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The 4 Required Documents of a Private Lending Transaction

By Michel Lautensack

Republish: EasyPublish™ Published: 28Feb2009 Word count: 444 Viewed: 123 time(s) Get Free Content For Your Site

Let's take a look at the actual forms that are involved in a private lending transaction. These are very important; albeit one of the major, major advantages of private lending is the fact that there are not many forms. There are not a stack of forms. When you go to the bank you're looking at probably two or three inches of forms to close a loan.

A private lending transaction is really composed of four simple forms.

Promissory note: 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. You have your promissory note, a page and a half. That's all it is.

Mortgage: A mortgage doesn't really matter because if you do it right, you're going to let your local title clerk or attorney record the mortgage anyway so you'll have very limited interaction there. You will have to pay a few dollars in fees to record the mortgage and to develop it, but typically it is $200 or $300 and that's it. The mortgage is then done right. It's recorded with the local county office and it's put to bed and done.

Insurance: You need to name your private lender on your insurance like you would any lender. If the building were to burn down or something were to happen, fire or water damage, you need to protect your private lender. If the insurance company came in and paid off the proceeds, obviously your private lender needs to get his loan repaid, so it's very important you name him or her on the insurance.

Disclosure Statement: A disclosure statement is a document that I use over the years now more and more. It just basically lies out that the private lending transaction is a personal one-on-one transaction. It is between my company and this individual. Here are the terms under which that person is lending me money. Here is the property and what I'm planning to do with that property and the most important part of the disclosure document is it really lays out potential risks.

It tells the individual that there are risks involved investing with real estate and potentially that person could lose all or some of their principal. Obviously, that's not going to happen but it could happen in theory, and I want to make sure that the investor understands that.

All lending is risky and we certainly know that in today's environment but it's very important that that lender acknowledge that he is a sophisticated individual, understands the risks, and is going ahead despite his understanding of the potential risks.

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