Private lender - forms required??

Question

I am looking to see what forms and documents to use when borrowing money from a private investor.  I have a few private investor willing to lend their money on a deal that I am working on.  I will need to secure their interest onto the deed of trust but need help with a document that can get this done.  We have already worked out the terms and agreement on the money lent.  Thanks for your help.

Scenario:

Purchase price: $185K

Rehab: $30K (my contractor and I est. $25K)

ARV: $295K

My capital invested: $125K (I have additional rehab capital of $50K)

Capital Funds needed: $60K on 12%

Turn around time is: 90 days max.  Properties are moving off the market in 5-7 days.

Thanks

Jeff S. · Answer

If your numbers are accurate, @Yia Her, this could be a good deal. Just be careful and make sure you protect your lender. Lending is not a job for a do-it-yourselfer, and a title company is not the place to get loan documents. Plus, at 12% APR, your note on its face is usurious in CA (I assume the property is in CA?). This is not a problem if you use a licensed CA real estate broker to originate your loan since they get an exemption against usury for loans secured by real estate.

My strong suggestion is to find an experienced hard money lender at a local real estate club to originate the loan for your lender. HML's are used to originating private loans as yours. Here's a Meetup link to many REIA's in your area. Bring your lender.

Any legitimate experienced hard money lender will either be licensed or have a licensed broker-of-record they use. Costs should be nominal. As the borrower, you will typical pay these.

One benefit is that a good HML will have local experience and be able to evaluate and confirm you have a good deal that protects everyone. This is implicitly required of any HML. They will have paperwork that's been vetted by a lending attorney (not the same as a real estate attorney) and experience working with escrow and title companies. You will both learn that there is more to a safe loan than a note and deed of trust.

In no order, typical loan documents will include:

• Note
• Deed-of-Trust
• Purchase Contract and escrow instructions to confirm your deal and the associated deadlines you and your lender will have to meet.
• Preliminary Title Report, which you and your lender should learn to read to understand all liens against the property.
• Personal Guarantee (You do want to protect your lender don't you?)
• 1003 which, at minimum, shows you have the assets necessary to complete this deal and protects your lender from a claim that this is a predatory loan.
• Use of Loan Proceeds Statement, where you declare that the use of the money will be for a flip. Makes this a business purpose loan and avoids Dodd-Frank, SAFE Act, and the like. This should be the very first document you prepare.
• Lender Instructions to direct escrow and title with your lender's specific instructions, including loan position, various insurance requirements, dealing with certain liens, and a pile of others.
• Lenders Title Insurance policy with proper endorsements.
• Fire and liability insurance policy (NOT a homeowner's policy)
• Appraisal
• I could go on

As I said, this is not a DIY job. None of this will be strange to an experienced hard money lender.

[Also, most flips will take much longer than 3 months, Yia. I would be prepared for 6 months and tell your lender to expect this, or more.]  Good luck.

Christopher Morin · Answer

Looks like a great deal, and a very secure position for your lender.

Only need two things to borrow money in Real estate: Note, security instrument.  Note has terms of repayment (amt, rate, term, special conditions).  Security instrument collateralizes the property against the note.  Depending on the state, its either a mortgage or a deed of trust.

My vote: Let a title company do it for you for cheap, just give them the terms and they'll draw up the paperwork and make it nice and easy for you both to just sign on the dotted line.

Vitalii Lunko · Answer

Can somebody share a form?

Jeff S. · Answer

Broadly speaking, investor law is dictated by the state in which your investor resides and lending law is dictated by the state in which the property is located.  There are only about 4,395 exceptions to this, however.

Yes, lending documents, the note and deed of trust in particular, are state specific. So are some of the required disclosures.

My advice above, which was written several years ago, doesn’t change, @Terry Keys. You should use a local hard money lender/RE Broker to help you with the loan origination. (Not a solicitation. We don’t do this.)

CA real estate is not cheap and you could be talking about a life-changing amount of money if something goes bad, Terry.  Make sure your lender is in full contact with a CA lending lawyer to understand what he or she is signing up for.  You should sit in on this conversation.  Note that lending lawyers are not the same as real estate lawyers.

Good luck, Terry.

Terry Keys · Answer

What if you have a property in California and have a private lender in Washington State that is willing to finance the purchase and rehab? Who could I talk to for this kind of scenario to protect everyone? I have a lawyer in WA that has all the documents but he states laws are different in CA.

George Despotopoulos · Answer

@Jeff S. gives you some great advice here. I would definitely look into a lender that operates in the manner and with the docs he laid out. The deal should be as risk-free as possible and having a lender going through the proper channels is necessary.

Yia Her · Answer

@Christopher Morin thanks.  I was just going to ask my title/escrow officer.  Thanks again!!

Private lender - forms required??

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