Private Lending: How to Safely Lend to Flippers

[Phil Vongsavang]

I've got a bit of cash I was going to put toward personally flipping homes in the next 12 months. But someone recently approached me asking if I'd be interested in helping to fund their flip project. I do trust this person and know first-hand that they're experienced so this isn't a question about vetting. What I'd like to better understand is how to structure lending in order to protect myself, both when a deal is successful and when something goes wrong. 

I'd love to hear from those who have been personally involved with private lending to hear about the successes and pitfalls I should look out for. 

[Jerel Ehlert]

This could be several books worth of information.  

* Find an attorney in your state to draw up the docs.  Don't use the borrower's if they are not representing you.  Don't use the title company's or the fee attorney because they don't represent you. 
* Minimum docs are a promissory note and lien instrument (mortgage or deed of trust). 
* I include a business purpose affidavit to ensure this is not a consumer loan. 
* Lend only to an entity (not a trust) and get a personal guaranty.  If you do lend to a person, the business purpose affidavit is a "must get".  If they are married, the spouse has to sign, too.
* Close at a title company.
* Get named additional insured on a builder's risk policy.
* Terms are dictated by you and modified by prevailing market in your area, but insist on some sort of payment each month.  This acts as a bellwether for trouble.
* If they miss a payment, send late notice and charge a late fee.  If they don't pay the 1st and miss the 2nd, send notice of default and intent to accelerate (i.e., start foreclosure).  Even if you can work it out and open to working it out, start the process.  You can always stop, but you can't go back in time to start earlier.

That will get you started.  Talk to other private lenders.