All Forum Posts by: John M. Erdek

Thank you for the kind words @James Masotti.  

I'm awfully busy right now, so a quick reply--and it may sound a little harsh but, in my experience, the following is true to one degree or another regarding private lenders who think it is "too scary or unsafe" to do the work required to protect their investment.  Even if that just means engaging a lawyer that YOU (as the borrower) will pay for--which is, uh,.....NOT hard!

James, your intentions are great, and I highly recommend your approach---total transparency, explain, explain, explain, and be up front about risks and rewards.  However, overall (and this is the harsh part), if you are trying to be the "good guy" and make sure your lenders are protected MORE than they think they should be protected, you are:

Trying. To. Fix. Stupid.   Can't be done. 

Here's the thing--you can TRY and educate lenders, you can TRY to let them know you want them to be protected as well as you, but if you take that horse to water and it don't drink....well, good for you.  Take their money and if things don't work out for the lender, that's NOT your problem.  Who should be most concerned about the money being lent?  The lender!

I have a saying:  My BEST clients are those that come to me the SECOND time.  Why?  Because the second time, they LISTEN to me.  

In summary, I think you are doing all you can--and kudos to you for trying to do the right thing.  I can tell you a story  about a borrower (a CPA in fact) who hit up a whole bunch of private lenders (her clients) for loans.  Long story short, that CPA and her "projects" all went waaaaay sideways----to the extent the FBI and NJ state police were involved and jail time resulted.  

There was ONE---and only ONE--lender in that bunch who got his investment back (about $350K) via foreclosure of a property. Guess who? My client--who insisted after talking to me that the CPA sign the loan documents I prepared with proper collateral, correct LTV, first mortgage, title insurance, confessions of judgment, etc, etc, etc.---all that "difficult" stuff. You think any of the other lenders who didn't worry about that stuff and/or thought it was too "cumbersome" wish they did a little more......?

In short, you can try and point your lenders in the right direction (maybe find a trustworthy lawyer you can point them towards?), but if they insist on lending based on a wing and a prayer.........I say let them.

Best-

John M. "Can't write a short-reply" Erdek, Esq.

This message is not intended as legal advice and may not be relied on by anyone for any purpose whatsoever. The information in this message is intended solely for general informational purposes and does not create an attorney-client relationship between the author and any other person or entity.

Original poster indicated lender only desires interest payments, so amortization period does not matter-loan is not amortizing at all.

Having represented many "related" (family, friends, etc.) lending relationships over the years, I would highly recommend--for both you as the borrower, and family member as lender--that you structure this deal as if you are NOT related.  And that includes NEVER having a title company supply documents or tell you what is "needed".   Too many relationships have gone oh-so-bad over time when everyone *thinks"* they know what their deal is and later have different memories.

Engage an attorney, document the transaction correctly, and everyone is thereafter on page one from day one.  And, on the same page at day 2283.....

BTW, scenario #2 makes no sense for this transaction.  You (your entity) is the borrower, someone else is the lender.  That's it.

John M. Erdek,

I am writing as a) an attorney who represents both private lenders and borrowers (both traditional and self-directed IRA borrowers/lenders) and "regular" lenders (e.g., banks), b) a partner in a RE investment private lending company and, c) a RE investor for many years.

I have given numerous presentations on private lending to local (Phila-area) RE investment groups over the past 10 years and I am always amazed at how loose private lenders will be with tens of thousands--or more often, over $100,000-- of their hard-earned money.   The posts here are evidence of that.

Without trying to sound harsh, a private lending transaction is not rocket science, but it is complicated and should be handled by someone who knows that they are doing.   The first post here sounds like a farce--that process should have NEVER happened the way it did.  The title company sounds clueless--in several instances. 

A title company should NEVER prepare loan documents--EVER.  The borrower should NEVER prepare loan documents (did Wells Fargo let anyone provide the loan documents for their home mortgage.....?).  The lender is in control and lender makes the rules.   A private lender---just like "real" lenders--should have its counsel prepare the loan documents, and at the borrower's expense.  Just like a bank does. 

There are SO many nuances to private lending that are never touched on by those "winging it".  They may include: Loan structure- single advance, or multiple advances?  When?  How? Lender's title insurance.  Borrower as entity or individual?  Spousal waivers to protect collateral.  Property insurance in favor of lender.  Assignment of leases and rents.  Loan extensions.   Interest or principal/interest payments.   Property/construction inspections.  Invoices for construction materials at property/incorporated into project.  Assignment of construction contracts.  Personal guarantee(s). Confession of judgment for money.  Confession of judgment for possession.  Confession of judgment waivers.  Type of mortgage--open ended or not? Mortgage priority.  Loan agreement (a "note and mortgage" is NOT sufficient--who says the borrower HAS to use the money you advance for the purposes you *think* you are lending it?  Hint:  that's not covered by the note nor mortgage).  Closing protection letters. Endorsements.......   The list goes on.   And on. 

Not every private loan incorporates all of the above, but 70% of it applies to every transaction.   Why would anyone try to wing it?  As I say when I teach RE investment courses:  If everything goes to plan, and everyone does what they are supposed to, you don't need ANY paper. But, when things go sideways, what's the first thing EVERYONE does?  They go to the paper to try and figure out their rights to get the other side to do what they are supposed to do.  Just like RE investment partnerships:  everyone loves each other on day 1, but what happens on day 195 when the project is overbudget/not sold, the payments stop, the contractor has run off, the borrower is in the middle of a divorce--or dies, etc, etc, etc.

Personally, as a private lender using my own and my partner's funds, MY loan documents look an awful lot like those a bank makes you sign when you want money from it.  WHY wouldn't every lender want the same protections a bank requires?  For the relatively small cost of having an attorney review things like the title report, title insurance exceptions, property insurance and borrower documents, as well as preparing the RIGHT documents so everyone knows what is expected of them, it seems like a no-brainer.   That said, the RE investor universe is well-populated by folks who will hesitate to spend $1500 on doing it the right way, but will fork over $100,000 with crossed fingers and a prayer.  

As an attorney, I HATE--HATE-HATE getting a call from a private lender asking "xxxxx happened! What can I do now?" and seeing loan documents that leave them hanging waaaaaay out in the wind.    Old saying in law:  "Pay me now, or pay me later--later is always more expensive".  Totally applies here.      PS--for those trying to save a buck:   reusing loan documents is a tremendously bad idea--details matter. 

Just food for thought---climbing off my high horse now....

John M. Erdek, Esq.

This message is not intended as legal advice and may not be relied on by anyone for any purpose whatsoever. The information in this message is intended solely for general informational purposes.