Legal Consequences of Using Private Money

[Ian Livaich]

Hello everyone,

I am considering using a family member as a private lender.  He would fully finance the property, including rehab costs.  Most importantly, I am trying to structure the deal in a way that best protects my family member's assets.  I don't have a property yet -- I am trying to understand the mechanics of private lending first.  Please let me know if I am missing something.

Q1: If my name is on the deed and a tenant were to sue me for some reason in regards to the property, I would be liable as my name is on the deed but not my family member as the private lender, correct? 

Q2: Further, if we execute a promissory note and deed of trust to secure his investment and record that lien with the county and a tenant successfully sued me and forced the sale of the property, would my family member, as the first position lien holder, receive what he is owed FIRST, then the tenant receives the remainder (if any)?  

Q3: Would the combination of a promissory note and deed of trust deter an attorney representing a tenant from suing me because I have no equity in the property?  In other words, similar to a conventional loan where I would only have 20% of equity in the property, in this scenario, I would own 0% of equity in the property while the the private lender controls 100% of the property through the "mortgage."

Thanks for your help in advance.