How to move around private money?

Question

If I am just starting out and have a private investor who is willing to loan me the cash needed for a flip, how do I get that money from his hands to closing?  Is it customary to ask the partner to write me a check personally (we have a trusting relationship) or do I simply have him write the check to the title agency at closing?  How does that process traditionally work/look?

Mark Gallagher · Answer

@Josh C.

Given what you're describing I think you want it to work like this and I'll make some round numbers..

123 Main Street Purchase Price $100,000, ARV $150,000, $20,000 Repairs

Investor Joe is putting up 25% down payment ($25,000) and obtaining $75,000 mortgage on 123 Main Street.

Investor Joe is giving you $20,000 to perform the repairs.

House sells for net $140,000 = $20,000 in profit. Investor Joe gets his $25,000 down payment back, $20,000 in repairs back, and you split the profit $10/$10.

Regarding title, you could be on the title but not on the mortgage provided the lender allows it. I'm not sure you'd really want to be on title though, because if Investor Joe stops paying the mortgage, you'd be responsible for the debt accrued.

Easiest way is to think of it as Investor Joe buying the house. You're handling the rehab. All you need to determine is how Investor Joe is giving you the funds for the rehab. If he's located close by, he could give you a few thousand to start, and check in on the progress and then give you a few thousand more, in draws, as you go along. Then you just need a simple agreement on how you will split the profit and how you will be paid. If you know this person, you can likely just do a handshake agreement. Otherwise, some sort of simple written agreement verified by your attorney.

Regarding how money is brought to closing, Investor Joe would simply bring certified funds or send a wire to the closing company/attorney.

Josh Eitingon · Answer

@Josh C., any real estate attorney can definitely help you set up the structure.  There is a cost associated with it but, I think the piece of mind associated with creating the LLCs is well worth it.

Mark Gallagher · Answer

@Josh C.

Not sure how you can pull off what you're stating since Joe Investor doesn't have enough funds to make a cash purchase. I think the only way you could do it would be for YOU to obtain the 203K loan, and have him "gift" you the funds you need to close. As long as you can put down 3.5%, his out of pocket would be very limited.

Josh C. · Answer

@Mark Gallagher - the strategy that you described is exactly what we have happening.  The only possible change is that we may do some 203k's where eligable so the private money lender would not have to front that money.  The problem I am facing is that I do not want to rely on him for pretty much anything other than capital.  Meaning, I do not want to rely on him to have to find a bank, secure a loan, scheduling closing, do all of the necessary paperwork.  He prefers to be hands-off.  It sounds like to only ways to do this are to take the loan/title in my name or to form a partnership/LLC.  Could we also open a joint bank account and both be on the note and title?

@Josh Eitingon - I am definitely interested in hearing more about the managing LLC structure.  I have read a little bit about the series LLC but it seemed to be more of a headache than anything at this point of my business endeavors.

Josh Eitingon · Answer

@Josh C. a few questions asked but, I would suggest your purchase the property in an LLC.  That gives you and your investor some additional protection even if you sign on loan docs, etc. personally.

The structure that I use for multiple reasons is an LLC for each property as the purchasing entity.  Then, a managing LLC which have a level of ownership in each purchasing entity.

Happy to provide more detail if you are interest.

Best of luck,

Josh

Verna M. · Answer

I used a private lender for a "cash downpayment"  I had a private loan agreement with my lender. 80k and  I just needed the money for 90 days.

We opened a joint bank account, my lender deposited money into that account.  I wired the money to escrow from that account. I took title in my name only.

The bank required us to sign a letter stating we both agreed to the wire, and understood the funds were  being used for an asset for only one account holder.  Nothing notarized, just a signed and faxed letter.

I closed on the house.  Then I paid the note as due.

Josh C. · Answer

@Mark Gallagher - I think you stated it better than I did :) - exactly, I have an investor willing to contribute X amount of money, and I am just curious how that whole transaction works from a paper standpoint.  I don't think there are any limitations, he can take the loan in his name, then we split title, or I could take the loan in my name and still split title... but if we did the latter, would the money ever have to exchange hands from him to me?  From this discussion, I conclude that it does not - we just need to bring it to closing.  As long as whoever is putting the loan in their name passes underwriting, there should be no issues.

Mark Gallagher · Answer

@Josh C.

We need some more details apparently..

You're trying to get a conventional loan from a bank, using someone else's credit? And then they're going to give you the money to fix it?

Josh C. · Answer

@Mark Gallagher - well I have actually been toying with that question myself.  Do I start an LLC now?  Wait until I get a couple properties or few more flips complete, then form the LLC?  I was told in another discussion that I cannot borrow with a traditional mortgage in the name of an LLC.  As this is really my first purchase with the intent of flipping/investing, I am not sure how to go about the process.  If not an LLC, my initial thought was to have the investor take the mortgage out in his name and then share title 50/50.  Our goal would be to have the project complete (purchase closing to sale closing) within 2 months.

How to move around private money?

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