Hard Money Terms for me to lend

[William Shadbolt]

I have a friend (and third owner of some of my rentals) who would like me to do a hard money loan to buy an REO for him to rehab and flip. He's looking for 10% interest, six month balloon (interest payable at close or 6 months) and I'm thinking 4pts. I'd be financing 100% of the purchase and he would pay for all the rehab. He has excellent credit but not enough income to get a FNM loan and the house we've looked at wouldn't qualify for a loan as it's in poor condition.

I know the neighborhood (own a house across the street).  I'd have a RE attorney do all the paperwork and make it a commercial loan.

Any thoughts on the terms or doing it?

[Bill Gulley]

I agree with Jeff, get a HML involved and fund the loans through them or use an independent mortgage broker who can take the property through to ultimate secondary market financing for the end buyer.

Doing that provides a better opportunity to work in seller concessions in your marketing that don't really cost you, for example, the appraisal can be updated saving 200/300 bucks, title has already been done, updating may be free or 100 bucks, some charge more for construction reviews that would already be done and such can be avoided. Several pluses in having the take out loan set just waiting for the qualified buyer.

As to points: Again, points are prepaid interest, private lenders are not HMLs, they are not in the business, they are not registered lenders or regulated per se and most states limit points, if allowed at all, points are still computed and applied to any usury limit. You need to get with an attorney as the laws most look up relating to usury are generally applicable to lenders, not individuals and other restrictions may very well apply to individual lenders....this generally covers Lonnie the back alley Loan Shark type and these restrictions can be under various Chapters of Statutes. Ask an attorney!

Construction loans are disbursed as materials are needed and as work progresses not as a lump sum at loan closing, This is an additional and important safeguard protecting the lender but I know many HMLs may not do that as it's more work, but I'd not do a sizable loan (purchase +) any other way. You get lien waivers to date before you advance the next disbursement. You can fund an amount initially, then in the middle of the project, then a final disbursement. What happens if your contractor gets hit by a bus???? You don't have all the money tied up in his estate! Title companies usually offer disbursement services as it keeps title cleaner for future transactions among other reasons, ask about disbursement loan services, they borrower can pay for it.

Lots of folks have money, seems having money alone makes them think they can be a lender and that doing so is some simple matter that anyone who has made money can probably do......well, they just find it hard to admit they really don't have a clue and many lose money and wonder why when things happen, Penny wise, pound foolish applies.

As Jeff mentioned, just any RE attorney is probably not versed in financial laws as finance is NOT real estate.

A tip to find a banking attorney, look to your bank, see who is on the board of directors....any attorneys there? Advisory boards are often printed on those little cards at the cashier's window, any local attorney on that advisory board ? Legal counsel may also be on some publications. Call them and tell them you're a customer and ask a few questions.   :)