How can I protect my money as a private money lender?

Question

A guy from my REI group is looking to borrow some money for a few months to cover mortgage cost for a property that he flipped. I am thinking about reaching out to him and help him out and also build my network at the same time, but this my first time to lend out money to others.

Assuming we have agreed in our terms (agreed on the amount, length of loan, interest, and additional fees).

What kind of paperwork do I need to file?

Do I need to file something with the title company? So, it shows that my money is tied to a specific property.

Thanks,

Donny

Darren Eady · Answer

For those of us in the industry of lending our own funds, there are a myriad of things you should do and watch out for that we couldn't tell you on a BP post. In starting a private lending company, there are at least two years of making mistakes that you'll go through. If this is someone you extremely trust, realize that lending them money will change your relationship. If this is someone you don't know that well, maybe think about helping them find a lender that fits their needs. Like I said, there are many mistakes you'll make with valuation, title issues, property problems, payment set up options and problems, identification issues, that you may want to avoid if you are just trying to lend on one or two deals.I don't mean to discourage, but some of the mistakes you'll make will cost you!

Jay Hinrichs · Answer

@Donny Widjaja since your being asked to just loan enough money to make payments on the existing first mortgage . you would simply be doing a unsecured Promissory note.Although not tagged to a property there is no defense for non payment and a judgement is easily gotten ... caveat is that this person actually has some assets which sounds like he probably does not since he needs to borrow from you to make payments .unsecured prom notes to a very qualified a borrower are fine.. second loans behind construction loans are not are not advisable in any scenario and can very well be a event of default on the first loan.@Steve Bach a phone call to your state banking commission to ask your questions BP is not the place to get this info its your butt on the line and BP is all hearsay when it comes to t to laws of the land

Jay Hinrichs · Answer

@Percy N. there are lenders who love those second position loans as they generally have much higher interest rates... but they also have the ability to cure and foreclose the first. from what I know about PA foreclosure rules and how its a very slow drawn out process I would be uber careful in PA lending money. Us West coast lenders that use Deed of Trust and Prom note and can foreclose on non owner occ in 6 to 7 months for 2 to 3k .. much safer than what I see in mortgage states

Charlie Fitzgerald · Answer

Gotcha Jay. No worries.

Jeremy S. · Answer

I have borrowed private capital a few times and I would suggest that you only lend on deals where you have a first position mortgage and the borrower has at least some of their own cash into the deal. I would also make sure they have the experiance AND the cash on hand to fund the renovations. My title company took care of the paperwork but I, as the borrower, always paid the costs to draw up the note and record the mortgage with the county. If you PM me, I'd be happy to send you the contract I use as an example.

Frank Buono · Answer

From my standpoint I don't see any difference in being in the first or second position as far as a mortgage holder goes. The real question here is equity. As long as there is equity above the first and the second is protected.I would have a qualified real estate broker gives me a broker price opinion or BPO and then subtract the first position mortgage unpaid principal balance. This would leave me with a fair market equity number and I would feel comfortable owning 50% of the equity left in the property. Naturally, you are assuming that you're investing in an area with a positive upturn and that no outside forces will be knocking down value.As far as the paperwork goes it's very simple to create a mortgage and promissory note. Most title companies will do the work for you. My title company will create the note creates a mortgage and record the mortgage in the county offer one set fee of a couple hundred dollars. At this point you have a recorded mortgage against the property. When the owner sells you will be notified by the transferring title company and ask for satisfaction peace and an amount of pay off. At that time you can collect your principal balance and any unpaid penalties or interests that have accrued over the life of this loan.Please let me know how you make out and I can refer you to all the correct people so that the transaction is smooth effortless and secure.Good luck,Frank

Douglas Snook · Answer

Personally I would not lend more then a couple of grand without some kind of attachment/mortgage on the property. whether the one he needs the money for or an other one. Be sure that that attachment is in the name of the property holder (he may hold it in an LLC) I would also be sure the note is in both the LC name AND the individuals name if necessary. If he has another piece of property that has some equity or where you can have a first place position, I would lien that as well just to cover yourself. depending on the size of the loan, I would be OK with being second.Just my two cents but I would also find a real estate attorney in your area who can help make sure you are attached correctly.

Charlie Fitzgerald · Answer

Exactly what Jay said Percy. Of someone asks me for a 2nd position loan, I will offer to do a loan for them that takes out the existing home 1st at the same. Then I am in 1st position where I want to be, they have a better overall loaN from me, and all is good.

Percy N. · Answer

@Donny Widjaja, check with your attorney, but in PA, where I have (technically my LLC has) lent against a brand new house which was 95% completed and some commercial garages, I had an attorney who owns a title company draw up the note and mortgage docs. Borrower paid all costs directly via retainer to attorney.@Charlie Fitzgerald, would you lend on a second lien basis if LTV was 50% or less? Are there other risks other than being able to pay off first?

Donny Widjaja · Answer

Thank you all for sharing your knowledge and experience. This has been a great help. Donny