Borrowing funds to buy NPN

[Erick V.]

When you borrow money to purchase notes, how is that personal loan secured for the person lending the money. I have a person willing to lend me money to purchase npn but he wants to know how he's loan is secured since there is no deed yet. I know all about hard money lending for properties but not much on lending for notes.

[Doug Smith]

@Erick V. There are quite a few ways that it can be done. I'll touch on a couple:

1) Some note lenders require that a separate LLC be set up that is either fully-owned by the lender or is partially owned by the lender. The note is then purchased in the name of that LLC with contractual language that states that, upon liquidation of the asset, the lender is paid their principal and interest before you, the investor, get to take your money. Sometimes there is even a profit participation that the lender takes.

2) In addition to the security agreement, an assignment of mortgage can be completed and held by either the lender or an escrow agent that, in the event of a default, the assignment can be filed and the lender becomes the new owner of the note.

3) I've also seen other lenders simply have you sign a security agreement along with the note without taking an assignment, but this is pretty rare.

4) The lender could use the entity that the asset is purchased in as collateral. In the event of default, they can exercise their rights against the owning LLC/entity that owns the collateral.

Those are the most common I have seen. Traditional banks often do not understand note investing like they do direct real estate investment. In many cases they want to include an Account Control Agreement of sorts to limit your ability to sell notes or REO that might be collateralized without their permission. Make sure you understand the security agreement.

Erick, I hope this helps a bit. It's not like securing real estate.