There needs to be an agreement as to when payments will happen. Normal note documents ask all the right questions (including late fees when a payment is late).
As to interest rate, set an annual rate. Not X% of the loan amount but an interest rate so that if the loan was outstanding for a year you would pay what you are thinking though you are off in the math.
Using your example you would pay $31,531.60 after 6 months. Get a financial calculator and learn how to calculate loan payments. Otherwise you are borrowing the interest back from the guy each month for free. Put another way, a loan that was outstanding for 6 months with a PV of $30K and $1,500 in interest implies the interest rate was 9.80%.
Another example where computing the interest as would normally be the case builds creditability.
Yes, people will tell you that you could agree a fix amount later but then you really need to be clear that you are not pay 10% in the same way most people mean 10%.
Side note: As I enjoy teaching people how to use a calculator (and what it really means) if you get an HP calculator I will coach you on how to use it for RE loans.
John Corey
Chelsea Private Equity LLC
PS. One hidden benefit of learning how to use a financial calculator is people realize that splitting the profits with a cash partner is a who lot more expensive then 15% and 5 points from a hard money lender.
Private Money Terms/Structure - Posted by Matt (FL)
Posted by Matt (FL) on August 15, 2005 at 13:46:29:
I am looking for ideas as to how one would structure a private money loan. I have an individual who is interested in loaning money yet he has never privately financed before, and I have never used private financing for my projects. I would be borrowing between $30,000 and $100,000 from him for various projects, for no longer than 6 months. What would be a fair way to structure these loans? This would be cheap money for me as I am sure he wouldnt want points, just a flat rate. I was thinking something like 10% interest only payments, with balance due in 6 mos…but wanted your ideas on other ways to structure these loans.
I am a hard money lender so have some experience with privately financed deals.
You are dealing with someone who has no experience. If you decide to go forward with this person then keep the deal simple and clean. That way when friend of his start asking questions later everything will be easy to explain and will meet normal requirements.
The escrow person handling the transaction can arrange for a note agreement and a security agreement. Depending on your state this will be a trust deed or a mortgage.
Use an escrow, get lender’s title insurance and have everything that is normally recorded put into the public record. Nothing odd or different then any other loan you might get as a borrower. Same docs and process.
Terms as to interest rate, pre-payment penalties, term of loan, PI or interest only payments, etc are all things to decide with the lender and then to be provided as instructions to the person drawing up the contracts. I believe FL uses lawyers to manage escrows so have the lawyer write up a standard note and security agreement with the terms as agreed.
Do absolutely everything you can to pay on time or even a bit early. You want to build a great track record. Ask the lender to supply a letter of recommendation after you have paid off the 1st loan. Then when you find someone else with spare cash you can show them the letter. You can tell them that all the standard procedures are followed. All deals are vanilla when it comes to process and details.
Good luck. If you have more questions post here or send me email if you find I missed something and you need an answer. There are lots of folks where who also can provide great advice.
Re: Private Money Terms/Structure - Posted by Matt (FL)
Posted by Matt (FL) on August 16, 2005 at 11:21:10:
Thanks for the detailed reply. I completely agree with you regarding simplicity of the deal, I really want this individual to feel good about dealing with me as I think this could be a long term lending relationship. I just have one more specific question you may be able to help answer: As for payment terms, what is the most common way these loans get repaid? Would you just say ?I?ll pay you 10% of $XX,XXX due in 6 months? or do you amortize over a period and make ?normal? loan payments? I guess what I am thinking is paying him 10% of the money borrowed, and paying it back in a lump sum when the project is complete. So if I borrowed say $30,000 I would payback $33,000 at the end of 6 months or whatever the term is.
Thanks again.
Matt