Structuring a Private Loan

[Account Closed]

I have never done a flip with a private loan before, but a good opportunity has presented itself and I know someone who is interested in partnering with me.  The way it would work is he would fund the purchase and rehab costs with cash.  I would buy the house, renovate it, sell it, and give him a flat percentage of the amount he loaned.  I have a few questions related to this.

1) How do we structure this deal between the two of us.  How does he protect himself if I were to skip town ,die, or just decide not to pay him?  Do we write up a lien?  How is that done?

2) What is a normal percentage to pay to a private lender?

3) How do we go about putting in the best and strongest offer?  Does the seller need to know that the money isn't my own?  Does he give me the loan before the closing, or does the money go directly from him to the seller at closing?

Thanks in advance, I'm sure I'll have more questions to add to the thread as the discussion gets rolling.

[Kevin Yoo]

@Account Closed

We lend money for such projects as yours so my answers to your questions may have a bent towards the viewpoint of a PML. 

1) How do we structure this deal between the two of us. How does he protect himself if I were to skip town ,die, or just decide not to pay him? Do we write up a lien? How is that done?

There are two ways the cash partner protects himself. One, the property. Two, you by which we mean your personal assets. As for the property, your cash partner can protect himself by either purchasing the property himself and he being on the title or by you purchasing it with his money and he filing a lien against the property. It is also possible that both of you be on title together. If you are not on title, you should file a lien against the property but this is harder to do unless you have some reason to do so like having worked on the property or lent money against the property. Until you have filed a lien, you are not protected in case your cash partner wants to dump you. If it is OK with your cash partner, I recommend you both being on title.

As for your assets protecting your cash partner, he may ask you for a personal guarantee. If he does not, then he is taking on more risk than a typical HML would. If you were to borrow this money from a HML, most likely you would have to give a personal guarantee. If he does not ask for PG, it would be only right that you offer it to him.

2) What is a normal percentage to pay to a private lender?

If I give my money to someone to flip through Crowd Funding, I would typically get 10%. If I give my money to someone to flip through a HML, I would typically get 12%. If you borrow from a HML, you would typically have to pay 15%. So, I would offer low teens to be fair. 

When we give money to someone for flip, we typically charge 36% or 50% of the profits which is very expensive but we are simply highly selective. And interestingly enough because we are so easy to use, we have people that borrow our money again and again. And so, don't be offended if your cash partner ask you for 50%. This is also very typical in the real world.

3) How do we go about putting in the best and strongest offer? Does the seller need to know that the money isn't my own? Does he give me the loan before the closing, or does the money go directly from him to the seller at closing?

The best and strongest offer is all cash and quick closing such as couple of weeks with no contingencies. But you best make sure that there are no major issues with the property. Otherwise, you would have lost a lot of your cash partner's money even before you started the rehab.

The seller does not care whose money it is especially if you have your cash partner as the buyer. You should not take your cash partner's money into your own account (unless required by seller such as a bank) but have it go directly to escrow. If I were your cash partner, I would insist on that. It is cleaner and faster. 

I hope this helps. Using an attorney is very important and recommended. But make sure you have thought things through, talked to your partner extensively, and maybe penciled out a rough agreement. Otherwise, you will spend thousands on attorney fees prior to even doing a deal. Make sure you minimize what the attorney needs to do for you. I have attached a link for you for a JVA that we use that may help you. 

https://www.dropbox.com/s/pdbvxu5kz3y6mds/JV%20Agreement%20Template_01-24-2016.docx?dl=0