The anatomy of a private money loan process

[Catalin B.]

I am new here and I am looking for a short brief description about how a private/hard money loan works from start to closing (typical process)...this might be helpful for both private parties that are interested in lending funds and also for borrowers looking to flip properties (what to expect)...I have outlined some questions below:

-What type of documents are usually needed for private money loans closing (they might differ from state to state)...sample docs links might be helpful (e.g. promissory note, deed of trust etc).? 

-What certified parties are required on the process (e.g. attorneys, brokers, title company etc) and what the lender can do himself in order to save money?

-How the private lender is protected in the case of default, late payments etc....in other words how to reassure a potential private money lender (friend, family member) that their funds are safe (mimic the professional and experienced private/hard money lenders steps)

-What are the common terms of the loan (rate, interest only payments, length, penalties, collateral on other property equity, early/late reimbursements, etc.)

[Shera Gregory]

@David Whitaker -- good questions! 

1. So far everyone that I have loaned money to has been through connections I made in person at a local REIA or other real estate type meeting. In some cases I have done follow-up one-on-one meetings at a coffee shop, etc, but not always. Often someone who does private money lending will mention that during the introductions if the meeting organizer does a round of introductions at the beginning of the meetup. I have had people approach me after I mentioned in the larger group setting that I do lending. The first thing to understand is that people who have money to lend WANT to lend money. We just want to be certain that it's secure. And different lenders have different levels of risk tolerance. For some folks the fact that you haven't done a deal yet would be a no-go. If that's common in your area then you might need to use a hard money lender to get your first deal done. There are some advantages for a newer investor in working with a LOCAL hard money lender. If they don't want to lend on a deal then it's not a deal. Use their experience in the local market to keep yourself from getting into a bad deal.

If you are able to identify some private money lenders in your local area I think it's a very good idea to talk with a few of them before you have a deal just to get a feel for what they want to see. Without a deal in place you may not get them to do a one-on-one meeting outside of a regular real estate REIA but that's OK. So, to directly answer your question # 1 I would be fine if a new investor came up to me during the networking part of a REIA meeting and said "I am working on getting my first deal and I would like to be able to use private money. I plan to cover at least X% with my own money. Are you are open to working with a newer investor like me?" The "X%" could be money you get from family, credit cards, etc. The higher X is the better.

2. You said a" new investor (like me) wouldn't have anything except the potential of the current prospective deal". Actually, there is a lot that you can line up ahead of time. I would suggest making a list of the people you will use to help you with your deal. Do you have an attorney or title company?  Is there anyone in your area who does inspections to help determine the scope of the work required (not a retail home inspector but a contractor/former contractor who can go over the property with you)? Do you have a real estate agent who is helping to determine the sale price (if this is for a flip)? If it's for a buy and hold and you need short term financing from the PML then how are you determining the market rent? Basically ... what does your team look like? The more support you have from others who ARE experienced then the more confidence the lender will have that you won't get into trouble.

Best of luck!!