Private Money Lender Basic Questions

[Ed Russino]

Clearly there is a lot of due diligence required when acting in the capacity of a private money lender, but are there any particular measures that one takes to help to ensure your financial protection such as the ability to place a lien on the property for which you are providing the loan?

Is there a standard template contract that you use for each loan, or do you have a customized contract with specific terms drawn up for each deal?

Along the contract lines; do you use an attorney for each individual transaction?

Finally; do you typically provide all of the funding for a particular deal, or is it possible to enter into deals where your loan is only a portion of the funds being sought by the borrower, who will then use multiple private lenders for a single property?

 Thanks in advance for the insight.

[Jeff S.]

It’s unfortunate when unknowing private lenders allow even a well-intended borrower to provide the paperwork and originate a loan. Most borrowers don’t fully understand all the paperwork required to properly protect their lenders and often think all they need is a note and deed of trust or mortgage.

This thread should give you an idea of the paperwork required in private loan: Private-Lender---Forms-Required

You rarely read discussions here about lender’s title and hazard insurance requirements, personal guarantees, appraisals, 1003’s, and lender instructions. Few borrowers understand how to read a title report, their state’s usury requirements, or the difference between a consumer purpose and business purpose loan.

For these, you really need either a knowledgeable lawyer or an experienced hard money lender. HML's are used to private loans, will have vetted paperwork, and some will originate a loan for you for a fee. A good HML will also help you evaluate the property, the borrower, and even you, for suitability. Lawyers don't typically do this. (Not a solicitation, nor do we.) Either way, this is your hard-earned money, @Ed Russino, and you should protect yourself.

With regard to multiple lenders on one loan, this is a state-specific question. Some states allow multiple lenders on one loan and some don’t. In CA, for example, a broker could include up to 10 names on one deed of trust and record it in first position, thereby securing each investor with a lien on the property. Unsecured loans are nothing more than a handshake, and like second position loans, are something you should avoid.

Good luck, Ed.