Promissory Note Written to Investment Group

[Trevor DeSimone]

Investment Info:

Single-family residence private money loan investment in Garden City.

Cash invested: $52,000

This is the second time I've acted as a PML; the connection was made on Facebook of all places; A local group had advertised the need for private money to fund rehab on a fix and flip in Ohio. After some introductory calls and vetting the business, we agreed to a $52,000 note with a 5-month term at a 17.38% return with the expectation we could perform future business.

What made you interested in investing in this type of deal?

I preferred the relatively guaranteed return within a short time frame.

How did you find this deal and how did you negotiate it?

Facebook; Reached out and made contact with the group and went from there. Have to put yourself out there!

How did you finance this deal?

I liquated my brokerage portfolio to fund the deal. Better rate of return based on my investment history in the markets.

What was the outcome?

Pending; Note term ends in December.

Lessons learned? Challenges?

Have solid negotiation and people skills; I was able to raise the interest rate from the initial offer after building a good repour with my point of contact, learning what the competition was offering, and then coming in at a lower price point. I was told they would be willing to meet me in the middle and preferred working with me because I was well-liked.

[Robert Ellis]

Did you ask for a personal guarantee from at least one principal or other collateral? 

[Trevor DeSimone]

Quote from @Robert Ellis:

Did you ask for a personal guarantee from at least one principal or other collateral? 

I would technically hold a second lien position on the property; However I'm learning that perhaps I should be recording this lien properly so that it is "attached" to the property. Also I'm not afraid to say I don't know everything and I do expose myself to a certain amount of risk in doing so. The company also holds a number of additional assets, which could be liquidated in the event of default. A provision in the note also covers reasonable attorney and legal fees in the event I had to progress to litigation.

[Rick Pozos]

You need a deed of trust or mortgage that is recorded in the deed records or county clerk's office. It can be a second, but if they choose NOT to pay you, right now, there is no recourse. With a deed of trust or mortgage there is notice to the world that your 2nd is due on sale or according to the terms. You can also foreclose on a 2nd that is recorded.

You can NOT foreclose on a promissory note alone.

[Robert Ellis]

Quote from @Trevor DeSimone:

Quote from @Robert Ellis:

Did you ask for a personal guarantee from at least one principal or other collateral? 

I would technically hold a second lien position on the property; However I'm learning that perhaps I should be recording this lien properly so that it is "attached" to the property. Also I'm not afraid to say I don't know everything and I do expose myself to a certain amount of risk in doing so. The company also holds a number of additional assets, which could be liquidated in the event of default. A provision in the note also covers reasonable attorney and legal fees in the event I had to progress to litigation.

 a lot of advanced hard money lenders are actually taking title so they don't ever have to foreclose. depending on the loan amount I think you should put more carve outs to protect yourself. I'd get a personal guarantee from every principal on site, schedule regular inspections required for progress, ask for permit inspections every few weeks, etc. you should absolutely record the lien as well. whatever assets they hold you won't be able to do anything with unless they are collateralized with your note as well. whoever drafted your paperwork didn't do their jobs. I wouldn't just sign what these flippers are putting in front of you. these guys are bragging about raising millions of dollars. I'd recommend having an attorney review and make sure it's more than fair to you too. doesn't seem like it in this. people think real estate flipping is low risk but I can tell from experience it's far from it. wait till they don't pay a contractor and you have a mechanics lien. that trumps yours 

[Trevor DeSimone]

Quote from @Rick Pozos:

You need a deed of trust or mortgage that is recorded in the deed records or county clerk's office. It can be a second, but if they choose NOT to pay you, right now, there is no recourse. With a deed of trust or mortgage there is notice to the world that your 2nd is due on sale or according to the terms. You can also foreclose on a 2nd that is recorded.

You can NOT foreclose on a promissory note alone.

Thanks for your response Rick. Hypothetically, assuming the lender was unable to pay back the loan, and we went to litigation, couldn't we go after other assets held by the entity? If I was relatively confident they had other collateral, is my investment still secure?

[Rick Pozos]

nope. You can go after the property IF you have a mortgage or deed of trust.

Foreclosure is the way to get made whole, but you need a mortgage or deed of trust. 

You need to go through a title company or attorney, YOUR ATTORNEY, not theirs and have them explain your state laws. By the questions that you are asking it sounds like you are about to make a VERY risky move. Education is SO important. Dont get all your knowledge from here and YouTube. PAY an attorney. They know the law.

[Jeff S.]

I hope you have not already wired your money, @Trevor DeSimone. You did not make a real estate loan. You made a completely unsecured business loan to a Facebook “investment group” of some sort. Without a mortgage, you do not have a lien on the property and you cannot foreclose. Without a personal guarantee, you cannot go after anyone’s assets. You are not in second position, which would be unwise in any case, you have no position. At best, if you could afford it, you could sue the company to which you loaned your money for a judgment and then try to collect -- on an out-of-state debt.

A note alone is simply an IOU. It has no teeth unless secured by a recorded mortgage. If you are lucky, you will get paid back. As an out-of-state lender, did you consider the usury and licensing restrictions in Ohio? Did you get a lender’s title insurance policy? Heaven knows how many others like you loaned them money and also think they are in second position. How are you covered on their fire and hazard insurance?

These guys might not have acquiesced to a higher interest rate because you, “Have solid negotiating and people skills.” That's hubris.  I’m sorry, but it's very possible/likely they did it because they hooked a live one. For your sake, I really hope I’m wrong, but this is not how you loan money, Trevor.

“I preferred the relatively guaranteed return within a short time frame.”

What makes you think this loan is “… relatively guaranteed?” And why are you liquidating an entire brokerage portfolio for strangers you met on the Internet? Are there no real estate clubs in NH where you can meet and vet real estate professionals face-to-face as well as physically vet and evaluate the property you might actually own? Have you spoken to a lending attorney to learn how real estate loans are made in general and more specifically in New Hampshire and Ohio?

“Have to put yourself out there!”

No. You don’t. Sorry, but this is just a nonsensical aphorism and not the basis for a business. First, you educate yourself.

I know I’m being harsh and I’m sorry for the cynicism, Trevor. I really hope this works out for you.

[Tom Gimer]

Quote from @Trevor DeSimone:

Quote from @Rick Pozos:

You need a deed of trust or mortgage that is recorded in the deed records or county clerk's office. It can be a second, but if they choose NOT to pay you, right now, there is no recourse. With a deed of trust or mortgage there is notice to the world that your 2nd is due on sale or according to the terms. You can also foreclose on a 2nd that is recorded.

You can NOT foreclose on a promissory note alone.

Thanks for your response Rick. Hypothetically, assuming the lender was unable to pay back the loan, and we went to litigation, couldn't we go after other assets held by the entity? If I was relatively confident they had other collateral, is my investment still secure?

With only a Note you would need to obtain a judgment against the borrower in order to pursue other assets (if any actually exist). And, if the borrower files BK before you obtain that judgment, that $52k goes poof.

That's why you always need to record a proper security interest (mortgage/deed of trust) against the real estate. A mortgage lien would not be affected by a subsequent BK.

Shocking fact pattern. Hope it works out.

[Chris Seveney]

Quote from @Trevor DeSimone:

Quote from @Robert Ellis:

Did you ask for a personal guarantee from at least one principal or other collateral? 

I would technically hold a second lien position on the property; However I'm learning that perhaps I should be recording this lien properly so that it is "attached" to the property. Also I'm not afraid to say I don't know everything and I do expose myself to a certain amount of risk in doing so. The company also holds a number of additional assets, which could be liquidated in the event of default. A provision in the note also covers reasonable attorney and legal fees in the event I had to progress to litigation.

if you did not secure it to the property and it is unsecured, that does not stop them from getting additional loans on that property or even selling it, making a profit and paying you back.

Any type of lending should also be done where you are securing an asset. If its being given to an entity then you should also get a PG.

[Trevor DeSimone]

Quote from @Jeff S.:

I hope you have not already wired your money, @Trevor DeSimone. You did not make a real estate loan. You made a completely unsecured business loan to a Facebook “investment group” of some sort. Without a mortgage, you do not have a lien on the property and you cannot foreclose. Without a personal guarantee, you cannot go after anyone’s assets. You are not in second position, which would be unwise in any case, you have no position. At best, if you could afford it, you could sue the company to which you loaned your money for a judgment and then try to collect -- on an out-of-state debt.

A note alone is simply an IOU. It has no teeth unless secured by a recorded mortgage. If you are lucky, you will get paid back. As an out-of-state lender, did you consider the usury and licensing restrictions in Ohio? Did you get a lender’s title insurance policy? Heaven knows how many others like you loaned them money and also think they are in second position. How are you covered on their fire and hazard insurance?

These guys might not have acquiesced to a higher interest rate because you, “Have solid negotiating and people skills.” That's hubris.  I’m sorry, but it's very possible/likely they did it because they hooked a live one. For your sake, I really hope I’m wrong, but this is not how you loan money, Trevor.

“I preferred the relatively guaranteed return within a short time frame.”

What makes you think this loan is “… relatively guaranteed?” And why are you liquidating an entire brokerage portfolio for strangers you met on the Internet? Are there no real estate clubs in NH where you can meet and vet real estate professionals face-to-face as well as physically vet and evaluate the property you might actually own? Have you spoken to a lending attorney to learn how real estate loans are made in general and more specifically in New Hampshire and Ohio?

“Have to put yourself out there!”

No. You don’t. Sorry, but this is just a nonsensical aphorism and not the basis for a business. First, you educate yourself.

I know I’m being harsh and I’m sorry for the cynicism, Trevor. I really hope this works out for you.

Jeff this is a very well-written passage from someone who clearly has a lot of experience in PML. I do appreciate you taking the time to respond and your passion on the subject is notable. 

I'm aware that my skillset is limited and experience minimal and that I'm missing key pieces of information regarding PML that I intend to correct for future deals.

My only disagreements with you would be that strangers on the internet and strangers from a real estate club in NH are both strangers to me. You, yourself are another stranger. I spoke and vetted the individuals I'm working with now the same as I would if it were a face-to-face conversation. Where I will very much agree with you is that you've pointed out I'm at significant risk with my investment for not speaking with an attorney prior to my investment, not recording my note, and exposing myself to potential risks without access to the lender's title insurance. 

I do very much appreciate the lesson, and no need to apologize for the cynicism, it only expresses your concern, clarifies the severity of my method of doing business, and persuades me to seek additional resources. 

Besides speaking with a lending attorney, would you be willing to offer any other recommendations in ways I could educate myself properly on the subject? Books, courses, anyone else I should speak to?

Maybe you could clarify a few questions I have right out of the gate;

Can an entity give a personal guarantee (meaning can the entity guarantee to pay debts do with other assets owned by the entity?) Or are personal guarantees strictly from "persons".

How at risk is my position not being on the fire and hazard insurance? If the policy pays to the borrower, wouldn't the borrower pay me as the lender? (Assuming they had proper coverage, such as an Actual Cash Value policy based on the ARV). Or is this really to ensure that the borrower has proper coverage?

Once again, Jeff, thank you. I am still feeling secure about my current investment, and getting routine updates on progress, but I think a tactical pause once this note is paid is needed, and I appreciate you shedding some light on the matter.   

[Trevor DeSimone]

Quote from @Tom Gimer:

Quote from @Trevor DeSimone:

Quote from @Rick Pozos:

You need a deed of trust or mortgage that is recorded in the deed records or county clerk's office. It can be a second, but if they choose NOT to pay you, right now, there is no recourse. With a deed of trust or mortgage there is notice to the world that your 2nd is due on sale or according to the terms. You can also foreclose on a 2nd that is recorded.

You can NOT foreclose on a promissory note alone.

Thanks for your response Rick. Hypothetically, assuming the lender was unable to pay back the loan, and we went to litigation, couldn't we go after other assets held by the entity? If I was relatively confident they had other collateral, is my investment still secure?

With only a Note you would need to obtain a judgment against the borrower in order to pursue other assets (if any actually exist). And, if the borrower files BK before you obtain that judgment, that $52k goes poof.

That's why you always need to record a proper security interest (mortgage/deed of trust) against the real estate. A mortgage lien would not be affected by a subsequent BK.

Shocking fact pattern. Hope it works out.

 Thanks for the insight Tom, is it common practice to record a deed of trust during the closing or can this done with relative ease after an individual or entity owns the property?

[Trevor DeSimone]

Quote from @Rick Pozos:

nope. You can go after the property IF you have a mortgage or deed of trust.

Foreclosure is the way to get made whole, but you need a mortgage or deed of trust. 

You need to go through a title company or attorney, YOUR ATTORNEY, not theirs and have them explain your state laws. By the questions that you are asking it sounds like you are about to make a VERY risky move. Education is SO important. Dont get all your knowledge from here and YouTube. PAY an attorney. They know the law.

 Hey Rick, 

Thanks for taking the time to add to the post. Other than speaking with an attorney, and recommendations for education that are vetted and trusted by yourself?

[Rick Pozos]

My recommendation is do some rehabs and borrow money from hard money. Look at the docs that the title company prepares. Look and see what the hard money requires of YOU. THAT is what you should require of others that you are lending to.

[Tom Gimer]

Quote from @Trevor DeSimone:

Quote from @Tom Gimer:

Quote from @Trevor DeSimone:

Quote from @Rick Pozos:

You need a deed of trust or mortgage that is recorded in the deed records or county clerk's office. It can be a second, but if they choose NOT to pay you, right now, there is no recourse. With a deed of trust or mortgage there is notice to the world that your 2nd is due on sale or according to the terms. You can also foreclose on a 2nd that is recorded.

You can NOT foreclose on a promissory note alone.

Thanks for your response Rick. Hypothetically, assuming the lender was unable to pay back the loan, and we went to litigation, couldn't we go after other assets held by the entity? If I was relatively confident they had other collateral, is my investment still secure?

With only a Note you would need to obtain a judgment against the borrower in order to pursue other assets (if any actually exist). And, if the borrower files BK before you obtain that judgment, that $52k goes poof.

That's why you always need to record a proper security interest (mortgage/deed of trust) against the real estate. A mortgage lien would not be affected by a subsequent BK.

Shocking fact pattern. Hope it works out.

 Thanks for the insight Tom, is it common practice to record a deed of trust during the closing or can this done with relative ease after an individual or entity owns the property?

Deed of trust and note are executed at the same time -- before any money is disbursed from escrow. The problem in this scenario is the borrower(s) may not want to sign anything else. The deal you have may be the deal they made.

[Jeff S.]

I usually stop reading a post when I see the word, “Facebook” because I know nothing good will follow. I’m glad you recognize you have much to learn, @Trevor DeSimone, and you seem to have the right attitude.

You need to spend an hour with a good lending and securities attorney. This is not the same as a real estate attorney. Your discussion should include the general lending process in NH and perhaps northern MA, usury, licensing, paperwork, business purpose vs consumer purpose loans (which few here really seem to understand), and anything else the attorney recommends. This is where you will get your loan documents; NEVER from a title company. There will be many of them and they will be state specific. @Ann Bellamy, who lends in your neck of the woods, used to be prolific here and will hopefully chime in.

I strongly suggest you only loan locally and I disagree with your disagreement (Ha!) that internet strangers are the same as local strangers. There is no way you will get to know, like, and trust someone over a phone conversation as you will going to lunch once or twice and looking at a few of their properties with them. We put our hard-earned money where our mouths are on this and it’s the basis for our entire loan process. Of course, we still pull comps, do our own evaluations, and physically walk through every house to confirm the rehab estimate, but the borrower is key in our view.

Over the years, I’ve published our process a few times on BP which you can read in this thread. My post is still about 95% accurate.

“How at risk is my position not being on the fire and hazard insurance?”

If there were a fire, the insurance company would make payment to both the borrower and mortgage holder. If you are not a mortgage holder, payment will go directly to the borrower who can do whatever he or she wishes with the money. I’ve always liked Thailand, but France and Spain are also very nice.

“Can an entity give a personal guarantee …”

Whether an entity or a natural person, whoever is on the note is a guarantor. A personal guarantee is used when you additionally want other people/entities to guarantee the loan. If you made the loan to an LLC you would always want all members to sign the PG in their names plus anyone else you can agree to. The more the merrier.