I have a friend who wants to invest in my business. He is looking at loaning me a lump sum of money and I will be paying it back with interest. This is being used for what I’d like to call “emergency funds” just in case the rehab project goes over budget. Since this is being considered as a loan rather than an investment, my friend is not being granted any ownership with my company. Rather than paying a law firm to write up a loan agreement, is there anywhere else I could get a template from? Anything that you guys use in particular for these types of situations? My CPA referred me to a law firm, but they’ve been nickel and diming me as of late for any type of advise.
Just use a standard trust deed agreement. That’s a promissory note secured by a deed of trust.
You can find one for your state at uslegalforms(dot)com.
Don’t complicate this by using an attorney. The note and deed of trust (or whatever’s used in your state) will be straight forward.
If you don’t understand them, uslegalforms will include instructions with the docs they sell.
You could also talk with a title insurance company in your area, and see what they recommend using in your case. Not all title companies offer this information/help, but it’s worth asking.
You can also, if you’re really a cheap, guerrilla-type investigator, go to your local county recorder’s office, and look up some recorded second trust deeds, or second mortgage documents, make copies, and then use those as templates. I’ve done this. You’ll find the staff helpful for finding recorded documents.
Your lender friend will be fine using these documents, too, as they’ll comply with your state, and they won’t have any weird clauses in them.
Hope that helps.
I almost forgot…
You don’t want to create an ‘unsecured’ promissory note with your lender friend.
That is, a note that is not secured against a specific property.
Otherwise, in the event of a default, the lender can go AFTER everything you own, in order to get his money back.
In this case, if you simply signed a promissory note in the amount of XX dollars, in favor of the seller, without securing it against the property using a mortgage, or second deed of trust document, then YOU would become personally liable for the note.
I would look for verbiage that says something like “this note is secured solely by the real estate located at 12345 Adams St. etc. etc.” Or “secured solely by this instrument (deed of trust, mortgage, etc.).”
That’s it for now.
Ahhh yes, this is the exact information I was looking for. Thanks a lot! I was currently pulling up old recorded notes from the local county’s office, but some of these were really long and I did not want to type them out again.
As far as your recommendation on the standard deed trust agreement, does it have to be recorded once it is signed by both of us, or do we each just keep a copy?
I’m not an attorney, and don’t play one here… BUT I’ll go ahead and pretend anyway, and if you follow any of my advice, don’t be surprised if you lose your shirt, and end up living in a van down by the river…
If you don’t record the DOT, it’s still legal. However, timing is everything in regard to lien position with recorded documents.
So, if you fail to record the DOT, and then someone else liens your deal, all of the sudden your lender is not in second position, but third, or fourth, or whatever position.
Or say, you sold the property without paying off your lender friend, and obviously didn’t record your deed of trust against the property, your lender friend is screwed worse than a North Korean sex slave.
If I ever agreed to loan you money, secured against the property in question, I would want my DOT recorded immediately and without question. I would also want you to guarantee my position on the deed; making sure my second position was truly in a second position. No surprises.
This issue with your note, is that you don’t know how much the total is that you’re gonna borrow, or want to borrow, until after the fact. So, you may need to consider using the verbiage from an equity line of credit type of note and deed of trust (mortgage, etc.) and incorporate that into your secured note. An equity line of credit is written WAY differently than a standard promissory note and deed of trust. Just saying.
Thanks for your input. I’ll just go ahead and record the deed to be on the safe side. We will have to come to an agreement on the amount being borrowed and the payment terms. Sorry for the newbie questions.
That would be a definite “no.” You should not be disclosing the details of the rest of your financing arrangements with anyone.
That doesn’t mean you should ignore, or not read, the terms of the HML. If the HML prohibits further encumbrances, then you need to comply.
If not, then you do what you want.
It’s rare that an HML’s would allow further encumbrances, since it can muck up their efforts to effortlessly, and elegantly repossess the property in the event of a default. Why?
Because the HML now has no choice, but to formally foreclose on you, in order to wipe out your second, regardless if the second is likely to redeem its interest by paying off the HML, or not. A deed in lieu is now not really an option, since the HML is forced to proceed with judicial foreclosure in order to obtain a marketable title.
Look down the road a bit. Are you wanting to establish a profitable, long-term relationship with this HML? If so, it might be wiser simply to abide by their terms. If not, find a different HML with more workable terms.
Meantime, the second mortgage could still be created, and yet remain unrecorded …to satisfy the HML.
This way, in the event of default, the holder of the second, would then record its interest against the property, foreclose on YOU, and in turn redeem its interest by paying off the HML in full.
At that point, you’re not giving a rip what happens, since you’re losing the project to foreclosure anyway. “So, solly by golly.”
The alternative is still to bite the bullet, and sign an unsecured promissory note …Or perhaps secure it solely against personal property you own. If things went sideways, you could still potentially negotiate a creative payoff, or offer in compromise.
However, either way, you’re probably down two borrowing sources from where you started. Worse things have happened.
A good thing to remember about this business is, that it’s built on relationships. And if you’re gonna abuse the relationships, and/or leave little bastards in your wake, then you’ll find it harder and harder to do business. It’s a small, small world.
However, if you become known as a “Knight In Shining Armor,” when it comes to maintaining a ‘chaste’ relationship with the “cute maidens” of your kingdom, word will spread, and doors will open easily for you.
That’s my sermon.
Thanks for all your help! I really do appreciate it.
Nice information, thanks for sharing it here. Gonna help many individuals.
Borrowing and lending should never be taken lightly and it is good to see that you want to put the agreement in writing. Always prepare for the worst case scenario when preparing documents. Then you will be protected in case things do not work as planned.
Here are three sites that offer online legal agreements:
Hope they help.