Need Advice on How to Lending Contractor Money

[Geoff K.]

Hi all, I need advice pretty quickly.

I have offered to loan my contractor $60k so he can also buy a rental property off market. I fully trust him but I also need to know what documents/title lients/promissory notes/etc that I will need to draw up to safely loan him the money. I would be the "bank," so holding first position (and only) lien on the house he wants to buy.

And yes, I should use a lawyer, but I just started working with a lawyer and he is a small 1-person shop and can't get the documents created in time. I am also accustomed to buying cash, so loan type documentation is not my strength.

Any recommendations for how to do this myself? Ultimately, I'd love to do some private lending on the side (in addition to my flips and rental purchases), and would love your advice!

Thank you,

Geoff

[Jeff S.]

Under no circumstances should you obtain your loan docs from a title company, even if they offer. Title companies are insurance companies, @Geoff K.  They have lawyers but these are not your lawyer. I’ve occasionally seen the documents they will provide. First, they are never a complete loan package. Second, what they have is normally awful and will barely protect you. (And for heaven’s sake, what private lender gets their docs online? Geeze.)

If you want to see a sample of the docs typically required for a private loan, read my post in this thread: Private Lender – Forms Required??

It’s not just about obtaining docs. Do you know how to originate a loan on your own? Specify hazard and title insurance requirements? Read a title report? Specify lender instructions? Do you understand the usury and licensing law in your state? Private lending is not a DIY project until you know what you’re doing. Then, it’s incredibly simple and can be very safe.

You can call a real estate attorney who does closings. Is that who you are using? Most of these are used to conventional loans and not particularly versed in private lending.

My suggestion is to call a larger local hard money lender and ask if they would help originate your loan. Some won't but many will. HML's are used to private loans and should have a set of well-vetted paperwork and the appropriate license, as required. (Too bad you didn't mention your state.) They should be able to help you evaluate the property, the borrower, and you – something a closing attorney won't do. Also, ask which lending attorney they use. If they won't originate your loan, perhaps they can recommend their lending attorney to you. Lending attorneys are not real estate attorneys.

I bet you spent a lot more time earning the $60K than your borrower is giving you to fund the loan, Geoff. Encourage him to get an extension but don't be pressured.  There will be other borrowers.  Being able to close a loan very quickly is a great competitive advantage that will separate you from a lot of competitors. First, make sure you’re set up to do it safely though. This might take time.