How to get private loans into a contract?

Question

I have an investor with $20k but I don't know what to do as far as a contract goes. Can anyone guide me into the right direction?

Jon Holdman · Answer

Hard money lenders often lend on ARV rather than as-is value.  So, there is more risk than you might think.

On our deal, the house was on a busy street across from a high school.  That made it hard to comp.  Comps when we made the loan supported one value.  Comps when the borrower had it fixed up were lower, so the 70% LTV loan we originally made turned into something more like 90%.  The lesson there is to avoid hard-to-comp properties unless they are a screaming deal.

Darrell Shepherd · Answer

That makes sense, of course.  Guess I'm thinking more as a borrower than lender, but at 65% LTV there isn't all that much additional risk to have a 2nd.  Maybe the deed in lieu would take additional effort, but a normal foreclosure wouldn't .  It's four weeks and then the first Tuesday of the month here in Georgia.

My thought process is that at those interest rates and that low LTV, making a stink about taking on that small amount of additional 'risk' seems like a bit much.  But hey, he who has the gold makes the rules.  I'm not here to tell someone how they have to lend their money.  If you need to put a second on it, just shop it to a lender that doesn't care.

Personally, is rather my borrower have the extra money to take the deal home, it's probably going to paying me interest and to improve my collateral anyway...

Darrell Shepherd · Answer

A non recorded deed is the same as any other deed, you just dont record it.  Recording a deed just announces to the world that the deed exists.  You can transfer me your house by signing me a deed and that deed is valid, but until it is recorded, nobody knows.  Also, if another deed is recorded prior to mine, they go by recording date, not the date of the actual deed.  Its definitely in my interest to record it, but legally that deed transfers ownership when its delivered and accepted.   Its a little confusing, I know.

Anyway, you can borrow the money from them and give them a note and security deed, which they can record at a later date or just hang on to it.  That's what I did on my loan last year.  I got a note and deed, but it was a short term loan and I trusted the guy, so I didn't bother filing the deed just so I could release it in 2 months.

If they dont record it, their risk is you selling the house without paying them or someone putting a lien in front of theirs- you borrowing from someone else, or a mechanics lien or something.  Not sure I'd recommend trying to sell that without you really understanding it, but that's how it works.   A lot of that depends on what the investor/lender wants.  The hard part is getting them to say yes, once they do, its just a matter of how to secure their interest that will fit the rest of the deal.

Nick Stango · Answer

Thank you Bill Gulley for your replies, How about if I am dealing with a hard money lender for the remaining of the loan to finance a deal. For instance, the house has an ARV of $200k, I can get 65% from  hard money but I have a private lender with 20k or maybe even two private lenders with 20k each. What would be the best way to work this out when bidding on a foreclosure property? Should I bid on the property first then gather up my funding, or gather up the funding first? Will hard money lender want to be first in line on the deed? Do I have to put the private money lenders on the deed? Thank you in advance.

Jon Holdman · Answer

@Darrell Shepherd a second lien weakens the first.  I've been a hard money lender where the borrower defaulted.  The borrower gave the property back to us (my partner and I) with a "deed in lieu of foreclosure".  That's quick and easy.  Had there been a second, though, we would have had to go through the foreclosure process in order to either get the property or get paid off and wipe out that second.  That would have added considerable time and cost to what was already a losing deal.  We don't allow any additional loans at closing (not unlike most conventional lenders) and if any additional liens are placed on the property while out loan is in effect, the loan is now in default.

Nick Stango · Answer

@Sean O'Connor hey Sean, that sounds good, I will also check out WPB, my contact info is on my profile, give me a call. Thanks

Nick Stango · Answer

@Darrell Shepherd great info Darrel, I do appreciated your detailed reply, so it looks like it's going to be a tricky situation to get everyone onto a deed especially with a HML and two private lenders. A non recorded deed sounds like that might work, but I'm not sure how to do one.

Sean O'Connor · Answer

Hey Nick, I too am in Morrisville, PA and have a few rentals in town.  Have you tried to secure financing will William Penn Bank?  I just started talking to them about my next venture and they seemed very willing to lend to investors.

I also see that you are a contractor.  Perhaps we should meet up and see if we can come together on something.

Let me know.

Darrell Shepherd · Answer

A hard money lender will definitely require 1st position.  You can then put the other two in 2nd or 3rd, but some HM lenders wont allow seconds.

I do this, get most of the money from an institutional guy, then slap a smaller private loan on it to cover costs.  If the HML wont let you put a 2nd on the deal (many wont, although I really dont see why) then you just secure it with something else.

What works depends on your relationship with your lender.  I got a check for $50k yesterday from my guy and we're doing the paperwork when he gets back from Asia in two weeks...my dad and I both do real estate and used to be partners and these days  send large sums back and forth without much more than a text.  That's not exactly normal, but when you establish relationships its more common than you'd think.  I loaned $20k to a guy last year I'd never met and didn't bother to  record the deed I got because someone I trust said I could trust him (and said he'd pay me back if that guy didn't)  Reputation goes a long way in this biz when you've been at it a while.

Anyway, things vary from state to state on doing it, but its essentially just two documents, a note outlining the terms of the loan and a security instrument (security deed, deed of trust) that encumbers the property with the note so you cant sell it without paying them.  If your lenders trust you enough to loan to you or an LLC without recording a deed, then sure, you can float it.  Just need a note at that point, or a probably a note and an non-filed deed.  IMO, it works out way better when your private lenders are secured, though.  Them sending money to and getting paid from closing attorneys adds at LOT of legitimacy to what you are doing, especially for folks who aren't in the business.

And on the process- yes, you want to know you've got sources for money, of course, but then go bid on the property and get it under contract, then secure the money for closing.  I do my own, but the closing attorney should do your docs for you.

Bill Gulley · Answer

I think  you are asking about a loan commitment letter, where the lender obligates funding the agreed amount.

A letter can be drafted that simply states that the lender agrees to fund X dollars to be secured by a deed of trust for the purchase of real property located at (give full address) scheduled for settlement on xx/xx/2015, this commitment expiring 30 days after the scheduled settlement. This loan commitment being subject to acceptable title and insurance assigned (and any other contingencies).

Have him sign the letter and date it, it is addressed to you.

Tell him you need a loan commitment letter for (any Realtor)  closing agent, or seller as proof of funds.

As Jon mentioned, use the standard finance contingency in your purchase contract, you do not need to disclose who your lender is and often it's best not to say private financing unless required in your area. Saying private funding has different aspects not knowing if some guy will just change his mind or backs out or if they have experience and will perform. :)

How to get private loans into a contract?

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