Never Fund a Loan on Real Estate Without Having a Trust Deed
Real estate investors have long used private money lenders to finance their real estate investments. A real estate investor, who we funded loans for in the past, confided in me that he was preparing to do a new property acquisition using a friend’s private funds. His friend was planning on advancing him the funds to purchase the property, and in return, would charge both interest on the funds and a small percentage of the profits.
I asked how the lender planned to secure the loan and the investor informed me that the lender would only require a promissory note to be signed to secure the loan. So, what is the problem with this private lender making a loan to this investor?
The Promissory Note
The problem is with the Promissory Note that is intended to secure the debt on the property. A promissory note is only a “promise to pay,” but it is generally not recorded. In order for a private money lender to secure repayment of a promissory note with the real estate, a lender must use a deed of trust, or a mortgage.
If the private lender makes the loan to the investor and secures it to the real estate with only the promissory note, this will not be sufficient security.
A deed of trust is sometimes referred to as a security document because it secures the promissory note to the real estate by creating a record in the County where the real estate is located. This recorded document creates the lien against the property that is a notice to the world that there is a debt owed to the lender. Without it, the investor could resell the property without paying back the lender.
Conclusion
Pay attention to this if you’re planning on making private money loans to friends, investors, and others. Always use a Deed of Trust or a mortgage to secure repayment of a promissory note with real estate.
Further, consider using a seasoned, Private Money Loan Broker to handle your next private money loan transaction to make sure it is done correctly. A seasoned Private Money Loan Broker understands all of the steps and documentation requirements to make sure you’ve secured your debt properly for piece of mind. To learn more, check out a recent post we wrote on this topic, ‘How to Become a Hard Money Lender.’
