In a typical private money lending transaction, you the real estate investor (borrower) will borrow from a private individual (private lender) and the transaction is documented by a Promissory Note and Mortgage. Additionally, you will need to name your private lender on your property insurance. We also recommend you included a disclosure statement.
Most private money lending transaction involve you as the borrower where you borrow money from a private individual (private lender) and the transaction is documented by a Promissory Note and Mortgage.
Additionally, you will need to name your private lender on your property insurance. It is also very smart to include simple disclosure statement where you explain the risks involved with your investments.
Promissory Note
One of the most important documents you will ever sign with a private lender is the actual Promissory Note that creates the loan obligation. The Promissory Note lays out the terms and conditions under which the private lender is willing to lend you money and under which you are willing to borrow money.
The Promissory Note is where you want to control the private lending process in your favor and give you the borrower the control and flexible you may need in the future. If the Promissory Note does not have the right clauses contained within it, you are potentially giving away tremendous control to your private lender and tying your hands in the future.
Mortgage
The Mortgage is the security document for the borrower's performance under the Promissory Note and usually is secured by the piece of real estate you are about to purchase.
The Mortgage is the document that you will record with your local county recording office. Generally, you should have a title clerk or attorney record the Mortgage to be sure it is done correctly and to avoid any problems later.
Certificate of Insurance
You should always provide your private lender with property insurance, including both an owner's title policy and a lenders title policy. You will want to make sure your lender is named as an additional insured on your hazard insurance policy, just like you would if Bank of America was your lender instead of your private lender.
Disclosure Statement
You may want to consider a disclosure statement form that outlines exactly what it is you will be doing with the property, how you plan to exit out of the property, the time line you are projecting and the risks involved with real estate investing and the possibility your entire plan could change while owning the property.
Private lending does have investment risk and it is possible the investor could lose some or even all of their investment. You need to make them aware of these risks before you use their money for investment purposes. I disclosure statement can be in any form as long as you disclosure the risk involved with your investment.
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