Best Practices for Using Private Money in Land Flipping: Seeking Advice

Hey guys! I’m sure this question has been asked before but I’m having a little trouble finding an answer for it via the search bar.

I’ve been flipping land for about a year now and I’ve generated some interest from friends and family who would like to invest in some upcoming deals. Thus far, I’ve only self-funded my deals and while I’ve debated on using JV partners with various companies, I’ve always decided against it because of the larger chunks of profit they eat away (most want 20%-50% of the profit depending on how quick the property sells).

BUT…Utilizing private money via interest-only loans with no pre-payment penalty is very enticing. My question is - how do I actually go about doing this?

Sure, a friend who trusts me could just shake my hand wire the money to my bank account - but I want to do this by the book and professionally. Do I just need a promissory note? Do they get a lien position on the property? What do I even do with the promissory note, once signed?

This is obviously a very new world for me - thanks for any direction or insight!!

Great question @SeanHangley - I actually put together a blog post about some creative funding options for land flippers a few months back… options you may not have thought of. You can find it here: Beyond Traditional Financing: Creative Funding Options for Land Flippers

None of these options are ‘friends and family.’ If you’ve ever gotten emails from companies randomly trying to throw money at you (I’ve seen them from PayPal, Stripe, Quickbooks, and others), these are the options I’m talking about. All these lenders have different terms regarding when/how you need to pay them back, so if you go down this road, you’ll want to pay close attention to what each lender wants. But the nice thing is, most of them don’t ask any questions about what you’re spending the money on (unlike what most lenders would require). They’re similar to a HELOC in that, you can just take the money and run with it.

As for the land funder thing, I used to feel like you do about funders eating large chunks of profit. However, the more I’ve learned about the service funders provide, and the more I’ve explored funding deals myself, my perspective has changed quite a bit, which probably isn’t surprising.

When you consider that:

  • The funder typically puts up 100% of the capital to buy the property.
  • The operator (that’s you) has almost no financial risk in the deal, aside from finding the motivated seller in the first place. If the deal goes completely backward and loses money, the funder is left holding the bag, not you. You would lose whatever time you put into it, but that’s usually better than being stuck in it for tens or hundreds of thousands… maybe even millions.
  • Working with funders allows you to participate in deals you otherwise would never have access to. In many cases, it will also enable you to make A LOT more money than you could by self-funding all of your deals.
  • Because your capital constraints do not limit you, there is technically no financial limit to how many deals you can go after and how much they’re worth. If you can fund the funder(s) to partner with you, you can do them all.
  • If you’re working with an astute funder, you’ll benefit from learning from them (some of them are very smart and care a lot about getting a good deal since it’s all their money tied up in the deal). This second set of eyes on the due diligence is a huge advantage.

All this to say, if your goal is to keep the highest percentage of your profit, it’s true, funders will take a big chunk of it, but it’s well-warranted, in my opinion.

If a land operator focuses too hard on the percentage they get to keep rather than the total number of dollars they’ll walk away with when they close a monster land deal with a funder, they’re missing the forest for the trees, in my opinion.

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Hey Seth - Thanks for the response!

All of your points about the funders are absolutely valid and if I need to use one to secure a bigger deal that I couldn’t do on my own ( if I ran out of capital/don’t have access to private money) then I would absolutely be willing to give up a larger portion of the profit to get the deal done.

Buttttttt… I like me some cheap money :slight_smile:

Have you worked with a private money lender? If so what was that process like?

Most of what I’m finding in my research currently shows that you should have a Promissory Note, First Mortgage (or Deed of Trust), Lenders Title insurance, and Hazard Insurance… BUT I believe this is more-so when structuring deals for a fix and flip. Perhaps we just need a Promissory Note and First Mortgage along with the sellers signed purchase agreement for land before sending the documents over to title?

I’m not positive - but hopefully I’ll learn more by the end of the day as my quest for this knowledge continues :nerd_face:

If you like cheap money, private money probably isn’t for you.

Most people go to private money lenders when bank financing doesn’t work for them, because the deal comes with way more risk or speculation than banks are comfortable with. In return for a PML taking a risk on you, it’s usually going to cost you a lot more, either in higher interest, tighter terms, or some ownership in the deal.

There are endless ways to structure deals like this. If you’re structuring it as a loan, then you’d want a promissory note and mortgage.