How to cover my butt as a private lender. Legal docs? Lean?

Question

Hi,

So, I'm trying to make it simple...

I got money I am lending to a brother in-law to purchase a property. Property needs cosmetic work. He will do the work him self and pay for repairs him-self and then occupy the property.

I am putting up 75% of purchase price.

This will be a cash purchase. He will get title search/insurance and insurance on the property after taking ownership.

The question is how do I cover my self in case of unforeseen situations? Lets say he gets hit by a bus or something or looses his mind and refuses to pay back the loan.  How do I get the lean on the property or set it up as collateral on the loan? How do I make sure I have recourse.

I want put together a doc and put all the terms on paper. Have him sign. Is that even legally binding?  Is there a doc online that already covers this? Do I need to get a lawyer involved?

FWIW... I am in Florida, he is in Ohio.

Please advice on how to best handle it. Thank you all in advance!

This may have been already covered and if some one can me to where I can read up on it. I would appreciate it.

Tom Gimer · Answer

Man.

Just make your relative take title to this property in an entity and structure this as a business loan. Note and 1st position mortgage/deed of trust secure your money in case things go sideways.

I doubt you are financing a brother-in-law 30 years... there could be a divorce a year from now. He can refi, pay you off and change title at that point.

Account Closed · Answer

Borrower pays broker fees, not you.

Florida is a mortgage state, meaning, you have to go through the courts to foreclose.  So, if after court costs, lawyer fees, lost opportunity costs, that whatever is left over when collateral property is sold at a sheriff's sale there is enough to cover your loan principal and interest, then yes, you do have effective collateral.

Account Closed · Answer

Since he is occupying it's a consumer loan!

Please talk with a legal professional before doing this loan.

Consumer loans generally require tons of regulatory compliance and licensing.

Consumer loans have been legislated out of existence for private lenders ... according to my lending attorney.

But, you can still do it, just need to comply.

Tom Gimer · Answer

Account Closed This is an acquisition. It's not a primary. Your responses all assume too much.

If you read the original post, the relative will acquire and rehab the home. OP could be paid off with a post-rehab refinance and relative can then make it his primary. Or, the two relatives could acquire the property jointly, do the rehab and refi OP out. There are many ways to protect OP ... which if you bothered to read it was the purpose of his post.

Tom Gimer · Answer

Account Closed

You have 6 replies of NO for a family loan. Not a single attempt to explain how to make it happen legally while protecting both lender and borrower... which can certainly be done.

It's quite odd.

Tom Gimer · Answer

Instead of striking fear into the heart of OP how about trying to help him structure this properly? His sister will appreciate your efforts.

Paul Gilo · Answer

@Kathie Riedel the other property is a duplex he got for cheap, gutted the full ting and is working through putting back together. He was originally planning to live on one side and rent the other, but then found this SFH that he could get and pay off in a few years, instead of paying rent where he lives right now. The plan was for him to live there until loan is paid off and then turn it into a rental. But that seems backwards based on what I'm reading. lol... sigh...

Account Closed saw this post on another thread... is that something a title company typically does? handle the recording of leans against property? But I guess since this is the primary residence its a bit different.

"1.  Funds are distributed by title after mortgage is recorded, usually the same day.  I would wire money, not cashier's check, cashier's check will delay closing by a few days to clear.  You can send your money to title in one of two ways, (1) wire $25k and title will send you a check (or wire) after closing for your points/fees, (2) net funding: wire $24k ($25k-$1k) and you don't have to wait for your $1k check.

2. I get a ALTA Lenders Policy with whatever endorsements come standard.

3. Attorney once, template forever more.  You fill in the blanks, email to borrower, borrowers signs, in front of notary for mortgage, notary not necessary for note, borrower overnight mails originals to title, title records mortgage after your funds arrive at title, title distributes net proceeds to borrower and whatever if any proceeds to lender.  Borrower will usually have to bring money to closing to pay down payment, fees, liens, taxes, etc above and beyond what lender funds don't cover.  If borrower doesn't bring money to closing you as lender lent too much ... borrower doesn't have skin in the game."

Account Closed · Answer

@Paul Gilo

I'll say it again since some of the readers can read.  If you really want to do this loan go through a loan broker.

Also, there was somewhat of an odd suggestion by one of the other posters that your in-law should put what he plans to be his personal residence into an entity ... bad idea.  He would lose the 250k/500k capital gains exclusion on resale, homestead and probably the stepped up basis on death.  He would also have expenses associated with the entity.  Check with both an attorney and CPA before taking this suggestion.

Be careful who you listen to, some folks are only on this site to advertise there services and don't know what they are talking about.

Account Closed · Answer

I am trying to help, and  I disagree with your approach @Tom Gimer.

Substance will trump form in court.  The substance is that this is a consumer loan, even if you structure it in a business form.  It will probably work, same as not putting the property in an entity will probably work.  Borrower has no history of being in this business, and no future intention of being in this business...it's a consumer loan.

Account Closed · Answer

@Paul Gilo

Let me start by saying if you are seriously thinking of going ahead with this consumer loan you are in over your head and making a mistake.

Yes, those are federal lending laws you will likely be violating doing a consumer loan, maybe more depending on what state you are in.

Any lender (institutional or private) needs to be a party to the purchase closing, and needs at a minimum to be the mortgagee on the fire policy and needs lenders title insurance.

Consumer loans has very little to do with owner occupied (OO) or non-owner occupied (NOO).

Pop Quiz (and this is a trick question):

1.  If I lend you money secured by a NOO you own and intend to flip, and you use the money for a family vacation, is that a consumer or business purpose loan?

2. If I lend you money secured by your OO personal residence, and you use the money to rehab a flip, is that a consumer or business purpose loan?

3.  If I lend you money secured by a NOO flip that you move into after rehab, is that a consumer or business purpose loan?

Answer:

1. Consumer purpose.

2. Business purpose.

3. Consumer purpose ... this one has gotten a lot of private lenders in trouble.

Again, chances are non of these bad things will happen, but it's out there.

Disclosure: I'm not an attorney therefore don't know what I'm talking about.

How to cover my butt as a private lender. Legal docs? Lean?

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