Private Financing Lined Up. Who buys the house?

Question

Hi all,

Glad to finally be partaking in discussions here at BPO. Reading the various forums has been a great experience thus far.

I am looking to purchase my first REO property and expect to place my first offer within the next couple of weeks. I myself do not have the necessary capital for an all-cash offer, but have successfully secured private financing from a family member. What is the best way to structure the deal? Do I have my investor purchase the property directly? Do I have the investor cut me a check, which I deposit, and then use to purchase the house? Do I start an LLC and have my investor be considered a partner?

Any guidance on this matter would be appreciated!

Bill Gulley · Answer

Might look to profiles of posters too, might get an indication of who you might rely on, do your due diligence. Saying family member isn't definite enough in legal aspects, a third cousin or "immediate family" member, mother, father, sister, brother are going to be exempt lenders. :)

Bill Gulley · Answer

Welcome Zoran to BP! 3 basic ways, put them on title with you, if they are a close family member the could do a note and deed of trust or you can form a partnership in an LLC and use the capital account as to the % of ownership of the assets. Simply not enough information of the deal to say which is best. Generally, the LLC is better for investors. If your father for example makes you a loan he would be exempt from most federal lending laws as a family transaction, otherwise lending money can fall under state and federal laws. You cant take title jointly, personally, which is the easiest way and work things out between you, just make sure you are insured. I assume you're flipping. You need to see an attorney! Internet forums are great for ideas, but never do financing based off of what some guy might do, or getting information from folks who think they know something. The way Joey does something may be illegal, unethical, or just bad business practice and Joey may have been doing something for years, just being lucky. See an attorney in your area to ensure what you do is customary in practice and lawful. Don gives pretty good advice, there are some others too, but then there are others just puffing away with comments. Good luck. :)

Zoran M. · Answer

Thanks for the tip, @BillGulley. The family member is my uncle.

Zoran M. · Answer

Thanks for all of the replies! To be clear, the investor is a family member. I'll look over the responses more closely to see which one suits me best and will follow up with any additional questions.

Muhammad Abdullah · Answer

Zoran First off congrads on your new venture I truly wish you the best. Now, down too business my first recommendation is to find something very simple where you get the neccesary experience and make a quick profit. When doing business with family you have a very small margain for error. Establish an LLC separate from your private investor. Put everything in written be clear from the beginning about all aspects of compensation and profits. If you're looking to hold this property then what exit plan do you have for repayment.

Don Konipol · Answer

@Zoran Miling , handle closing at a title company. Best to have attorney, or title co attorney draw up closing docs, including note and deed of trust or mortgage, depending on state. At closing, your lender wires funds to title co; these funds are held in escrow until (1) warranty deed transferring title is executed by seller and (2) any down payment funds are produced by yourself and note/deed of trust are executed by you. At that time funds are released to seller, less any payoffs of existing liens and expenses related to transaction. Warranty deed (transferring title) and deed of trust (securing note with the property in question) are recorded (usually electronically) by title co with the county clerk office. Hold title in your name or name of an entity you own; your lender is secured by first lien on property and possibly by your personal guarantee.

Darrell Shepherd · Answer

Some answers to that are state specific and vary some with what your exit is. Plus people structure their businesses in different ways. Saying that, Ideally you'd have an LLC or Land Trust to purchase the property with so your personal name isn't on title, then your lender wires the money to close and the closing attorney files a security deed on their behalf so they have to get paid in order to transfer the title. Basically, the same routine a bank does, YOU buy it, THEY get a mortgage on the property. Just a lot less headache without the million pages of BS a traditional mortgage makes you sign. You'll sign a note, a security deed, your HUD1 and probably a page or two of lawyer CYA stuff. In and out pretty quick when the banks arent involved. You guys just need to do up a note and have it signed at closing. Back door me if you want the one I use. Your lawyer probably has one, too. I actually file my own security deeds and do the note outside of closing, but my lender knows I wont screw him over, its better to let the lawyer do it if you haven't done any before. You can do it in your name, too. Don't miss a deal because you dont have an LLC, but from an asset protection standpoint the less that shows up on an asset search the better, so you dont want things in your name if you can help it. Not everybody does it that way, but they should. One thing, if you plan to put the title in a trust or LLC, the offer has to be made in that name on an REO, they wont let you change it once its accepted. Also, around here there is an intangibles tax if the loan is over 36 months long, so I always do a 35 month balloon. You should check with your attorney and see if there is something similar there. Best of luck!