Private lending documentation advice

[Steve Saenz]

I have a couple of associates that are available to offer the funding to do a flip I have in mind. However, they are not familiar with the process of being private lenders. How can I introduce them to the proper documentation to and legal process for this? Would I have to reach out to a real estate lawyer or are there documents readily available to move this forward? 

[Doug Smith]

Hey @Steve Saenz. I'll do you one better. I'll tell you EXACTLY what we ask for as a lender when we begin the process and then later I'll mention the closing docs.  I'll first start with our due diligence materials. but first, I highly, highly, highly recommend visiting www.optoutprescreen.com. Whenever you apply for a loan, the credit reporting agencies will give your information out to solicitors. Your phone is likely to explode with unwanted calls. To avoid this, you can first go to Opt Out Link, scroll down to “Electronic Opt Out for 5 Years”, complete the form, and submit. The major credit reporting agencies will remove you from the lists they provide to solicitors for 5 years. That will keep your phone from ringing off the hook for a while. This will take 4 or 5 days to filter through the system, so you’ll want to do this first. It will save you headaches down the road. By the way…this will be the case with ANY lender that does a hard credit pull.

THERE IS A LOT HERE, BUT LET’S TALK BEFORE YOU START GATHERING EVERYTHING UP. I’ve been quite thorough with my list below. A lender won’t need all of this for an approval, but I wanted you to know what a lender will likely be asking for. Your friends might not want or need this, but if you go to an institutional lender, this is what they'll ask for...

• GUARANTOR APPLICATION: Each owner of the Borrowing Entity will need to complete some sort of application on themselves personally. The lender will want to know about their financial background in order to underwrite the loan. For us, we give them a link into our application system. Some want a Fannie Mae form 1003. Others have their own form, but most lenders will usually want an application of some sort. 

• PERSONAL FINANCIAL STATEMENT(S): Most lenders will have their own form. If you already have a form with all of this information, that’s great. They can use that, but they will need one for each and every guarantor.
• SCOPE OF WORK: Basically, a lender wants to see that you thought this through and understand the costs involved. They would love to see an itemized breakdown of the work from a licensed GC along with costs. 
• ORGANIZATIONAL DOCUMENTS ON THE BORROWING ENTITY: They will need
  1. * Filed Articles of Organization
• * EIN Letter from the IRS
• * The fully-executed Operating Agreement for the Entity (By Laws for a Corporation)
• * Meeting Minutes Showing the Signer has the Authority to Sign and that the project has been approved by the board of the entity.
• * Certificate of Good Standing for the Entity
• DRIVER’S LICENSES FOR EACH GUARANTOR: Please be sure to get a legible picture of the front and back of the document. Make sure it is legible.
• EXPERIENCE/TRACK RECORD: A big portion of how aggressive a lender can be with their terms is your experience. We need to show underwriting what your experience level looks like. Provide them with a list of properties that you have flipped in the past including dates, addresses, amounts, outcomes, etc. That will really help solidify your experience and get you a better deal.
• BASIS FOR YOUR AS-REPAIRED VALUE (ARV): When you flip a house, it's important that you know what you are going to sell the property for. How did you determine the ARV for the property…in other words…what you plan to sell it for? Do you have a Comparative Market Analysis (CMA) or a Broker's Price Opinion that I can include with the file? It would be quite helpful. ***this is very important…don't skip getting good comps or, better yet, a good CMA***
• BUILDING PLANS, SPECS, AND QUOTES: For a construction project, they’ll need to understand the deal. Provide them with any and all building plans, specs, permits, drawings, and quotes that you might have to help us get a handle on what your project looks like.
• THE FULLY-EXECUTED PURCHASE CONTRACT: They’ll need the contract signed by all parties to get the file into underwriting if you are buying the property. If you already own it, you'll want to give them the settlement statement from when you bought the property. 
• HAZARD AND FLOOD INSURANCE QUOTES/BINDERS: They will need to make sure the property is insured. Please provide us with the quote(s) or binder(s). They will at least need the agent information to work with them to get what they need.
• CONDO ASSOCIATION HAZARD/FLOOD INSURANCE DECLARATIONS PAGES: If this is a Condo, associations usually carry hazard/flood coverage as part of their association dues. We will need the declarations pages for the hazard and, if applicable, flood policies prior to underwriting. 
• BUILDER’S RISK POLICY INFORMATION: If you are doing a rehab, They do need to get your builder’s risk insurance information.

I do realize this seems like a lot, but if this is given to any good lender, they'll have a pretty complete package to underwrite. Again, your friends may not want all this, but it's what an institutional lender would ask for. Now, to the docs. 

Lenders will already have the closing docs, but your friends will need to have an attorney draft the promissory note, Deed of Trust (in TX or other Deed Theory States) or the mortgage in Lien Theory States like me home state of Florida, and other ancillary documents that go along with a loan of this type. DO NOT try to do that yourselves. Let a good real estate attorney do this for you and let a competent title agent/attorney close the loan. Some people try to do it themselves and they miss things. Pay the lawyer...don't skimp. 

I know this is a lot, but I hope it helps. Good luck.