First time Private Lending - keep my investment safe and tips

[Vikas Grover]

Hi 

For first time private lending to rehabber - trying to figure out - how this works

1. What should be lending terms?

2. What if rehabber drops/delays the project?

3. What if property does not sell as fast you would like?

4. How much should you lend?

5. What paperwork/contract needs to be done?

6. Reward (interest rate etc)- what are the rewards for lending that private money lender should ask for?

[David Garner]

Hey Vikas

1. What should be lending terms?

Terms should suit you, the borrower and the project. Rehab loans typically run at 6 to 12 months.

2. What if rehabber drops/delays the project?

Be prepared to take over the project yourself, or take control of the real estate and sell it, or cut the borrower some slack and extended your term in exchange for points or higher interest.

3. What if property does not sell as fast you would like?

Same as above.

4. How much should you lend?

Subjective. I have lenders that loan me 100% of acquistion and rehab, but I've done a ton of business with them and always performed. 

Typically you will want to loan a % of the contract, plus a % of the rehab. That might be 80% of the contract and 100% of the rehab, or some other ratio that suits you. Just make sure your borrower has some skin in the game... this is your first rodeo together.

5. What paperwork/contract needs to be done?

Loan agreement

Promissory note

Mortgage deed or deed of trust

Personal guarantee

Get these drafted by an attorney. Don't skimp here, you might rely on the paperwork later to get your money back.

6. Reward (interest rate etc)- what are the rewards for lending that private money lender should ask for?

Points upfront

Late fees

Origination fee

Underwriting fee

Usually just points and interest with private money.

Also....

Close through a proper title co or attorney who will ensure full title work is done and your deed is recorded properly.

Have the borrower pay for lender title insurance.

Make dure the borrower has all the correct insurance for the property, and licences, permits and insurance for the project.

Hope that helps.

DG