What are potential issues with private money lenders?

[Billy Bob]

I'm considering using a PML and putting up a rental property I own out-right to buy another investment property for cash. It would be a 50% LTV. The lender would be the mortgage holder on the Deed on the property I own, but not a new one I buy. It would go through the "Lender's" title company. In a year or two I have some money coming in from a family estate and will pay it off. What are some of the pitfalls in dealing PMLs and how do I make sure I won't lose my property (besides defaulting) or put myself in a bad position? What happens if at the end of the term I pay off the lender and they don't release the Deed? Anyone have any horror stories? Any legal advice aside from having a RE Attorney look over the contract? Thanks in advance!!

[Bill Gulley]

Originally posted by @Billy Bob:

Thanks Dave. Yes, I figured I needed a solid paper trail of payments. I plan on having a RE Attorney either draft or review the Lender's agreement prior to signing. That's what I thought, if a PML does not release the Deed after pay off I would need an attorney to get that done. They're charging 3 points on the loan. The Lender wants to use his title company. Any issues with that?

Then, you're not dealing with "private money" you're dealing with someone who is actually doing business as a lender.

First, find out if this lender is a registered and licensed to do business, you can ask for his documents and get the name the money is loaned in. Then check out that name, Secretary of State and State Finance Department, if he isn't registered and he was soliciting loans, he's most likely in violation.

Next issue, all ready, is that he requires you to use his title company, he can require the note be closed at his settlement agent, he can't require you to use title insurance from his favorite company. You may have misunderstood that.

Points are prepaid interest on any type of loan, commercial or residential. I have not seen any state that allows a non-registered or unlicensed lender to charge points, so you have another violation most likely.

As a borrower, if it's really an individual lender you need to use a loan servicing company, that's the best way to ensure you don't have problems.

You could be working with a shamster lender, lots of them out there who lend and even set up a default (just toss your payment in the trash, it could be 30 days before you even realize payment wasn't made!) as they plan on taking the property. Indicators for such lenders are those who have no license and who don't register, charge points and run afoul of lending regulations.....not saying that's your case, just indicators.

Private money is from an individual who is not in the lending business, investors try to use the term but incorrectly. Lenders use the term to soften the "hard money lender" stigma and to market themselves as being easier money to obtain or other benefits as if it's a private transaction, sort of no lending rules like the bank has.

There are many issues using private money, much depends on who approaches the matter, who makes the offer. You should do some reading here in this forum concerning private lending and HMLs.

I think one of the biggest mistakes investors make is not understanding financing much better than they do, many think they do, but they really don't. Lenders have been around forever, I've not seen too many lenders using their money who are in their 20s or 30s, most are much older and have been in the business for years. Many take a rather arrogant attitude, as if they know what they are doing and will continue to do things as they have 10 or 20 years ago.

If a borrower is better educated in financing, you can have a much better feeling knowing that if some guy tries pulling anything you can clean their clock. With some violations the lender can lose the entire amount owing plus damages and get hit with fines. If someone tries to screw me over intentionally my goal is to destroy them, totally. IMO, borrowers lack education playing this game which is why some get messed over by individuals. Things have changed, if they fail to change they can be easy pickings. Don't bet that a RE attorney will be up to snuff on lending issues, his attorney or yours or that they can guard against issues down the road. :)