Cam Dunlap here with a great question from a newer investor that’s perfect to share with you here at Awesomely.
Check it out…
“Once we find a private investor, is there special paperwork that needs to be done to secure the money or do they furnish the paperwork?”
Love it. Here we go…
First, know this: If we’re working with a private lender, the relationship will be different, but the mechanics of the transaction will be very much like if we were dealing with a bank — whether this is your first or most recent real estate deal.
See, when we borrow money from a private lender to buy a piece of property, we’ve got to create a note and mortgage or note and deed of trust. (It depends on what state you live in, whether you’re in a mortgage state or a trust state. It’s the same thing, effectively.)
So, who does the paperwork?
Well, the closing agent/attorney.
For deals I do in New York, I work with attorneys. And the attorney who handles the closing will also draw up the note and mortgage. It’s all done by the book, and then it gets recorded.
Then, the lender is in a very secure position because they have collateral that guarantees the loan. You’re obviously not going to default, but from the lender’s perspective, they have to look at the worst-case scenario. And if there’s a default, they’ll have the property to fall back on.
Remember, because we’re investors, we “buy” at prices that make sense for investors… that allow us to make a profit… that automatically puts the lender in a better position… because now the loan-to-value ratio is lower.
What we borrow relative to the present or after repair value (ARV) of the house is relatively low compared to, for example, an FHA insured loan from the local lender down at the corner of Main and Elm Street, where the borrower’s borrowing.
See, 97% of the value is a very high loan-to-value ratio loan and is very risky, relatively speaking. A low loan-to-value ratio loan is much less risky because of the likelihood of the lender getting everything they’ve invested.
But, if you were to default, and then they force a sale, the less they’re owed, the greater the chance they’ll get everything they’re owed back. (And in some cases, the lender might decide they want the property.)
A useful example…
Now, when I do real estate deals in Florida, I use title companies. So, the title company will draw up the note and mortgage, and get it recorded so the lender is protected.
So, there’s no “special” paperwork.
Recently, I even did everything over email. I sent an email to the lender and copied the closing agent:
“Hey, Mr. Private Lender, just for clarity’s sake and for the closing agent, George, who’s also copied on this message, I want to spell out what we’ve agreed to. You’re going to lend me $100K at 4% on a 20-year amortization with a 5-year balloon. The payments are interest-only at $X,XXX or the payments are principal and interest at $X,XXX. And if you need a hand coming up with that, just get familiar with a financial calculator or the closing agent can work up an amortization schedule for you.”
Simple, straightforward.
BTW — you’d certainly want to provide a copy of that amortization schedule to the lender.
So that’s really all the paperwork you need… written down in some way to present what you and the lender have agreed to. You’ll make sure the closing agent has it all in writing, so they know the terms to draw up for the note and mortgage.
And that’s it.
Not so scary, totally doable.
Now, go find a great closing agent.
PS: looking to learn more about private money lending? Check out the best private money lending books to read today.