The Private Lending Twist

In my most recent blog post, a reader dutifully acknowledged that some States require private lenders obtain a license to make private loans. If your business resides in one of those States, I say, follow the rules and get whatever license your State requires. Always check with your legal counsel and find out the rules of engagement…then go make good returns being secured, just like a bank.

The Alternative…

This a secret…so keep it to yourself! Make a ‘loan’ that looks, tastes, smells like a private loan but is not a private loan. For the one who says, “you can’t do that”…(…if I had a penny for every time someone told me I can’t do something…) I have used this strategy several times in my own business and my legal counsel has OK’ed it. (Be sure to check with your own legal counsel and see if this works in your area.)

In a nut shell, while the Purchase and Sale Agreement document is in your ‘borrower’s’ name, they assign their property to you at the closing table using a simple Assignment of Deed of Trust document. You then immediately sell the property back to the ‘borrower’ at a higher price(which equates to what your loan point fees would have been) with a longer closer date, say 6 – 12 months. Use a garden-variety Purchase and Sale Agreement or a Real Estate Contract – depending upon your State law, to resell the property to your ‘borrower’. Your ‘borrower’ will only record that document if you, as the now Seller dies, becomes incapacitated, or becomes unethical.

Then, give your borrower an Early Entry Access document which will allow them to enter the property you sold them to make improvements. Ensure this document has a monthly ‘rent’ clause which is paid to you which equates to the interest you would have charged the ‘borrower’ if you would have made him a loan. Upon completion of the improvements, your ‘borrower’ will list the property and sell it. Remember, you will have to sign the listing agreement and deal with the buyer’s agent and closer because you are still vested as owner.

At closing, you instruct the closer to cut two checks – one to your ‘borrower’ who also gets a 1099 IRS form, and two, to you for the principle and remaining ‘rent’ owed. Granted, you have got to have a positive relationship with your borrower and be in good standing in the local community so your borrower will know you won’t take their property and run.

Personally, I use this strategy when I cannot make my borrower a loan. Sometimes a borrower comes to me who recently just got out of a BK, bankruptcy, or who has tax liens, or who has large judgments. Instead of passing on what I deem to be a good deal, I use this strategy. As you know, if a person who has one of these issues, buys real estate, that tax lien or judgment attaches itself to that buyer’s property. Because, the law says the lien or judgment will get paid before the buyer takes any profit. So, the buyer cannot take title to the property.

The Takeaway

Just because your borrower does not qualify for a loan or you don’t have a license to make a loan, you can still do business with your ‘borrower’.

To Your GOOD Wealth!

Photo: propertysnaps

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.