Private money lender

[Armand P.]

Hello, 

I spoke to an investor/wholesaler who purchased a flip property in Texas sept of 2023 and didn’t have the funds at the time to get begin rehabbing. He is looking to borrow $50k with 10% interest. He already has the $50k with the hard money lender however they will only release funds once first phase of the project is completed. 

In order to secure my investment will a promissory note suffice or do I need a deed of trust or something as collateral in the event I don’t get my $ back? 

Is it normal to have private money funds get wired to individuals business or personal account since he already has possession of the property? 

Thank you 

Armand 

[Jeff S.]

Prepare to get your lunch eaten, @Armand P.  There are many red flags here.

Your borrower started out in financial trouble and you want to loan him money? What is his status with the existing HML? His purchase money loan is already 6 months old. Is he current on his payments? Why did the HML make the loan if he couldn't initially perform? Do you know this borrower? Have you spoken to the HML? Sorry, but with so many questions, this scenario stinks to high heaven.

You will be lending in second position at best. Do you actually know if or from whom else he's borrowing? These loans are as dangerous as they come. If the HML forecloses, your loan will be wiped out. This happens all the time. Can you afford that? So you know, at 10%, your borrower is getting the deal of the century for a loan like this.

Before you lend, learn the process. Of course, you need a deed of trust. And a note, a personal guarantee, and many other documents and disclosures. After your borrower signs your professionally prepared loan documents (which he pays for) all money gets transferred through title. You are making business-purpose loans. The last thing you need is to provide any reason for him to claim that this is a consumer-purpose loan. Thus, money is always sent to a business account.  That he owns the house already is irrelevant.

There is very little profit in a $50k loan, Armand. Plus, after your borrower pays the associated expenses, they are hugely expensive. I would pass on this one.