What is fair? and should I do it?

Question

I met a private investor that will fund my deals 100% with a 12% interest. There is another investor that knows  I have this contact. This investor has contacted me and wants me to fund the deal 100% through my private investor including the labor. I asked what the split would be since I would be providing the money for the deal and they responded with 12%. Then also said that the money should be sent to her through my private lender so everything would be going in her LLC. This is someone I have been going to weekly REI meetings with that is running the meetings. I am just wondering if this sounds normal and the numbers pan out correctly.

Account Closed · Answer

Why not just be nice and connect the investor and the lender? You do two favors and build relationships.

Victor Spencer II · Answer

Account Closed

I for got to tag everyone on my last response, but I connected the both of them and the deal is going through and i'm still getting my little chunk of the pie. Thanks for everyone's advice I really appreciate it. After just connecting the both of them it just felt like the right thing to do.

Thanks again,

Victor Spencer II · Answer

Hi @Kevin Siedlecki that is correct I have someone that will give me a personal loan and I would need to show him the details and all the information on the property in order to receive it. I was told that I would need to go to the title company and have a lean on the house for the amount that I would buying the house for. Then with the rest of the money I was giving would go towards renovations for the house.

Account Closed I have been thinking about that as well, but it takes me completely out of the picture. It does seem like that is what is happening anyways. I want to do everything the right way and do what is fair and that's why i'm on here trying to get other people's opinions that has been in this business i am fairly new.

Account Closed · Answer

The trick in business and life is to add value to other people. Then you usually do well. I dont see your value add in being in the middle of this transaction. If you feel strongly that you need or deserve compensation just ask the borrowing party for a referral fee if the loan goes through. But I would do the favor and build a reputation and relationships that would pay off in the long term in much higher returns. Think about it. If you get your fee, neither party feels they owe you anything. Its a simple transaction and over. If you do the favor, maybe they bring you a deal they cant do which is highly profitable. Or partner with you on something else.

Victor Spencer II · Answer

Hey everyone thanks for the advice. I took anisha's advice and connected the both of them. I appreciate the input and now everyone is happy.

Jeff S. · Answer

Borrowing money at one rate and lending at a higher rate is certainly ethical, @Victor Spencer II. This is how banks and many hard/private money lenders operate.  Unfortunately, the rate you mentioned is illegal.

In California, interest charged on a loan in excess of 10% APR is usurious unless the loan is secured by real estate and originated by a licensed real estate broker.  You're taking a personal loan at 12%, which exceeds the usury rate and not secured by real estate or originated by a broker.  If you borrowed at 10% or less this would might be ok.  Understand your lender would expect payments whether you have a use for this money or not.

I'm confused about the other half of this deal.  It sounds like this other individual wants you to sign a personal loan from someone else that immediately gets transferred to her LLC? Nonsense.  The money you borrowed personally would go into your bank account and you would begin making payments to your lender.  When your "partner" purchases her property she would use a proper escrow and title company.  You would either loan her the money at a rate greater than 10%, originated by a licensed real estate broker and secured with a note and deed of trust with lenders title insurance etc., or as a partnership/JV using an agreement specific to your deal that's obtained from a lawyer and which provides a sensible return to you.

With due respect, Victor, it's clear that all of you are over your heads here.  You're dealing with an unsophisticated lender willing to make an ill-advised unsecured loan to you and a partner of some sort who has no idea how buy property using a secured loan that protects you.  Or, she's very sophisticated and scamming you.  My advice is to take @Anish Tolia's advice above and just make the connection.

Shawn Devoid · Answer

To me, this sounds completely unethical and even though you are "in the deal", you probably won't make much, if any money AND most importantly, you have a lot of financial liability with little control.  The question you have to ask yourself is, how much do you value your reputation?  The only way to do it ethically ( and perhaps, legally) is to partner up with investor #2 and have some kind of Joint Venture paperwork drawn up.  Then, investor #1 is lending money to your joint venture.  I sure wouldn't do it for 12%, maybe anywhere from 30-50%.  Plus, you would need to be "involved", for it to work at all; your private lender trusts you, not some random lady at an REI meeting.  Depending on your market, maybe this could still work.  You really need to know your market and run all the numbers.  In many areas, the deals are too thin for three investors.  Plus, does investor #2 have a proven track record?

Shawn Devoid · Answer

To me, this sounds completely unethical and even though you are "in the deal", you probably won't make much, if any money AND most importantly, you have a lot of financial liability with little control.  The question you have to ask yourself is, how much do you value your reputation?  The only way to do it ethically ( and perhaps, legally) is to partner up with investor #2 and have some kind of Joint Venture paperwork drawn up.  Then, investor #1 is lending money to your joint venture.  I sure wouldn't do it for 12%, maybe anywhere from 30-50%.  Plus, you would need to be "involved", for it to work at all; your private lender trusts you, not some random lady at an REI meeting.  Depending on your market, maybe this could still work.  You really need to know your market and run all the numbers.  In many areas, the deals are too thin for three investors.

Kevin Siedlecki · Answer

@Victor Spencer II - I'm not following. Is the other investor asking you to use your investor to fund her deals, too? And she's giving you 12% of the profit from those deals in exchange for you putting up the money that isn't yours to begin with? That seems unethical, and probably unworkable, since the first investor you mentioned is giving the money to you to do deals, and I would imagine wants to see the plans for the deals before he gives you the money. If I misunderstand the situation, please correct me.

What is fair? and should I do it?

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