Private and/or HML in Texas - How do I do it?

Question

I've had a few fix and flip guys approach me about lending them money for projects and I'd like to explore that some.  I'm not really sure where to start though, as I've never worked on the lender side of a deal.  So I have a very broad question of, "How does one become a private or hard money lender?"  Also, what are the rules I need to be concerned with in Texas?

I would be lending around Corpus Christi so I can go look at properties until I have a history with the flipper.  We are in Houston about once a month for a few days, I would welcome the opportunity to buy lunch for anyone that's currently lending, either in Corpus or Houston, in return for the opportunity to pick your brain.

Feel free to email me if you're willing to help me out.

Tamara Deering · Answer

@Bernie Granier

I think that this is one of those times that your best bet, after you have listened to podcasts and got a feel for the risks and rewards of private lending, may be to find a real estate attorney and talk to them about the paperwork they recommend and how much they will charge to draw it up.  Essentially you are loaning money for a property so in addition to the promissory note and deed of trust paper work you want to think about how you are going to protect the investment itself.  Most (if not all) hard money lenders require that the borrower insures the property and names the lender as an insured.  You will also want to think about how you are going to collect the payments, are you going to do interest only and collect monthly or are you going to write the interest into the note and collect it when the property sells?  Also, what actions will you take if the borrower is unable to pay off the note at the agreed upon time, (foreclosure, default interest rate)?  Considering things like this will make your conversation with the attorney much more productive.

Bernie Granier · Answer

@Julian Buick, thank you!  I don't know why it had not occurred to me to look for a podcast, I'm driving to Houston this morning to see Game 6 of the World Series with my dad and driving back down tomorrow morning so I've got 8 hours in the car to start listening to it.  That should give me a good

Julian Buick · Answer

@Bernie Granier there is a weekly podcast out there called the private lender podcast by Keith Baker. I’ve been listening to it from the beginning. The podcast provides a lot of really useful actionable steps for private lenders. Keith Baker is from Houston so you may be able to contact him through his website and see if he would be willing to let you buy him lunch.

Bernie Granier · Answer

Thanks for your input, @Jeff S.  I read through several threads on the subject and am continuing to research.  I made this post in the hopes that someone that is local to Corpus or Houston is willing to accept a free meal in return for letting me pick their brain about the lessons they've learned and things they wish they'd done differently here.

Jeff S. · Answer

Getting into private lending has been discussed here many times, @Bernie Granier, so you might do a search.  Assuming you are talking about lending your own money to local flippers (i.e. not hypothecating or syndicating a mortgage pool), we’ve been doing exactly what you want to get into and published our process in detail here a few times.  For example, look for my post in this thread: Becoming a Private Lender.

I don’t know the laws regarding usury, licensing, and origination specifically in Texas.  For these you’ll want to speak to a lending & securities attorney.  The best way to find one of these is to ask other local hard money lenders who they use.  I bet you’ll hear the same few names. Note too that lending attorneys are not the same as real estate attorneys, though of course there is a lot of overlap.  You want someone who lives and breathes lending.  Not someone who does lending today, evictions tomorrow, and leases the next.  A good legal understanding of the law on your part is important.

With business as good as it's been these past many years, lawsuits are relatively rare compared to say, 2008.  It shouldn’t be a surprise however, that there are clouds now on the economic horizon, so this could change quickly.  Lending documents are state specific and are your only protection in a complaint.  These must be bulletproof to the degree possible.  They are also state specific.  Don’t try to write loan documents yourself or get them off the web.  You’ll learn that a good loan package contains many more docs than a note and a deed of trust or mortgage.

Last, these are the magic words you wrote: “I would be lending around Corpus Christi so I can go look at properties until I have a history with the flipper.”

My only quibble would be that you want to look every
property with every flipper forever and only loan to those you’ve gotten to know, like, and trust.  The post I referenced above, explains how we do this.

Best of luck to you, Bernie.

Cody L. · Answer

Like lots of things, I tend to over simplify so take the standard disclaimer of "I'm not an attorney, please consult one, bla bla blah"

I've done private lending (and have received it).  It's not that hard unless you want it to be.  A HML or even a traditional mortgage is noting more than a fancy IOU with the property being collateral.   So I worked up a basic promissory note secured by a mortgage/lien on the property.   When the loan was paid off, the lien was released.

As far as I know, nothing more 'official' or legal needs to be done.  But again, I tend to operate very casually.  Drives me insane that loan docs are 1000 pages when they could be 1 or 2.