Using Private Money to Fund My Real Estate Deal in Pennsylvania and New Jersey:
A Lawyer’s Take
My name is Joseph Console from Console Matison. LLP. I am a real estate attorney in Philadelphia and the surrounding Pennsylvania and South Jersey burbs, though I venture into North Jersey on occasion. If you are involved in the real estate industry and you go out and network you’ve probably met me (Italian-American, about 5’9 in heels) one time or another.
This blog is not about meeting me, however. This blog is about meeting some other folks at these networking events. These professionals often sponsor the events, stand up and proclaim that they “HAVE MONEY TO GIVE AWAY” to fund projects. These are, for lack of a better term, the hard money people. Oftentimes a private money guy is someone whose business itself funds projects or they are a business who connect lenders of private money to borrowers of private money.
First of all, who needs private money? On large scale projects, private investments are an everyday occurrence. Not so with a majority of the deals I work on from the borrower’s end. Private money deals to the newbie real estate investor typically represents an alternative to trying to raise the capital one needs to fund their first project.
Oftentimes, when you want to get started in the real estate industry you’ll find that there is no major bank that is willing to lend you money to buy a property shell, rehab it and flip it. You just don’t fit their investment criteria. They do not view your loan needs as a priority, and so you may find yourself by necessity, looking elsewhere for monies to get started. That is where the private money comes in handy.
Should you use it? It is a useful tool and can be exactly what you might need to get started, though the industry (from a legal perspective) is riddled with cases of folks giving it a shot and failing. Here are the major caveats you have to really internalize before you make a decision on whether you should be going the private money route. First, most private loans are either for one year or two years. This means you have to rehab the property and either get it sold or refinanced to a traditional loan before the end of the loan timeline. Second, the interest rate is going to be (substantially) more than you would pay for a bank mortgage. Otherwise, why would private lenders be using their money for you job and not just getting a few points in an easy safe investment? Finally, because this is a commercial transaction (and therefore not protected by foreclosure laws on residential properties) it is not difficult for you to lose the project.
Lenders are taking a risk, and by necessity must protect their interest. To do this, they will have you execute a few different documents in conjunction with getting their money. First, the promissory note, this is the document that lays out the terms of your agreement, and functions as a clear reminder of your obligation. What you will likely notice on this document (and then on the others) is that you are signing both on behalf of your company and individually. The reason this is done is because it puts you on the hook personally to prevent your company from folding and the lender losing their recourse.
The next document is the deed of trust which is an actual deed that the lenders use to secure their foreclosable interest in your property. They lent you money, you missed 2 payments, now they are free to walk to the recorder of deeds office and file this deed you’ve already signed and notarized, turning the property over to them. Borrowers who default are often caught off guard by how deceptively easy it is for them to lose title of the house, but know that this what you are signing. This is a commercial mortgage and you are not entitled to fight for your right to get it back. You will authorize a confession of judgment which the lender can use to tell the court that you defaulted and have already agreed to turn the property over to them and to accept a judgment for the outstanding monies owed. At this point, all you can typically fight in court is a challenge to the proofs presented by the lender (did he calculate my payments correctly, were his lawyer’s bills REALLY that high?!, etc.).
I am hoping I laid out the major land mines a new borrower might face in this landscape, and to remember that this is my job (to think of all the potential negatives). I am actually a fan of private lending as I see great results every day from folks that use it the right way. If you need any help in planning your first (or fourteenth) transaction, call my office and we can chat and see if you are thinking everything through before you put yourself on the hook for a loan.