Are you interested in loan private money but you don’t know how to do it correctly? Here we will show how to efficiently vet the deal and secure your money
LEGAL NOTICE
Kindly be aware that the content shared on this platform is intended solely for educational and informational purposes. It should not be considered as legal advice. The information presented pertains to general corporate principles and should not serve as a substitute for personalized legal or financial guidance tailored to your individual circumstances. Laws and regulations are subject to variation across different jurisdictions and may undergo revisions over time, thus the content shared here might not be exhaustive or current. It is crucial to seek counsel from experienced legal and financial experts before undertaking any decisions concerning gap funding or bridge loans in real estate investment.
Risk Awareness
Gap Funding / Bridge Loan
Providing gap funding or bridge loans to borrowers for real estate investment comes
with inherent risks, including but not limited to:
The borrower:
- Defaulting on the loan
- Unexpected expenses or delays in the project
- Changes in the real estate market that could negatively impact the project’s profitability
Additionally, the borrower may have other liens or debts that could impact the
property’s value or the lender’s ability to recover their investment in the event of
default.
Before offering gap funding or bridge loans, make sure to do thorough research and put strong security measures in place to reduce risks. It’s wise to consult with legal and financial experts to fully understand the implications of these investments.
Gap Funding / Bridge Loan Funding Checklist
(People/Entities You Should Be Interfacing With)
- Determine Loan Amount and Terms (Borrower, JV Partners)
Based on your due diligence, you should determine the loan amount and terms,
including interest rate, repayment schedule, and any fees or charges associated
with the loan. You would need to interface with the borrower and your JV
Partners to negotiate and finalize loan terms.
o- Determine a healthy, but fair compensation
- Remember, this is on the riskier side of lending, so higher
compensation is not unusual. Plus, you are the one SAVING this
project from potential failure. However, getting too greedy will
ensure that the borrow never wants to deal with you again, and this
may damage the reputation of your JV Partners as well. - How much is the borrower likely to make after all debts are paid in
closing?
- Most flippers like to make AT LEAST 15% profit
- Most flippers like to make AT LEAST 15% profit
- Consider “whichever is greater” compensation
- Example: “15% of seller’s distribution OR 5% of the overall
sale price, whichever is greater”
- Example: “15% of seller’s distribution OR 5% of the overall
- Have a “back-up” offer ready, in case the borrow rejects your
initial offer
- Determine a healthy, but fair compensation
- Conduct Due Diligence (Borrower, Real Estate Agent, Attorney, JV Partners)
Before providing a gap loan, you should conduct due diligence to ensure that
the fix and flip project is viable, and that the borrower is a reliable investment
partner. This may include reviewing the borrower’s credit history, experience in
the industry, and their proposed project plan. You may need to interface with
the borrower, a real estate agent, or an attorney to conduct due diligence.
Additionally, you should:
- Get the address, look at photos, virtually look around the neighborhood
- Run comparative analysis (“comps”) to determine area/market sales
trends - What are similar renovated homes in that area selling for per sqft?
- How fast are homes selling in that area?
- Determine ARV and compare it to the borrower’s claimed ARV
- Gather information about what the borrower intends to use the funds for:
- Do you assess that it will be enough money to complete the
project? - Do they have quotes / estimates / invoices to back up their
estimation? - Obtain information about the title company to be used:
- Name of company
- Phone number
- Escrow ID number or reference number
- Look up the title company, are they legitimate?
- Call the title company, ask about the deal and people involved. Do
you have a good feeling? - Are other investors already involved? (PML, HML, etc.)
- Are they lien holders?
- What lien position would you be in?
- If 2nd position or greater, is there enough of a split between
ARV and other lien holders’ debts to cover your investment
if foreclosure was the only recovery option?
- If 2nd position or greater, is there enough of a split between
- Prepare a Promissory Note (Attorney, Title Company, JV Partners)
The promissory note is a legal document that outlines the terms of the loan,
including the loan amount, interest rate, repayment schedule, and consequences
of default. This document should be prepared by an attorney or a legal
professional. Alternatively, some title companies have standard Promissory
Note forms you may use, if you choose. - Prepare a Deed of Trust (Attorney, Title Company, JV Partners)
The deed of trust is a legal document that serves as security for the loan by
providing the lender with a security interest in the property being financed. This
document should also be prepared by an attorney or a legal professional.
Alternatively, some Title Companies have standard Deed of Trust forms you
may use, if you choose. - Review and Sign Loan Documents (Borrower, Attorney, JV Partners)
Once the promissory note and deed of trust are prepared, both you and the
borrower should review and sign the loan documents. You may need to
interface with the borrower and an attorney to review and finalize loan
documents. - Record the Deed of Trust (Title Company)
The deed of trust should be recorded in the county records where the property is
located to provide notice of the lender’s security interest in the property. You
would need to interface with a title company to record the deed of trust. - Disburse Funds (Escrow Company)
After the loan documents are signed and the deed of trust is recorded, you
should disburse the funds to the borrower according to the terms of the loan
agreement. You would need to interface with an escrow company to disburse
funds. NEVER SEND FUNDS DIRECTLY TO THE BORROWER! - Monitor Progress and Payments (Borrower)
Throughout the course of the project, you should monitor the borrower’s
progress (project and/or sale status) and ensure that they are making timely
payments according to the terms of the loan agreement. You would need to
interface with the borrower to monitor progress and payments, if applicable. If
the terms are based upon equity, you will interface with the Title Company or
closing attorney for your disbursement upon sale.
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