Private Notes: Lump Sum vs Demand

[Xuan "Swan" Redding]

Hi BP,

I am putting together hard money investors to fund flips. To protect everyone involved, we will be writing up notes for the loans.

I see on LegalZoom there are 4 types of promissory notes:
Amortized, Balloon, Lump Sum and Demand.

Any one of these better than another for structuring the flip loan?

[Jon Holdman]

Exactly what Wayne says. Lending is a regulated business. At this moment, you think everything will go great, your deal will work out and you'll pay your investors. In reality, things can go wrong. Nows the time to think about those, not when they actually do. Most states have some laws about interest rates and such. You will want to be in compliance.

You mention investors, plural. That's a little scary. Now, if you mean you're doing multiple deals and one investor is funding each deal, that's probably fine. If you have more than one investor involved in each deal, you need to be more careful. If you're putting one in first position and another in second, your probably OK. I would never accept second position, though. Nor, if I was the guy in first, would accept there being a second. But if you're pooling multiple investors money, especially if you're pooling it to do multiple deals, then you're really in securities territory. Some claim even a simple loan is a security. Some say its not. A recent poster claimed it was state dependent. But for-sure, if you have, for example, three investors each giving you some chunk of money, and then you use that to do your deals, you are absolutely selling securities. That's a much more complex deal. You might get away with it if you structure them as unsecured loans to your company.

But all this stuff is why you really want to discuss this with an attorney and have solid paperwork. Your investors should really have their own attorneys look over the paperwork, too.