loan?

@Bryan L.

If you have the funds (and licenses if needed in a state) and go to a RMLO they will perform the requirements to get you compliant with Dodd frank by vetting the borrower etc. i can send you the name of a nationwide RMLO who originates loans for owner occupied investors.

They won’t assist with any state licensing etc (google NMLS and you can see requirements there by state).

Thanks @Chris Seveney .  One more question please.  I have no desire to become an NMLS.  But, if I run it thru a RMLO who is licensed, would I have to be licensed too, just to be the investor who funds it?

You may think it's unconstitutional but good luck changing that. Until then if you do it you're breaking the law. You may get away with it if say it's someone in your family or a friend but if you're doing it for a business and you lend to owner occupied you are breaking the law. You wont just have to worry about the SEC and states but other law enforcement agencies may pursue you. 

It's not when things go right that people get caught it's when something even miniscule goes wrong!

Honestly, this has been as frustrating as hell.  Cause I can find deals (I've often had opportunities that would be good deals to just fall into my lap).  But with all of the laws and rules and regulations - plus the difficulty to get bank money to do these types of deals, this has just turned out to be more difficult than it should be.  But one thing that I've learned is that difficulty creates opportunity.  If I can figure this out, there's money to be made.  The difficulty keeps much of the competition out.

Originally posted by @Bryan L. :

Thanks @Chris Seveney .  One more question please.  I have no desire to become an NMLS.  But, if I run it thru a RMLO who is licensed, would I have to be licensed too, just to be the investor who funds it?

Generally, as long as you’re using a licensed mortgage originator, you’re good. You don’t also need to be one yourself if you’re just the money person.  However, since you’re a licensed agent, you do need to be careful because there’s things you can do (i.e. negotiate terms of the loan) that would require you to also be licensed. 

Here’s an article with some more info on that: 

https://berlinpatten.com/potential-liability-seller-private-financing/

I’d suggest doing further research on your own though, and perhaps even speaking to an attorney, to make sure you fully understand what you can/cannot do legally. 

@Bryan L. What about investing with a lender that does non owner occupied loans to investors and syndications? There are a lot of options out there. They do all of the borrower vetting, due diligence and have a loan servicer collect payments and send you a monthly check plus the balloon at the end of the term. Rinse and Repeat! 

@Kyle J.   Even though I am a licensed Realtor, I do not do much Realtor work.  For most of these opportunities that I have seen lately, I would not be acting as a Realtor in the transaction at all.  Just wanting to make some money by loaning money.

@Kyle J.

Let’s say I personally owned the home outright. Didn’t want to rent the property. Wanted to sell the home but held the note through owner financing, and then wished to sell the note

@Bryan L. - There are two components.

1. The transaction between your firm and the borrower, if you use  registered mortgage loan originator to vet the borrower then you can comply with Dodd Frank.

2. Each state has specific laws regarding lending money and they are not all the same. This is where you may need to have your firm licensed. This is unrelated to the specific transaction but a state law regarding loaning of funds. 

Item #1 you should do in every transaction no matter where it is. Item #2 is state specific regarding licenses the business must obtain to operate in the state.

@Adam Fiore if you own a home outirght and want to sell through owner financing if it will be a owner occupied home you must comply with dodd frank. If not then you do not. Again depending on the state you should see if you need to also obtain a license. Many states exclude those who are "not in the business" or who orginate less than 3 loans from getting a license but again it is state specific. If you originate a note you can sell it on the secondary market but I would recommend using a 3rd party servicer an you will most likely sell it at a discount.

Originally posted by @Chris Seveney :

@Bryan L. - There are two components.

1. The transaction between your firm and the borrower, if you use  registered mortgage loan originator to vet the borrower then you can comply with Dodd Frank.

2. Each state has specific laws regarding lending money and they are not all the same. This is where you may need to have your firm licensed. This is unrelated to the specific transaction but a state law regarding loaning of funds. 

Item #1 you should do in every transaction no matter where it is. Item #2 is state specific regarding licenses the business must obtain to operate in the state.

@Adam Fiore if you own a home outirght and want to sell through owner financing if it will be a owner occupied home you must comply with dodd frank. If not then you do not. Again depending on the state you should see if you need to also obtain a license. Many states exclude those who are "not in the business" or who orginate less than 3 loans from getting a license but again it is state specific. If you originate a note you can sell it on the secondary market but I would recommend using a 3rd party servicer an you will most likely sell it at a discount.

Chris I would add that with owner carry back sell the note model  that the person wanting to do this should get familiar with the PV button on their real estate calculator.. this is the heart of the matter to a note buyer.. 

understanding that note buyers want a certain return..  which in all cases or most anyway.. exceed note rate in other words they are not purchasing notes at Par..  one would tinker with the return an investor is wanted then back into note rate and the term.. the note rate PLUS the term dictate the discount to achieve a yield for a note buyer in todays market place.. 

when folks just write the note and don't think ahead they get shocked when their note needs to be discounted 20 to 30% or more to achieve yield. 

@Bryan L.

The numerous laws, rules and regulations enacted in the last 14 years regarding mortgage loans secured by owner occupied residential properties is extremely limiting, confusing, and intrusive.

Aside from the politics, a lender making a residential mortgage loan has three different masters to satisfy; the Dodd Frank Act, the Consumer Finance Protection Bureau, and the laws of the state where the property is located.

Merely using a licensed professional to originate the loan, while required, does not automatically place your loan as compliant. Different loans are classified differently and must meet different criteria. Using a licensed professional to originate the loan SHOULD result in a fully compliant loan; but primarily do to the complexity of the legislation, the changing of the agency regulations, and legal interpretations of law, it may not. I personally do not see how any individual making a few loans can earn a worthwhile return in the owner occupied residential arena. The returns are limited, the penalties for a mistake can be severe, and the legal council needed is expensive.

The way people profit in this area is the purchase of notes at a large discount to mortgage balance. For people selling houses they own owner financing may help them obtain a price enough above market to justify the above.

For loan originations, commercial or investment mortgages are a much more free market arena.