Private loan to fund primary residence renovation

Austin, Texas
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Private loan to fund primary residence renovation

JT Longino
Member since 2020 · 1 post · 0 votes

A friend has two properties. The first is a former primary residence that had seen significant appreciation. The second was recently purchased to become a primary residence after substantial renovations (~$200K). The original plan was to sell the first property to cover the renovation cost, but they weren't ready to put it on the market until rates had turned and prices had dropped and they decided to rent it for a while. So now they don't have the money to fund the renovation and they're not finding lenders who will HELOC or HEL the rental property. I'm considering loaning my friend the money but am not sure how to structure it so it's legal (doesn't involve lien on the new primary residence), but doesn't leave me exposed if I'm faced with a hostile estate executor. I'm not worried about the friend.

I'll certainly plan on talking with a lawyer if we get that far, but it'd be nice to have some framing for my thoughts before I get there and some idea that talking to the lawyer isn't wasting everyone's time. Is this something that happens? Do I back away slowly since it involves a primary residence and I'm not an immediate family member? Seems like there should be a way to structure things so it's a win for both of us.

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Doug Smith
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
3y

Texas does have some different laws with respect to home equity loans than the rest of the nation, so definitely consult an attorney. As an individual that doesn't lend money for a living, you'll be able to avoid some of the federal regulations around consumer lending that have come into play, but it's really hard to lend to friends or family. It makes Thanksgiving awkward. I'm not saying not to do it, but just be very, very cautious. Lending money to friends isn't always a great idea. That being said, if you decide to do it I would certainly do it a bit above the current interest rates that they can get an at bank. You likely don't want to carry that kind of debt forever and you'll want paid back quickly. Don't give them an incentive to keep a low-rate fixed rate loan when you can take that money and do other things with it. My biggest question centers around why other lenders aren't willing to make the loan. These are pros that lend money for a living and they are seeing something in the deal that is giving them pause. I remember when I was a commercial lender at a community bank, one of the board members that did not have a lending background asked me to give one of his friends a $1M loan for a business. I looked at the deal and declined it. He got angry with me and took it to the bank president who backed my decision. The board member, a pretty wealthy guy, reached into his pocket and gave the guy the money. He lost the whole thing. I know a lot of people want to get into private lending, but they don't realize that it is both science and art that takes experience to do it right and avoid losses. People without a lending background often get themselves into trouble...particularly when lending to friends. I don't know your situation, so I can't tell you not to do it, but I would caution you against jeapordizing your friendship and your money. I wish you well in your decision. Let me know if you need any advice. 

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  • Doug Smith
    Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
    3y

    Texas does have some different laws with respect to home equity loans than the rest of the nation, so definitely consult an attorney. As an individual that doesn't lend money for a living, you'll be able to avoid some of the federal regulations around consumer lending that have come into play, but it's really hard to lend to friends or family. It makes Thanksgiving awkward. I'm not saying not to do it, but just be very, very cautious. Lending money to friends isn't always a great idea. That being said, if you decide to do it I would certainly do it a bit above the current interest rates that they can get an at bank. You likely don't want to carry that kind of debt forever and you'll want paid back quickly. Don't give them an incentive to keep a low-rate fixed rate loan when you can take that money and do other things with it. My biggest question centers around why other lenders aren't willing to make the loan. These are pros that lend money for a living and they are seeing something in the deal that is giving them pause. I remember when I was a commercial lender at a community bank, one of the board members that did not have a lending background asked me to give one of his friends a $1M loan for a business. I looked at the deal and declined it. He got angry with me and took it to the bank president who backed my decision. The board member, a pretty wealthy guy, reached into his pocket and gave the guy the money. He lost the whole thing. I know a lot of people want to get into private lending, but they don't realize that it is both science and art that takes experience to do it right and avoid losses. People without a lending background often get themselves into trouble...particularly when lending to friends. I don't know your situation, so I can't tell you not to do it, but I would caution you against jeapordizing your friendship and your money. I wish you well in your decision. Let me know if you need any advice. 

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  • Dennis Muno
    Lender · Denton, TX · Member since 2023 · 349 posts · 80 votes
    3y
    Quote from @JT Longino:

    A friend has two properties. The first is a former primary residence that had seen significant appreciation. The second was recently purchased to become a primary residence after substantial renovations (~$200K). The original plan was to sell the first property to cover the renovation cost, but they weren't ready to put it on the market until rates had turned and prices had dropped and they decided to rent it for a while. So now they don't have the money to fund the renovation and they're not finding lenders who will HELOC or HEL the rental property. I'm considering loaning my friend the money but am not sure how to structure it so it's legal (doesn't involve lien on the new primary residence), but doesn't leave me exposed if I'm faced with a hostile estate executor. I'm not worried about the friend.

    I'll certainly plan on talking with a lawyer if we get that far, but it'd be nice to have some framing for my thoughts before I get there and some idea that talking to the lawyer isn't wasting everyone's time. Is this something that happens? Do I back away slowly since it involves a primary residence and I'm not an immediate family member? Seems like there should be a way to structure things so it's a win for both of us.


     I would be careful lending money to your friend. Money shows people's character and ruins relationships. I'm not saying your friend won't pay you bank(no one knows) but perhaps leave them to get a lender for them to do it. You said they have trouble getting money to fund the renovation. Why? Excess debt, low credit that leads to low approval?

    Sometime we want the best for friends and loved ones. You sound like a good friend but it is also good to calculate our risks too. Nicely ask them to call up more banks would be my opinion. Best of luck to you

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  • Dennis Muno
    Lender · Denton, TX · Member since 2023 · 349 posts · 80 votes
    3y
    Quote from @Doug Smith:

    Texas does have some different laws with respect to home equity loans than the rest of the nation, so definitely consult an attorney. As an individual that doesn't lend money for a living, you'll be able to avoid some of the federal regulations around consumer lending that have come into play, but it's really hard to lend to friends or family. It makes Thanksgiving awkward. I'm not saying not to do it, but just be very, very cautious. Lending money to friends isn't always a great idea. That being said, if you decide to do it I would certainly do it a bit above the current interest rates that they can get an at bank. You likely don't want to carry that kind of debt forever and you'll want paid back quickly. Don't give them an incentive to keep a low-rate fixed rate loan when you can take that money and do other things with it. My biggest question centers around why other lenders aren't willing to make the loan. These are pros that lend money for a living and they are seeing something in the deal that is giving them pause. I remember when I was a commercial lender at a community bank, one of the board members that did not have a lending background asked me to give one of his friends a $1M loan for a business. I looked at the deal and declined it. He got angry with me and took it to the bank president who backed my decision. The board member, a pretty wealthy guy, reached into his pocket and gave the guy the money. He lost the whole thing. I know a lot of people want to get into private lending, but they don't realize that it is both science and art that takes experience to do it right and avoid losses. People without a lending background often get themselves into trouble...particularly when lending to friends. I don't know your situation, so I can't tell you not to do it, but I would caution you against jeapordizing your friendship and your money. I wish you well in your decision. Let me know if you need any advice. 


     Absolutely brilliant and very well said. Money ruins relationships.Especially when you give and people don't give it back. Encountered it personally.

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