How do you construct a private money contract?

[Jonathan Johnson]

I found a really great house going up for auction in 3 weeks. I would like to buy it with some friends and family money from the auction. Fix it up and refinance it into a mortgage to live in.

I'm guessing this will take just a few months since the house is in good condition. 

I'd like to offer my friends and family interest on the money they lend me, but I don't know quite what a good interest rate would be and how to explain it in monthly terms. I think simple interest would be best for around 7%?

When we talk and agree to a rate and term, how do I write it up in a contract? I know it's family but I would like to be professional and trustworthy with clear terms and expectations.

Also, if the bidding goes too high, do I just give them the money back or should I give interest there too?

Never done this before, if someone could walk me through this that would be great. 

Thank you.

[Bill Gulley]

Merry Christmas!

This is something you need to go to an attorney for, to draft the promissory note and trust deed, it will also be more complicated putting several parties on as the lender. 

What you need is a "Partitioned Note", I have designed and used these many times, chances are, your attorney will be in the dark initially, but you can message me, get my number and I will go over it with your attorney! So, Merry Christmas, no charge!

Just as the name implies, a promissory note is divided up among its principal, interest and amortization into sub-note obligations, the different parts constitute the whole note obligation.

This allows multiple lenders to participate on one loan, it is secured by a deed of trust or mortgage and doesn't require multiple filings or priority of liens as a first, second, third mortgage would require. 

That leaves a second position open in the event you need to obtain future financing like a HELOC or second mortgage!

This concept is basically the same as "participating loans" between banks, one bank is the lead lender but other banks also contribute to funding, this reduces lending risks in large loan transactions. But, nothing says your loan has to be in the millions!

A "fractionalized note" is similar, but not the same as the different lenders are not defined in the note as holding a specific amount of the total lien, they can be difficult to administer, present collateral issues and lack the flexibility of paying off one of the lenders without paying off all the lenders, these can also be illegal when lenders cross security laws, so if this is suggested, stay away from a note with fractional note holders.

As mentioned, the amortization may be adjusted, one lender can be paid off quicker than another, such as a friend getting their money back before a family member.   This also plays into estate planning if a family trust is involved. In a partitioned note, a certain sum can be due at a certain time as a balloon payment providing more flexibility in your financing arrangements or requirements.

While you can have different rates of interest, that is not for the average lender/borrower because then you'll have weighted interest rate computations, so really, everyone should agree to the same rate. 

These are used more for commercial lending but may be used for consumer lending and can be fine under the Dodd-Frank Act as required and in your case as private lenders exempt from many requirements. Sounds like you're house hacking so that is a consumer loan.

BTW, for other readers on BP, I mentioned these several years ago, I think it went over a lot of heads, but they can be pretty simple and very useful in creative financing circumstances! I'll introduce this financing method early in 2017. These note can also have a "future advance" feature, those flipping rehabs should pay attention as one lender can be the purchase money, another be the rehab money, all under one note and security agreement. 

Merry Christmas!  :)