All Forum Posts by: Pat Arneson

Quote from @Mitch Messer:

Quote from @Pat Arneson:

I've read a few old posts regarding this topic and have those documents in order, but I still have the following questions regarding a private loan (from family) --

Loan Documents for Purchase -

1. We have the promissory note, personal guaranty, and deed of trust(title/escrow to handle) ready to go. Does the promissory note and personal guaranty go to title or should I execute these outside of escrow?

2. Does my lender need to provide escrow instructions or anything along those lines? Can he just wire the funds to escrow, I sign the deed of trust, and that's that? Or, do he need to send some type of escrow instructions that outline 1st position, will fund after all docs signed, etc?

Loan Documents for Selling

1. What will this same lender need to provide title and escrow when I sell the property? Is it just a payoff demand and wiring instructions?

Thanks! This forum has been extremely helpful.

Hey Pat, regarding your docs for buying:

1. The promissory note and personal guaranty are private documents that don't get recorded. That said, I would still recommend you have them executed at closing by your closing agent, along with the other docs. I also recommend you provide two sets for signature, so that both borrower and lender get signed originals.

2. Your lender just needs to wire adequate funds to close. If there are other liens to be recorded, you should have already agreed as to the lien position this lender will be in, and the closing agent should know it.

3. Also at closing: You should provide your lender with a lender's title insurance policy, separate from your owner's title insurance policy. I recommend you as the borrower pay for this.

4. Also at closing: You should provide proof that the lender is named as such on a valid hazard insurance policy effective at least on the day of closing.

Regarding the closing to sell or refi, yes, your lender will just need to provide a payoff letter with wiring instructions to the closing agent. Post closing, they'll need to sign a cancellation of mortgage document or equivalent.

Thanks Mitch, this is great information! 

RE: Post Closing. How will the deed of reconveyance/cancellation of mortgage work? I figured that would need to be a part of the closing to remove that deed of trust prior to new ownership. Thanks again!

I've read a few old posts regarding this topic and have those documents in order, but I still have the following questions regarding a private loan (from family) --

Loan Documents for Purchase -

1. We have the promissory note, personal guaranty, and deed of trust(title/escrow to handle) ready to go. Does the promissory note and personal guaranty go to title or should I execute these outside of escrow?

2.  Does my lender need to provide escrow instructions or anything along those lines? Can he just wire the funds to escrow, I sign the deed of trust, and that's that? Or, do he need to send some type of escrow instructions that outline 1st position, will fund after all docs signed, etc?

3. What about Lender's title policy? 

Loan Documents for Selling

1. What will this same lender need to provide title and escrow when I sell the property? Is it just a payoff demand and wiring instructions?

Thanks! This forum has been extremely helpful.

Quote from @Luka Milicevic:

Thanks for your reply!

With the trimmed down agreements, are you then entering into a full contract to purchase with the owner? If so, I'm assuming you write a check directly to the wholesaler and they are out of the transaction? Then deposit EMD for transaction with property owner?

For double close, how do you ensure the wholesaler is in contract to purchase? They obviously won't want to share that unless they redact the purchase price.

Can anyone point me to a step-by-step guide for end buyers working with wholesalers? There are a few things I'm specifically interested --

- Do wholesalers actually enter into a PSA? Or is it a trimmed down agreement (option to purchase)? I'd like to be aware of what the wholesaler's obligations are should they assign us the contract. If it is a trimmed down option agreement, do we then enter into a full PSA with the property owner?

- Assign vs. double close. What is typical? I'm assuming assign.

- Non-refundable EMD: For the most part, we are fine with this provided we receive marketable title. Should this be sent directly to escrow? I've seen posts say it goes directly to the wholesaler, but how do we get that money back should there not be clear title? Based on what I'm seeing in some FB groups (don't intend on buying here), there appears to be a lot of scammers. I'm assuming it works by using this non-refundable EMD or they are simply daisy chaining.

Ultimately, how can end buyers be most protected from fault of the wholesaler or property owner? 

If I intend to fund the rehab with my own cash, do I need to disclose my rehab budget? I’m seeing lenders holdback this amount. It’s showing as increasing the loan amount although monthly interest payment stays the same? 

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?

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...

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.

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!