Private money - contracts/notes

[Ronald Fontenot Jr]

I have spoken to a few people who may be interested in lending me money to help in building my portfolio. I'll be starting with some flips to build cash reserves. 

I understand that a promissory note can be used to secure their investment with me. Is there any other contract or lein necessary or recommended to aid in making my potential investors comfortable lending to me? I want to appear and be a professional as possible. Any advice is appreciated!

[Jeff S.]

The promissory note, which is really just an IOU, does not secure the investment, @Ronald Fontenot Jr.  Security is provided by the deed of trust or mortgage. This provides a lien against the property and ensures it cannot be sold until the note is satisfied. It also provides the right to foreclose, if necessary, as well as insurance and tax requirements. There are many additional documents associated with a private real estate loan so it’s good you want to do this as professionally as possible.

I bet you’re looking at borrowing life-changing sums, into the many tens to hundreds of thousands of dollars and, I assume, from non-professionals like friends or family who have never loaned money like this before. Yes? The last thing you want to tell them is you’ve never done this but got some random loan documents and lending advice off the web.

My strong suggestion is to have your potential lender speak to a lending attorney, knowledgeable in your state, who can explain the basics of a private real estate loan -- including the good, the bad, and the ugly, the process, their options, and the paperwork required. Note that a lending attorney is not the same as a real estate attorney. You should sit in on this conversation.  It might cost $500 or $600, which is cheap compared to the amount at stake.

The attorney should not just address paperwork but owner and lender's title and insurance, hazard and fire insurance requirements, personal guarantees, loan mods & foreclosure, and much more. (With luck, your family member will still want to talk to you 😱). Not covered will be knowing whether you have a good, loan-worthy,  deal that's safe for all. This is another topic.

Forearmed is forewarned, Ronald. The best and safest way to borrow money like this is when everyone goes in knowledgeably and with their eyes open. It will be a lot easier to convince someone to lend you money when each of you is informed.