Private funding contract

[Dana Regan]

I am purchasing properties with hard money, then refinancing. I have used hard money companies, but now my family and friends are interested.  I have no problem with this, as long as it is in a contract.  I need ideas on how to establish the contract- are there guidelines on developing a loan contract for this? For example, worst case scenario it could be a 12 month loan- do I establish the loan for 12 months, with a monthly interest payment or payment at the end of 12 months? Or do I do quarterly payouts, with a clause for potential early termination (less than 12 month). Are there loan templates?  Do I position it as interest or a fee?  Thank you!!

[Cody Backus]

Hello Dana, wow, lots of great questions.  First let me say I am a real estate investment attorney in Utah and draft private money and hard money loans with regularity.  

The first question you should ask is whether it is best for you and your private lenders to have their money secured by the property. Any good private lender would and I think someone who is working with friends and family should also grant that right to them. This way they know their money is secured by the property and if you default, they can know that they have a security interest in their property and will get their money back.  This note then becomes a Note & Deed that should be recorded when you close on the property and a good title co will record this with the Warranty Deed.  

The rest is a matter of negotiations and what is best for your lenders. Some charge an origination fee, some don't. Some want payments, some say just pay at the end when you refi out or sell.  My father was recently a private lender to my brother on a transaction for $130K. My recommendation to my father was to charge an origination fee and secure his interest on the property. This way, even if my brother flips the property in a few weeks, my dad hasn't risked $130K on something that only paid him a few $$ in earned interest. To me, that was a lot of risk for very little reward.  

I would suggest some form or origination fee or minimum about owed so that if you refi or sell quickly, they are rewarded. If you would like access to some private money loan form documents to use in these scenarios, let me know.