Private money lenders are individuals who are looking for a better yield than Certificates of Deposit or what they can get in the stock market and its associated risks. Even if the private lenders don’t’ ask for these basic requirements to make their loans, the investor should supply them anyway to protect himself.
In the final analysis, private lenders base their decision on the credibility and trust they have in the investor asking for the money. The professionalism displayed by the investor asking for the funding goes a long way toward making the perspective private money lender agree to loan money.
In the vein of providing the private money lender with what he needs to be comfortable loaning the money, the investor should at least provide –
1. Promissory Note – this is the document that “proclaims” that the lender is due a certain amount of money and the terms at which the funds were loaned. These terms include the interest rate payable for the money, how often the interest is paid, any principal payments and how they are paid, when the note is due and payable in full (expiration date), terms for default, who is responsible for the note, the collateral that secures the note and other terms and conditions agreeable to by the Mortgagor (borrower) and the Mortgagee (the lender).
2. Mortgage – this is the document that is recorded in the public record that “proclaims” to the public or the next buyer that the property is encumbered by a Promissory Note. This document can be recorded in the public record with or without the Note attached but generally the Note is not recorded.
3. Property Appraisal – to avoid the accusation that the lender loaned too much money for a property, an appraisal by a licensed appraiser should always be secured. This does not mean the real estate market can’t correct and the property’s value becomes less than the amount borrowed, just that at the time of the loan, the market value was independently established.
4. Title Policy – whether this is a new purchase or a refinancing, the investor should get a title policy for the private lender. This is to insure that the title to the property is clear and marketable. A marketable title is very different from an insurable title and has no encumbrances or defects. An insurable title can be issued by excluding these defects from the coverage of the policy. The title is much more important than the condition of the property simply because construction can fix physical defects, while title defects may make the property unsalable.
5. Insurance – Once the money has been committed to purchase or refinance the property, it is immediately imperative that the property be insured by an insurance policy for hazard, fire, windstorm (where applicable), flood and liability. This coverage is extremely important to protect the lender’s money in the event something damages or destroys the property or there is a liability law suit brought against the owner.
In summary, if you are going to solicit to borrow money from friends, family members or anyone that will loan you private money, it is absolutely necessary to provide them with the five items above. The costs of these items (mortgage recording, closing costs, title insurance, prepaid insurance premiums, and appraisal) can be financed into the loan amount initially, however, the insurance must be paid when due to keep it in force. Providing these items will help cement the fact that you are a professional and looking to protect the lender’s money.