Private Loan Transaction - Posted by JoeSoCal

import · July 31, 2003, 6:31pm

Posted by JoeSoCal on August 02, 2003 at 15:02:42:

Yeah, I have mulled that over.

However, as I stated above somewhere, I would like to have a cash flow coming in from the borrow/land seller, preferably on a monthly basis.

While I would only be doing this type of transaction on properties with lots of equity, I dont really want to foreclose and go through those hassles.

The costs associated with finding someone to lend the money to, due dilligence and time invested on the property, etc., the costs of transferring cash from one investment to another, etc. is what is driving me to find ways that my seniority isnt threatened nor my “loan” paid early.

With that said, my thinking (and I may be wrong) is that an individual would be more likely to walk away from a property if they havent made monthly payments for 3 years, than if they were making payments.

Secondly, if they are making payments and then fail to honor their obligations, I can know sooner, rather than later, and take appropriate action (foreclosure).

All things being equal, I would rather foreclose in the first year or two because the borrower has failed to make their payments, then live in the uncertainty of not knowing for 3 years.

import · July 31, 2003, 6:31pm

Private Loan Transaction - Posted by JoeSoCal

Posted by JoeSoCal on July 31, 2003 at 18:31:00:

Before we get going, I realize that ultimately I would need to consult with an attorney and so forth. However, I just wanted to get some initial feedback to see if this is even feasible.

Say John Doe owns (free and clear) a piece of property (we will call it vacant land for simplicity) that is valued at roughly $20,000.

He has got himself into a bind financially and needs $5,000 to take care of some personal business. I offer to loan him $5,000 with the piece of land serving as collateral, at 10% with a 5 year amortization.

First: Do I need to go through some major bureaucratic red tape to do this transaction? I assume that if I were to do several of these transactions, I would need to go through all the hoops in order to truely be a lender.

Second: Is it legal for me to demand that no other loans be acquired by using the property as collateral? Is it legal to demand that John Doe cannot sell the property during that five year period? I realize that there could be a prepayment penalty, but is it possible to demand that John Doe cannot sell the property?

Again, I realize that many of these questions are only going to be really answered by an attorney. But I would imagine that there are many of you who have lent someone money and asked for property as collateral.

Thanks.

import · August 2, 2003, 8:11am

a few other thoughts - Posted by rm

Posted by rm on August 02, 2003 at 08:11:42:

We’ve assumed a lot here.

Title is clear on the the property?

Taxes are current?

If they’re not, you could raise the loan amount to make them current.

import · August 1, 2003, 2:31pm

Re: Private Loan Transaction - Posted by Nate(DC)

Posted by Nate(DC) on August 01, 2003 at 14:31:51:

Why not do a sale/optionback? He sells you the property for $5K, with the option to buy it back on an agreed upon price and terms. Then you own it so you know there will be no more debt, and it can’t be sold without your consent.

NT

import · August 1, 2003, 2:21pm

Any Other Thoughts Here? (NT) - Posted by JoeSoCal

Posted by JoeSoCal on August 01, 2003 at 14:21:30:

.

import · July 31, 2003, 11:50pm

Re: Private Loan Transaction - Posted by Jasonrei

Posted by Jasonrei on July 31, 2003 at 23:50:19:

Oh, wait. You’re in Southern California? Forget what I just posted, real world rules don’t apply in SoCal.

import · July 31, 2003, 11:48pm

Re: Private Loan Transaction - Posted by Jasonrei

Posted by Jasonrei on July 31, 2003 at 23:48:54:

My guess is you could do a private money loan subsequent to its acquisition. Especially on a vacant lot. A homestead property might be another matter.

I would also guess your mortgage could have any number of restrictions. You could put in the mortgage that “John can’t sell this property”. Wouldn’t think that would be much different than saying “John can’t grow white-spotted mushrooms on this property” or “John must trim the hedges on this property, twice a week, with a butterknife”, right? As long as he agrees to it I would think it would hold up.

import · August 2, 2003, 2:53pm

Re: a few other thoughts - Posted by JoeSoCal

Posted by JoeSoCal on August 02, 2003 at 14:53:34:

Yeah, I was already looking past those basic assumptions.

I would probably only be looking to do something like this on a vacant piece of land, if my loan plus any other(if applicable) senior debt obligations came to no more than 50% of the FMV of the property. And to be honest, I am not sure I would even want to go that high, considering raw land doesnt produce income and can be illiquid.

Of course, I might be willing to go higher given different circumstances.

My gut says that I could go higher on the LTV for SFRs, but I might also have a situation where there is less equity to play with. It seems that vacant land owners are more likely to own their property free and clear.

import · August 1, 2003, 11:46pm

Re: Private Loan Transaction - Posted by JoeSoCal

Posted by JoeSoCal on August 01, 2003 at 23:46:10:

Hey Nate,

Thanks for the response. You propose an interesting angle, one that I didn’t think about.

My major gut reactions:

Positives: You dont have to deal with any lending regulations/laws that may be applicable.

Negatives: Psychological impediment that might exist in ones mind when they “sell” something for significantly less than FMV. I realize that they hold the option to get it back, but I would think that this transaction set-up might face some stiff (albeit, initial) resistance.

Also, another negative would be lack of cash flow during the duration of the option lifespan. Of course, maybe the terms could be worked out around that.

For example:

I buy said property for $5,000. If I am trying to earn a 12% return on my investment over 3 years and I do not receive any payments for 3 years, I would be owed about $7,150 (after the 36 months).

Theoretically, would it be possible to buy a property from someone and then offer them an option to buy it back with the option (premium) being paid for in monthly installments?

For example:

I buy the property for $5,000. I then offer them an option which would consist of a monthly payment of $50. I would think that one could theoretically offer a renewable monthly option on the property for $50, similar to selling a call option on some stock that I own.

I could see some california court/jury arguing that it was in fact not an option, but instead an interest only loan with a balloon at the end of a 3 year term.

What about this? Couldnt I theoretically buy a piece of property from John Doe for $5,000 cash and then subsequently sell it right back to him the same day with 100% seller (me) financing? Again, i am sure that this might just be viewed as an actual loan.

Anyway…sorry for the rambling/stream of conscious thought post structure.

import · August 2, 2003, 8:10am

OR, you could - Posted by rm

Posted by rm on August 02, 2003 at 08:10:14:

Do a private loan, with a healthy pre-payment penalty.

import · August 2, 2003, 1:39pm

Re: Private Loan Transaction - Posted by Nate(DC)

Posted by Nate(DC) on August 02, 2003 at 13:39:43:

You could have him sell it to you and “rent” it back for $50/mo with an option to buy…

As for it possibly being construed as a loan, if taken to court…that is a possibility. You might want to have your attorney advise on how you could try to protect yourself from having the arrangement deemed an equitable mortgage. Basically, think large, explicit CYA documents.

As for whether or not he’d do it…if he’s so desparate, and he only needs $5K, why WOULDN’T he do it?

NT

import · August 2, 2003, 8:08am

Re: Private Loan Transaction - Posted by rm

Posted by rm on August 02, 2003 at 08:08:41:

>What about this? Couldnt I theoretically buy a piece >of property from John Doe for $5,000 cash and then >subsequently sell it right back to him the same day >with 100% seller (me) financing? Again, i am sure >that this might just be viewed as an actual loan.

By doing this, you’re over-complicating the process and adding the “bureaucratic red tape” that you seem to want to avoid. AND, you’re adding transfer taxes, etc. to the mix.

The idea of buying it and offering an option is great.

Don’t assume that the person you’re dealing with won’t do it, simply on the basis that you would be resistant. You’re not in his shoes. And, you’re not a charity organization. The guy with the gold makes the rules.

If the sale and option is not a possibility, why don’t you just do a first mortgage on the property?