Deed of Trust and Note for Private Lender?

[Pat Arneson]

I have an opportunity to raise capital with a private individual at a flat interest-only rate as a way to reduce interest charges and eliminate origination and service fees. I'm looking for ways I can "protect" this private lender. 

In theory, this is what I'm proposing -- I'll fund 20% and cover closing and rehab costs. Private lender will wire ~80% to my business bank account shortly before close. In essence, it is a cash offer. I am assuming I can write the offer as cash, so long as the private funding is guaranteed otherwise I may put my EMD at risk. For non-auction properties, I'm assuming the title company can draft the deed of trust and promissory note and record at close? After all, most lenders just use the standard Fannie Mae template... For auction properties, I'm assuming once I purchase a property I can draft and record the deed of trust following recordation of the conveyance?

Then, upon resale, does this private lender simply inform the title company of the payoff?

Is there anything I'm missing?

Thanks!

[Mitch Messer]

Quote from @Pat Arneson:

I have an opportunity to raise capital with a private individual at a flat interest-only rate as a way to reduce interest charges and eliminate origination and service fees. I'm looking for ways I can "protect" this private lender. 

In theory, this is what I'm proposing -- I'll fund 20% and cover closing and rehab costs. Private lender will wire ~80% to my business bank account shortly before close. In essence, it is a cash offer. I am assuming I can write the offer as cash, so long as the private funding is guaranteed otherwise I may put my EMD at risk. For non-auction properties, I'm assuming the title company can draft the deed of trust and promissory note and record at close? After all, most lenders just use the standard Fannie Mae template... For auction properties, I'm assuming once I purchase a property I can draft and record the deed of trust following recordation of the conveyance?

Then, upon resale, does this private lender simply inform the title company of the payoff?

Is there anything I'm missing?

Thanks!

I don't understand: If you truly want to protect the PL, why not close with a title agent?

1. You'll want your private lender (PL) to have a lender's title insurance policy. Your current approach leaves your PL exposed to any title flaws that might arise.

2. You'll want your PL named as lender on the property insurance policy. Who's going to ensure that this policy is in place?

If it helps, put yourself in the position of the PL.

What happens if the PL wires the 80% to your business account and then you get hit by a bus? How would the PL ever get their money back?

What if you did buy a property at auction, and then before you recorded the deed, you got hit by a bus? How does the PL prove that a deed of trust ever existed?

Title companies and closing attorneys exist for this specific purpose.

Why not use them?

[Pat Arneson]

Quote from @Mitch Messer:

I don't understand: If you truly want to protect the PL, why not close with a title agent?

1. You'll want your private lender (PL) to have a lender's title insurance policy. Your current approach leaves your PL exposed to any title flaws that might arise.

2. You'll want your PL named as lender on the property insurance policy. Who's going to ensure that this policy is in place?

If it helps, put yourself in the position of the PL.

What happens if the PL wires the 80% to your business account and then you get hit by a bus? How would the PL ever get their money back?

What if you did buy a property at auction, and then before you recorded the deed, you got hit by a bus? How does the PL prove that a deed of trust ever existed?

Title companies and closing attorneys exist for this specific purpose.

Why not use them?

Hi Mitch,

Thanks for your reply - I agree completely. My goal is to be able to write cash offers. I presume I could still write in loan amounts while waiving loan and appraisal contingency. This won't solve for auction properties though, right? At least at the court steps... not sure how that will work with online auctions via Xome or Auction.com.

It sounds like I may need to capture this funding arrangement under a different instrument. Potentially a personal loan. In both your scenarios, the lender should be able to recoup their investment provided there are no other creditors (or at least liabilities that exceed assets). Another option may be to secure the loan using primary residence as collateral.

[Amir Khan]

@Pat Arneson I agree with Mitch, to provide protection and trust from your PML, you need to have his/her funds go to the title company and in escrow prior to closing (instead of coming into your bank account). Another important thing not mentioned is that you need to list your lender as "additional insured" on your insurance policy. 

[Pat Arneson]

Quote from @Amir Khan:

@Pat Arneson I agree with Mitch, to provide protection and trust from your PML, you need to have his/her funds go to the title company and in escrow prior to closing (instead of coming into your bank account). Another important thing not mentioned is that you need to list your lender as "additional insured" on your insurance policy. 

Thanks Amir! I like that idea -- This should work for most properties except in person auctions. I'm wondering if it will work for online auctions. I assume it should...

[Jay Hinrichs]

Quote from @Pat Arneson:

Quote from @Amir Khan:

@Pat Arneson I agree with Mitch, to provide protection and trust from your PML, you need to have his/her funds go to the title company and in escrow prior to closing (instead of coming into your bank account). Another important thing not mentioned is that you need to list your lender as "additional insured" on your insurance policy. 

Thanks Amir! I like that idea -- This should work for most properties except in person auctions. I'm wondering if it will work for online auctions. I assume it should...

Ok this is how you do it for court house steps.. the investor provides your cashiers checks. some will charge you to use them like 250.00 or something.. if you dont win you simply bring the checks back and give them to the bank and your out 250.00 or they dont charge you at all.
then when you win the bid to secure the lender you simply have the trustee's receipt name your lender as the buyer.. so he is secrured the deed comes back in his name then you simply reverse the ownership and record a mortgage.. U can have the receipt in yours and his name as well but this is how I have done it when I am giving money for auctions.

[Pat Arneson]

Quote from @Jay Hinrichs:

Ok this is how you do it for court house steps.. the investor provides your cashiers checks. some will charge you to use them like 250.00 or something.. if you dont win you simply bring the checks back and give them to the bank and your out 250.00 or they dont charge you at all.
then when you win the bid to secure the lender you simply have the trustee's receipt name your lender as the buyer.. so he is secrured the deed comes back in his name then you simply reverse the ownership and record a mortgage.. U can have the receipt in yours and his name as well but this is how I have done it when I am giving money for auctions.

Thanks Jay! I'd be curious how this arrangement would work. I'm assuming you need an established working relationship with said lender. Why would they agree to provide cashiers checks without knowledge of purchase price, rehab costs, and ARV?

[Jay Hinrichs]

Quote from @Pat Arneson:

Quote from @Jay Hinrichs:

Ok this is how you do it for court house steps.. the investor provides your cashiers checks. some will charge you to use them like 250.00 or something.. if you dont win you simply bring the checks back and give them to the bank and your out 250.00 or they dont charge you at all.
then when you win the bid to secure the lender you simply have the trustee's receipt name your lender as the buyer.. so he is secrured the deed comes back in his name then you simply reverse the ownership and record a mortgage.. U can have the receipt in yours and his name as well but this is how I have done it when I am giving money for auctions.

Thanks Jay! I'd be curious how this arrangement would work. I'm assuming you need an established working relationship with said lender. Why would they agree to provide cashiers checks without knowledge of purchase price, rehab costs, and ARV?

they wont.. as you noted you need the relationship first.. buying courthouse steps is uber risky for those starting out.. And keep in mind in a major metro area there will be investors and investor groups that will out bid you on anything that is remotely a deal. Now if your in smaller rural county you probably stand a chance.