I need some advice about a hard money deal I'm working on.

Greg Kimura · 2015-11-17T02:36:26-08:00

Sorry, this is a repost - I had a bad title on the last one. Here goes:Hi Everyone,I'm new to this site and I was looking for help to do a hard money loan. I have lent money to friends and family in the past and after the last debacle, I was told that I should have a lien position behind the first mortgage. I have no idea how to do this. Here is the information on the loan: My sister has a house that she would like to get a second mortgage on. The banks won't lend money to her, due to her debt to income. I have some extra funds and I want to help her. I know it sounds crazy, but I've agreed to a 2% loan (under 10%) with everything due in a balloon payment in 5 years (interest and principle). I have the loan documents written up and I have the money ready to lend. I want to make sure I have a lien position under her first mortgage, just in case. Her first mortgage is for $75K, the house is worth $165K and I'm going to lend her 100K. I know it's more than the property is worth, but she's my sister and she needs the help.And advice on what to do and how to do it. I'm trying to keep the expenses down.Thank you.Greg

Kris Haskins

Investor · hampton, VA · Member since 2009 · 428 posts · 249 votes

10y

good job thinking about ur security. what is she going to do w the money? eg invest in real estate, pay bills and live off of it?? ultimately it may be tuff to 4close and get ur $ back if this is her owner occupied house. i hv a horror story to share w u after u answer the 1st Q above...

1 Reply

Zlatan Omeragic

Pittsburgh, PA · Member since 2015 · 41 posts · 16 votes

10y

My advice is to call your local title company/attorney. I have a sister as well, and if she needed money I would give it to her. If I felt the need to loan her money, she didn't really need it.

1 Reply

Charlie Fitzgerald

Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes

10y

Give her the money and forget about the 2nd. In this case, your 2nd is behind a $75,000 1st. In California, it would cost you more to foreclose and pay off the 1st to get the home in return for non-payment. I seriously doubt you would foreclose on your sister anyway.

I would do a simple promissory note loan to her...the 2nd offers you very little if any security.

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Greg Kimura

OP

Investor · Castaic, CA · Member since 2015 · 19 posts · 4 votes

10y

Hi Kris,

Thanks for your response. Here are the answers to your questions. She's going to use the money to live off of and also for some overdue repairs on the house. The house is one of her rental properties. The house does have positive cash flow, but since she's not working, she uses the income for her living expenses. She has one more rental plus we're 50/50 on another, so she has 2 1/2 houses of income.

In 10 years, she can start taking money from her retirement account. She told me that she should be able to pay off the loan in 5 years, but worst case is that she may need 10. Our agreement on the loan is for one 5 year option at 5% interest, again due in a balloon payment.

The other reason why I need to have a lien position is that my better half wants it. She and my sister get along very well and are good friends - it's just something that she wants. I get it and we're all okay with it.

Thanks again for your help.

Greg

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Jeff S.

Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes

10y

Your better half is very wise, @Greg Kimura. Loaning your sister $100k, even secured by a note and deed of trust, at low interest and without any payments until she sells the house, could easily be construed by the IRS as a gift. Plus there are issues with imputed interest. You could easily be hit for gift taxes. Also, Dodd-Frank requires that even family loans be amortized.

To protect yourself, keep your better half happy, and so your sister knows that this is a real loan that is expected to be repaid, you need a note and a deed of trust or mortgage properly originated and in compliance with all state and federal laws, plus a handful of other disclosures.

Since you are clearly helping a family member and not looking to get into the lending business, rather than recommend you seek a CPA and lending attorney, there are companies that help facilitate family loans for exactly your purpose.

National Family Mortgage, whom I think is related somehow to FCI the giant loan servicer, does exactly what you need. I've never used them and have absolutely no relationship with them, but it appears they can help you at modest cost. There might be other companies who do this as well.

It's not clear to me you could loan using the terms you agreed with your sister (she will likely have to make some payments) but this will protect everyone and could keep some peace in the family.

Good luck, Greg.

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I need some advice about a hard money deal I'm working on.

I need some advice about a hard money deal I'm working on.

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