Loan in Partnership With a Realtor – How to Protect Yourself

8 years ago · 4 minute read

AMA question #7:

“My question is regarding a loan I issued on a home flip. A real estate agent I’m acquainted with bought a home using 50% of his money and 50% hard money. I loaned money for renovation costs. The hard money lender is first and I’m second in regards to a claim on the asset. The agent decided to make it a rental rather than sell it. There is plenty of equity in the home and yes, it has increased in value. From the day we made the deal and signed the contract he has made interest payments on time (I loaned the money at 13%, no points). Our deal was originally estimated to last 6-12 months, however it will be 2 years in October, 2018. The agent has been making interest payments to the hard money lender and myself throughout this time. Now he’s re-financing the home to pay off the hard money and myself. The re-fi has taken 9 months and it’s not done yet because there are problems with the Title. There was some sort of discrepancy on the title before he bought the home, and he’s working with Chicago Title to correct it and complete the re-fi. I’m beginning to wonder if there are problems he’s not sharing with me. How do I find out?”

Here’s our answer.

Key Points:

• The first thing you need to do is secure that loan. You need to file a trust deed to be sure that you secure this against title, so that the realtor can’t sell that property without getting you paid.
• Get another title agency to take a look and pull a report on the title for you.
• You might need to talk to a lawyer if it seems like there’s been any shenanigans.
  
• Ask the question as to whether the realtor had duties to you as a partner or as a lender in this deal.

AMA Video Transcript

Our guy, the one asking the question … it says, “My question is regarding a loan I issued on a home flip.” So, a real estate agent he’s acquainted with bought a home using 50% of his own money … as in the real estate agent’s money … and 50% hard money. Our guy loaned the money for renovation costs. This was actually a couple of years ago now. The house has increased in value, our guy’s getting paid just kind of points on his loan every month. “Our deal was originally estimated to last six to twelve months,” he says, “However, it will be two years in October.”

So I think he’s probably getting a little antsy, the agent is changing his mind about what he wants to do with the deal, and now the agent … the owner … is saying he’s gonna refi out so he can pay off the hard money loan and pay back our guy who loaned him the money on the construction costs. But the refinance qualification process has taken nine months, and it’s not done yet because there are problems with the title. So the question is, there seems to be some sort of discrepancy on the title, and the real estate agent is working with Chicago Title to correct it and get the refi. Our guy says, “I’m beginning to wonder if there are problems he’s not sharing with me. How do I find out?”

Yeah. A great question. I’m sorry that our listener has found themselves in this position. The first thing in my mind is to secure the loan. You have a position of the first money … the hard money lender is gonna be the first position. They’re probably already secured on the property. So there’s a lender. But if our guy has made a loan, then they’re entitled to secure that on the property, as well. Hopefully, they have a document called the promissory note and a trust deed. That would be documents that you would file and record on title. In that way, you’re encumbering title and in that way you kind of can’t get screwed out of the deal as easy, because they can’t sell the property without clearing it with you first.

The second one is I’d probably get another title agency to take a look. The title companies will pull a report on the title for you for free. Hit up one of the other title companies in your town, and have them back check the title and talk to them and see if one of their title officers can explain what the problem is. You might need to talk to a lawyer if it seems like there’s been any shenanigans, but I would start with being sure that you’re secured in your loan and then looking at the title without necessarily going through your realtor. I would ask the question as to whether the realtor had duties to you as a partner or as a lender in this deal. When realtors … I’m licensed, you’re licensed … when we enter these deals, it’s a delicate situation because you need to honor your professional duties to the people around you.

So as a partner, I’m ever cautious when I’m a partner as the licensed broker with other people to treat them fairly and to be sure that I’ve put everything on the table and advised them well, because I have an interest in the deal and I’m also the professional in the room. So, if there’s any shenanigans, there might be some professional liability and you might want to talk to a lawyer about that if you’re suspicious if your agent in this case has done anything self-dealing that has put you in a bad position, for example, knowing that there was an encumbrance on title and still bringing you into the deal could be cause for concern.

So, definitely some things that should be taken pretty quickly in this sort of situation. You don’t wanna be left out hanging to dry, you don’t wanna find out that, for example, that realtors borrowed more money and someone has secured a loan in front of you and now you’re in third position … that’s even more difficult to get. I think that pretty quickly you want to sit down with an attorney once you’ve done some recon and got the information.