Private Money Lending

[Amir Vahab]

Hi Everyone, I am a residential flipper in Atlanta, GA and I have a few questions regarding private money lenders. I have personally flipped 2 homes, but I am now in the process of developing a business plan to solicit outside private money lenders. I have covered most of my bases by gathering info from BiggerPockets and other online sources. 

I am in the process of developing the details of our promissory note and gathering intel to speak intelligently on how the lenders funds will be held and how it is used. Our lenders will fund a % of the asset purchase, and they will fund a % of the renovation costs. Obviously, the lender will wire funds at closing for the purchase, BUT how does my LLC hold the funds the lender is contributing to the renovation? The money will be used in draws, but the total invested money for the renovation will be contributed by the lender up front.

Does the lender simply cut our LLC a check and the promissory note state that we owe them X dollars with X percent interest? Are the funds held in a special bank account? How would you structure the holding of the funds to give the lender the most confidence and make is easy for the LLC to access when needed?

Thanks for your help and knowledge!

[Adam Schneider]

@Amir Vahab You might want to join the American Association of Private Lenders. They have excellent resources (membership is not free). 

Here are some Pro Tips:

-- If soliciting an institutional HML, the HML will steer the ship.

-- If soliciting an individual/local HML, the HML will still steer the ship, but will be much more flexible with structure than the institution.

-- If soliciting for a true private lender --friend/family member--who is inexperienced in the process, share the following information:

1. Security Instrument--there will be a Security Instrument in place (i.e. Deed of Trust / Mortgage), just like with a bank loan in a traditional mortgage situation.

2. Promissory Note--spells out terms and conditions. There are plenty sample forms on the internet, or a local R/E attorney can help. Or you can write one up with a crayon on a napkin. Your call.

3. Lien Position--the inexperienced lender needs to understand the impact of being in 1st, versus being in any other, lien position.

4. Title Insurance--we require the borrower purchase title insurance covering the lender. That's standard practice. The inexperienced lender needs to understand the reason for the importance of this insurance.

5. Insurance--we require the borrower to place us as mortgagee as first payee on the mortgage insurance. NOTE: New flippers should have a conversation with the insurance broker about what type of insurance they are purchasing (replacement v. cash value...does it cover vacant properties...etc).

6. LTV--since these are collateral based loans, using an LTV that provides equity cushion is a key component.

7. Liquidity runway--This is so important when working with the private lender. Liquidity runway is code for, how long is the lender comfortable not having the money back in his pocket? If the lender needs the money back in 6 months and a day, and the borrower says it's a 6 month loan....that has got trouble with a capital T written all over it. The private lender needs to have a runway between when the loan is due, and when the lender absolutely needs the money back. 

8. Flow of money. The lender will wire the money to whomever is doing the transaction (title company/closing attorney). In NC, it's the title attorney. The title attorney will disburse the loan funds as directed. In our situation, if we are dong draws, we hold the draw money and work directly with the borrower for payments throughout the loan. When the borrower is under contract to close on the sale, we provide the payoff amount to the closing attorney. The closing attorney wires proceeds to us. A lien sat needs to be filed.