How Do I Use Private Money? *NOT talking about hard money lender*

Question

Hi BP Fam! I have a friend of a friend who's caught wind that I flipped first property and has money she'd like to lend.  (Yeah!  Pretty cool!)  We are going to have a chat about her lending money for a fix & flip project but I'm not sure how to use private money.  Is someone out here willing to really dumb it down and explain how you'd use someone else's money in this type of scenario?  (This would be happening in Arizona...if that matters)  Only questions I can think of are:

• Does she deposit checks to escrow company?
• I'm sure I have to record a "note"....but not sure how that happens
• I know all terms are negotiable between us, but what are "typical" interest rate and terms

Thanks for your time & advice!

P.S. I've posted some pics of first flip on IG. Feel free to follow @felnoz

Jonathan Taylor Smith · Answer

In NC, I use Private Lender funds to both purchase the home and provide some amount (or all) of the rehab funds needed for the project. The money never comes from the lender directly to me... Everything goes through the closing attorney, who prepares a Note and Deed of Trust between my LLC and the PML that spells out all the terms and secures the lenders interest in the property. The Note details the amount being loaned, interest rate, points, term, etc... And the Deed of Trust ties it to the property.

On day of closing, the PML wires funds to the closing attorney (verifying the wire details by phone) and the attorney records the documents with the City electronically, completes the closing and sends the original docs to the PML. I then own the property and the PML is my bank with full rights to foreclose if I default on the loan (would never happen).

I normally do interest only payments for 18 months with an option to extend (for a fee) another 6 months if needed for a total of 24. And since I'm more Buy & Hold than Flip, I complete the rehab, get the property rented, and then refi out anytime after a 6 month minimum term, but I like to try to give a full 12.

J.T.

Will Pritchett · Answer

@Felipe Munoz The way I do it is very similar.  We use a Title company and their attorney writes the note etc.  Lender wires funds and it's really pretty easy.  I only borrow about 65-70% ARV and fund the repair myself.  I pay all fees and they get 10 percent interest with a minimum of 2 months of payments (to make sure it's worth their time).  We usually go about 6 months.  We do monthly interest only payments then refinance and pay them back.  We also do an 18 month term but I never intend to keep the loan that long and they are aware.  My lenders have been so happy with the returns that they are just waiting for the next project I bring.  It can really be a win/win.  So much that I'm now thinking about lending money too!  I hope this helps.  As you said, the terms are completely up to you and the lender to negotiate.

Best of luck,

Will

Julian Buick · Answer

@Felipe Munoz the answer to your first question is "Notes" are not recorded. The note is just a promise to pay and spells out the rate and terms of the loan. The security instrument (mortgage or trust deed, depending on what is used in your state) is what is recorded and that is what secures the loan to the property. The attorney or title company will record the security instrument with the county.

Jonathan Taylor Smith · Answer

@Christian Nachtrieb - I'm using PML for entire purchase price and in some cases a portion (or all) of rehab funds needed for the project up to 70% of appraised ARV, so no other lender involved at that point and I do not put anything down. Then when the project is completed and rented (I'm not a flipper), I do a normal bank refi to pay off PML. But going forward I will attempt to replace a short-term PML with a long-term PML at a lower rate, such as using someone's Self-Directed IRA Funds over 10 to 30 years.

J.T.

Felipe Munoz · Answer

Thanks!!  This has been extremely helpful!  More questions......

• Is the "Note" written up by an attorney and recorded by title?
• Proof of funds:  This question came up in a previous post but all answers referred to "approval letters" provided by hard money lenders.  How do you provide proof of funds when making an offer using private money?

Christian Nachtrieb · Answer

Got it thanks for clarifying. I was hoping there was some way I could use private money to cover JUST the downpayment for the property, and then do what you do with a cash out refi to get their initial investment back after 6-12 months.

Jay Hinrichs · Answer

title company will walk you through it since AZ is not an attorney closing state.

just negotiate the rate of return..

do check your usury laws and make sure your not violating those.. title company wont do that for you.

lender may need to be licensed but commercial non owner may be exempt I know in NV its not neither is Oregon or CA  but most states have a carve out if its a one off IE its the only loan she makes and she does not hold herself out as a lender in any means..

not really complicated.

Christian Nachtrieb · Answer

@Jonathan Smith are you using a commercial loan in order to be able to use a PML's money for downpayment? How does that work? Thanks!

How Do I Use Private Money? NOT talking about hard money lender

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