Vehicle to Secure Private Money with friend?

Question

How are you securing private money with friends, family or coworkers? In this case it is an old client of mine who has become a friend and has some money sitting around doing nothing. We have a solid trusting relationship and want to make it easy but still give him security. The capital will be used for rehab cost + landscaping on a 6U apartment that already has a primary loan. There is 125K of equity in the property and we discussed him lending up to 100K. I have heard to reach out to an attorney but we don't want to add the cost with the good relationship we have. Another friend gave me a very basic note that he used and had notarized when working with his father in law.

Any suggestions would be greatly appreciated.

Andrew

Any suggestions would be greatly appreciated.

Andrew

Jaspreet Baveja · Answer

Hey Seth, I would suggest creating a simple LP or JV agreement and offering them an equity position, if not debt, on the deal. Just something to legitimately secure their position in the deal. If you've got an asset free & clear, place the 1st position lien on it in that lender's name, and then use that fund for your next deal etc.. Just a couple of thoughts!

Jonathan R McLaughlin · Answer

Account Closed

"I have heard to reach out to an attorney but we don't want to add the cost with the good relationship we have."

This is exactly why you should use an attorney, so that everything is done by the book and it gives your relationship the best chance of success if things go sideways.

Jaspreet Baveja · Answer

Hey Account Closed, I do honestly think it's best to first talk to a Title Company to see if they can help you with drafting a Note with a 2nd Position Lien Mortgage document and help your friend record it, while also offering you guys an escrow account to rely on vs direct wires to each other etc. This would ensure that the Lien is recorded properly, and your friend can even order a BPO, simpler and faster than an appraisal to validate the equity, and Title Search could guarantee what liens are present as well. It is almost ALWAYS a good idea to have proper docs and records in place, ESPECIALLY for 2nd position, and not recommended as a first time investor. If they want to help you and you give them a personal guarantee and they're ok with a 2nd position lien vs an unsecured, I would still suggest using a Title Company to order a Title Search, and hole $$ in escrow and prep docs etc..

Jeff S. · Answer

“I have heard to reach out to an attorney but we don't want to add the cost with the good relationship we have. …  Another friend gave me a very basic note that he used and had notarized when working with his father in law.”

Sorry, but these are exactly the reasons your friend wants
to go to an attorney, Account Closed.

Your friend should know what he’s getting into.  Assuming you have another loan on this property, and that this first position lender allows it (some will, some won’t), the attorney will explain the dangers of lending in second position.

A knowledgeable attorney will also explain the applicable law in your state (AZ?) and provide a set of loan documents that protect both your friend and you.  This will not be a “very basic note.”  Notes don’t get notarized, mortgages and deed-of-trust do.  More importantly, a note alone results in an unsecured loan.

There are many documents associated with a properly originated loan.  Sorry to be blunt, but your other friend doesn’t know what he’s doing as far as lending goes.

Your friend, who will be a lender in the eyes of the law should speak to lending attorney, not a real estate attorney, and understand what he’s getting into. You should go with him.  Alternately, a licensed professional such as another hard money lender could perhaps originate the loan with vetted paperwork and guide your friend.

I know this is not what you wanted to hear Andrew, but borrowing money like this is not a DIY job.  You must be fair to your friend.

Best of luck to the both of you.

Kenneth Garrett · Answer

Do not borrow money from family, friends, etc as private lenders and not use an attorney.  It is essential you protect there money.  There are countless stories of deals that go sideways and family and friend relationships have been destroyed.  I have borrowed many times from private lenders and securing there money legally is the key.  A note and a mortgage or deed of trust is the most typical way.  If the money is borrowed with no security (property) would you lend that way.  Too many things can go bad.  Spend the $500 and hire an attorney.

Seth Hochberg · Answer

I'm curious if anyone else has answers on this as I'd like to know as well. I have a few friends/family that come to mind where they might feel comfortable investing 10k-20k. As someone very new to this (just brainstorming how to get financing at this point) is there a convenient way to give security to multiple people for smaller amounts? I'm assuming not, but curious if anyone knows a way. Obviously, it could be informal and rely on trust, but I don't like this at all and would rather give my lenders the same security I would give a stranger.

For context, I'm looking to BRRRR a SFH in Baltimore, MD. I could potentially finance most of it myself, but getting another 50k+ in private lending would give me a much better selection of properties to look at.

Vehicle to Secure Private Money with friend?

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