Private Loan, Note Purchase

[David C.]

I'm considering lending money to a house flipper. Because I'd like to avoid any issues surrounding loan origination regulations (usury, disclosures, licensing, etc.), I'm considering having him personally create a note and mortgage from his LLC, that owns the property, to him personally, then I buy the note from him, at a discount perhaps. So basically I buy a note vs originating a loan. Do you see any issues with this?

[Deb S.]

You could use a JV agreement to go with the note (note drafted by an attorney). So the note can stay within usuary laws and the JV can specify a certain dollar amount or percentage of profit upon sale of the property you lent on. JV agreement needs to specify your entity is paid out of escrow on sale of the property.

Basically your note charges a certain 'legal' interest rate. The JV agreement allows any amount over what's specified in the note to be collected as a % of profit upon sale of the property. Since a JV is not recorded (like a DOT/mortgage) it would be a good idea to also have specific escrow instructions that match what's in the JV agreement (your entity is paid from sale of the property). When the property is under contract to be sold, make sure the title company/attorney gets a copy of the JV agreement and escrow instructions - and review it with them. Make sure they understand your role and that you are to be paid accordingly.