Posted by John Corey on April 11, 2006 at 15:14:28:
Here are some suggestions.
- Assume a deal with a stranger who is a professional when it comes to RE and hard money. Use that as the benchmark. Terms and conditions plus the documentation for such a deal gives you a reference point.
What I would call typical is:
15% interest rate
Interest only monthly payments
65% LTV max on the as-is value (not ARV)
No credit check
1st position lien
Normal escrow process with HUD1, title insurance, fire insurance, everything that is normally recorded is recorded.
- Then consider how you might improve the deal (if at all) given the trust relationship.
- If the trust is strong then a higher LTV might be reasonable. Added risk to the lender. Also risk to the borrower that they will do deals that make little sense given access to higher LTV loans.
- A change in the points (0 to something higher than 5)
- Deferral of the payments until the property is refinanced or sold.
- Use of ARV rather than as-is for the LTV calculation.
- Otherwise keep the deal simple and similar to other HM deals - mostly indicating to use the normal process and paperwork so it looks and feels like a HM deal.
You seem to be saying that you will be emotionally guaranteeing the deal (legally you can guarantee the deal but we both get the point). The family friend is also helping you out by providing capital to grow your investment business. Hence there is a little give and take. Maybe you pay him a lower interest rate but more points on the back end so he has an upside when a deal is done. It all depends on why he wants to invest with you and how far you two trust each other.
Do assume that it has to be clean so someone else can pick up the pieces later.
As to your other comments…
Unless you are going to obtain some or all of the funds without securing the capital against real estate assume that you will not have free access (your phrase). The funds will remain in the other person’s IRA, bank account or similar. Each time you do a deal you will present the full documents and the funds will be wired or otherwise transferred. You can make offers knowing the funds are there but you never have direct access or otherwise control the funds.
It should be noted that there is an alternative model. You could form a partnership or a LLC and have the person invest the capital into the entity. You would then work out how to control the LLC, etc. Different with both positives and negatives.
I think you should stick with the hard money model and just operate knowing that if the deals make sense the funds are there up to some limit (the max the person wants to lend out at any one time). Have a set of criteria so that every deal that meets the criteria is approved subject to any upper limits.
By doing deals with the other person acting as the lender they get the liability protections that are accorded a lender. For example the liability from an accident, a toxic spill, etc. stop with you and are not something that will hit a lender. If the person is some sort of a partner then the funds are more at risk in most cases. You also know that you will not get a new ‘partner’ if there is a death or something. The funds are in the form of a loan and there are limits to what a lender say or do about a loan already in place.
PS. Any ‘note’ or paper deal where you are creating the paper to do the deal fits what I am talking about when I say HM. As long as the party with the cash appears as a secured lien holder and not a partner or some sort then all is consistent with my points above.