Private lender and Investor Agreements

[Elvin O'Neal II]

Hey BP... I have been flipping and renting for some time and now I'm attracting some private money people (friends that I know) that want to fund deals.  Does anyone have any standard agreements they don't mind sharing so I am do recreate the wheel when setting up terms and contracts?  Yes they are friends but I think its best for everyone to have legal documents in place.  

Also any advice with working private money would be helpful.  Thanks in advance.

[Jeff S.]

It’s good you found people who trust you, @Elvin O'Neal II, and I like your attitude. This is not the way to borrow money from a friend, however.

Can you imagine being offered what could be a life-changing amount of money from someone who trusts you and telling them they will be protected by loan documents you obtained from the web?  How do you think they would feel? Loan documents are state specific. There are similarities, but there is no such thing as a standard agreement. Nor should you be obtaining loan documents from a title company.

Title companies are insurance companies. They have attorneys but these are not your attorney nor that of your lender. Title companies will review some of your loan documents to protect themselves and no one else. No lender should rely on a title company to prepare loan documents and expect to be fully protected or in compliance with all state and federal laws. Plus, you’ll be lucky if they provide a note and mortgage. There is much more to a complete set of loan docs than these.

A complete loan package consists of many more documents than a note and mortgage. Among these is an ALTA 2006 lender's extended title policy that is obtained from the title company. This is normally included with the buyer’s title policy. It should be written for 125% of the loan amount. All exclusions, such as prior liens, unpaid taxes, and any other encumbrances should be paid and eliminated before the policy is written. The exclusions will appear in the preliminary title report which your lender or, more likely in this case, their representative should read and understand.

One super important document that you hardly see mentioned on this board, is the Lender’s Instructions. You won’t obtain these from a title company. These specify all the documents that must be signed and how they are to be handled. For example, if there are a few lenders on a property, in what order does your lender’s mortgage get recorded (IMO it better be first). There are too many posts here about lenders who didn’t know they were unprotected in second position, or no mortgage at all when they thought they held a first position lien. The lender’s Instructions also specify fire and hazard insurance requirements and how your lender should be named (mortgagee), endorsements to the lender's title policy, and it will reference all the documents you will sign and/or initial -- even the pages on which these occur. This document will be signed by escrow, title, and your closing attorney, as applicable, who must agree they will follow it. This is enforceable.

Even though you are now friends, I hate to say it, but nothing will change a relationship faster than when money is involved. I know you’ll ignore this but take heed doing business with friends or family. Your friend should have you sign a personal guarantee. If nothing else, this will make it easier to sell his or her loan if necessary.

There are also many disclosures that are required. Some are federally specified such as the ECOA appraisal disclosure, Fair Lending Notice, Anti-Money Laundering declaration, Hazard Insurance disclosure, Privacy, and a few others. Your state probably has some they require. (Ok. These you can probably look up online).

There are also Environmental Indemnity agreements.

All of these documents and a few more will form a complete loan package, and this should be prepared by a lending attorney used to private loans. I don’t know how loans are originated in GA, Elvin, -- if a license is required, a broker, or how your lender complies with usury. These are discussions your friend should have with a knowledgeable lending attorney. Please note that a lending attorney is not the same as a real estate attorney, who might only do conventional loans or spend a lot of time with leases, evictions, or landlord-tenant disputes.

We lend our own money against flips.  Privately, I can recommend a lending attorney we’ve used to draw docs who works nationwide. The more local the better in my view and one way to find a lending attorney is to ask some local hard money lenders who they use. Call around.  Lending attorneys can be as rare as hen’s teeth, and you’ll likely hear the same few names over and over.

Your friend should meet with this attorney as his or her client. You should sit in on this conversation to educate yourself, as well.

Best of luck to the two of you, Elvin.